On a new voyage: Why banks are scaling down their global ambitions

The heady days of setting up shop abroad by banks are over, and a nuanced and tech-based approach will be the way ahead, report Abhijit Lele and Raghu Mohan

Banks are crafting a new foreign operations strategy — be it branches, representative offices, or joint ventures. They have cut the number of offices to 253 in 2018-19 (the latest systemic data) from 309 in 2016-17 — the fall being the sharpest in branches — to 145 from 186. This is part of banks’ effort to either conserve or free up capital, and to slash operating costs.

Within state-run banks, the sharpest reductions in this footprint have been made by the pack leaders: Bank of Baroda — to 36 from 50; and State Bank of India (SBI) — to 40 from 52. The merger of four sets of state-run banks also opens the doors for another tweak in their peer group. Among private banks, both ICICI Bank and Axis Bank are to have a relook.
 

Says C Venkat Nageswar, deputy managing director (International Banking Group) at SBI: “Rebalancing of the share of India-linked business and local business in overseas territories is a thrust area. The share of India-linked business, which was 75 per cent few years ago, now stands at 60 per cent with the balance contributed to by specific global markets.” In terms of strategy, the bank is to consider taking on exposures largely to “A-rated” Indian state-run enterprises’ cross-border business. “The margins in the international business are thin and this limits the room for absorbing shocks of loans going bad.”
 

Adds A K Das, Bank of India’s managing director and chief executive officer: “We have either merged or closed nine of our overseas branches and subsidiaries. This has reduced the operational expenses and improved the cost-to-income ratio to 30 per cent from 33 per cent.”

 

According to Rajesh Dahiya, executive director-corporate centre at Axis Bank: “We have adopted a clear objective to focus on the local market and harness its full potential. In line with the objective, the bank has taken a decision to wind down the operations of Axis Bank UK. We are committed to delivering optimum value for all our stakeholders.”
 

Banks had upped their presence abroad to service both the Indian diaspora and get a pie of the business with India Inc shopping abroad for assets. It provided an opportunity to diversify their portfolios with a healthy mix of domestic-to-foreign business. The reality was that the plot changed on their home-turf — bad-loans mounted and capital started quoting at a premium.

 

The Nirav Modi-Mehul Choksi blowout at Punjab National Bank had a ripple effect on banks’ global ambitions. In any case, the foreign markets for both loans and services were completely different. “Let me very blunt. This strategy was not very well thought through,” admits a senior banker.
 

What next
 

The new approach to global operations is to be a combination of taking on quality exposure and relying on technology tools for acquiring and servicing customers.
 

“We aim to stabilise the split between the India-linked business and what we can originate in the markets we have a presence in at 50:50 per cent,” notes Nageswar. He is frank when queried on the timeline: “It is tough to give timeline to achieve this due to the economic upheavals in the international markets after the Covid-19 pandemic.”

 

Explains Das of BoI: “We are targeting ‘A-rated’ firms and above through participation in syndicated loans — primary as also a secondary purchase of loans. And focusing on the trade-finance business secured against bank guarantees.” The bank plans to acquire assets also in the US and the UK with good ratings and healthy credit profiles; hawk mortgage-based loans through branches (in the UK) with a product called ‘Buy to Let’; and selling more retail loans in New Zealand.
 

The fallout of these moves is that in the interim, Indian banks may not be able to help have a meaningful pie of the diaspora or Indian companies’ foreign operations. And these markets have progressed far beyond plain-vanilla products and services even as fintechs have changed the playbook. It would not be misplaced to believe that this revisit of their global operations by Indian banks may misfire going ahead.
 

UCO Bank & foreign payments

UCO Bank came in handy to slip through the sanctions-net that Uncle Sam threw at Iran when it came to oil payments. An internationally active bank is defined as one with more than 20 per cent of its business in cross-border. The Kolkata-based bank was identified as the nodal bank by New Delhi to deftly step aside sanctions under US law on foreign banks for dealing with the Central Bank of Iran for oil payments. More importantly, it does not have any exposure in the United States or the European Union. It helped UCO Bank garner float money in its current accounts.