By Abhiruchi Ranjan
In the age of globalisation where borderlines of nations, be it developed or developing, are becoming blurred, the presence of foreign banks in India is paradoxically undergoing a gradual diminution.
According to the Reserve Bank of India, only 45 foreign banks remain in the Indian banking sector, with 286 branches amongst them. What is triggering international banks to stay wary of India?
Reasons for exit
The fast pace of technological advancement has given to rise to a new avenue for bankers to foray into: branchless banking. With there being an upward trend in the usage of electronic payments, internet banking and carrying out transactions through mobile phones, banks, both domestic and international ones, are leveraging on this new feature that consumers are adapting to. Consumers want instant services and no longer want to be dependent on professional bankers for transferring money or updating their passbooks. This new age banking has allowed most foreign banks to exit the Indian market and not open branches at all in order to curtail operational costs and make sure their financial budgets are more on the conservative side.
Foreign banks are no longer the sole owners of new age technology. Indian banks belonging to the public and private sector have evolved and are giving international players a cut-throat competition by incorporating the latest evolvements in robotics and Artificial Intelligence (AI). India’s largest private sector bank ICICI was the first domestic bank to employ software robotics or technically known as robotic process automation (RPA). With error rates close to zero, the bank has been successful processing transactions of over Rs 2 million, without indulging in corporate downsizing.
Cost constraints plague every business and the multinational banks are no different. While operational costs in the form of rent of offices, salaries and other sundry expenses exist, the margins between interest income from giving out loans and advances and paying the depositors have somewhat become measly. The immediate solutions that come to our mind of resolving this meagre gap between lending rates and deposit rates is that banks either increase the interest rates on their loans to garner higher revenues or reduce deposit rates so that they’re liable to pay lesser to their customers. However, banks resort to this very rarely as they fear high competition, cannot afford to break even and may not be experiencing economies of scale (cost advantages). This is when institutions take recourse to selling ‘other products’ like insurance, mutual funds and securities and increase their revenue streams.
Stringency in priority sector lending (PSL) norms may also be cited as a major reason for foreign banks holding back on increasing their presence in the Indian subcontinent. In early 2018, RBI mandated that overseas banks with 20 branches and more on Indian soil would have to eventually lend 40% of their total loan book to the priority sector which includes agriculture, micro, small and medium enterprises (MSMEs) and rural infra. The rule which is to come into effect from April 2020 would impact giants like Standard Chartered, Citibank and HSBC which have 100, 35 and 26 branches respectively. PSL has always been a point of conflict between monetary regulatory RBI and foreign market players. While diminishing profits and working capital plaguing most banks’ financial statements, catering to the PSL criterion is only viewed as an added liability. Not wanting to lose their Indian customer base due to its high consumption and fast economic growth, these banks succumb to the demands of the RBI.
Coming to investments, the Indian mentality is such that the investment portfolio of most individuals comprises of instruments and assets where they are assured of a return, even if it is low. Households want an assured return which explains their bias towards holding more of real estate and gold. The low risk-return trade off is what defines a typical investor belonging to the Indian market. As a corollary, a lot of wealth management businesses have been forced into exile due to the potential of earning profits falling.
Protecting overall profitability for management is what it boils down to. A lot of banks decided to shut shop in the Indian market. Be it Deutsche Bank selling its credit card business, Standard Chartered letting go a quarter of its staff in corporate and investment banking or HSBC’s step to bid adieu to private banking, the trend is clear. Home banking and not global banking is being focused upon. This move has led to a lot of banks to return to their expertise in relationship banking and institutional banking by catering to the needs of high net worth individuals (HNIs) and focus on mergers and acquisitions (M&As), because that’s where they see potential for earning a greater amount of profit.
Like many central banks across the world, our very own RBI has also taken to monetary tightening. After the repo rate was hiked by 25 basis points to 6.25%, it can only be expected that the burden of expensive borrowing would be passed on to its consumers. This may provoke many institutions to hike their lending rates which would inturn have a dampening effect on their revenue stream. Moreover, complexities in the rules and regulations of the central bank has discouraged many a foreign banks to set up wholly owned subsidiaries of their own.
When the NDA came into power in 2014, they have vehemently endorsed the urgency of financial literacy and financial inclusion, especially of the rural communities. The Jan Dhan Yojna highlighted the importance of ensuring that the rural population was aware of financial services and has access to. This kind of political pressure may have added to foreign banks stepping back from Indian markets.
Why some foreign banks continue to target Indian market?
After the 2008 global financial crisis, some foreign banks have continued to establish and moreover retain their Indian presence. Indian financial markets remained resilient by showing that they were insulated from the shocks of the sub prime mortgage crisis. This has given rise to foreign banks being a lot more collaborative with regulatory requirements. Further, banks which decided to withdraw themselves form the Indian market did not face as many disruptions due to Foreign Exchange Management Act (FEMA) and banking regulations restrictions on capital repatriation and liquidity requirements.
ANZ Banking Group is expected to widen its network through institutional banking. India being one of the fastest growing nations in the world, economic growth and positive reforms mirror their sentiment of stability and soundness of the central bank continues to remain attractive to foreign investors.
The Asian economy’s growth highly depends on foreign banks. It acts as a channel to tap into foreign capital markets and is catalysing the process of economic growth which clearly leaves scope for greater foreign banks to enter the Indian banking sector.
While Indian banks grapple with the plight of mounting non performing assets and mounting levels of bas loans, households as well as industries have turned to foreign banks for loans. Although less reluctant than the Indian banks, loans would be an expensive affair for borrowers especially in times where the banking sector is plagued with scams of industrialist defaulters.
Expatriate, migrant and international student banking is another aspect that is showing a steady growth in its demand. As many individuals migrate to developed countries in search of better opportunities, foreign banks come forward to provide assistance to those by equipping them with the necessary instruments and providing unique benefits such as opening their bank accounts, providing debit cards and arranging for loans.
While foreign banks do fill a certain gap in the Indian market, their journey to survive is riddled with abiding by a complex regulatory system, battling high operational costs and meeting demands of consumers in an intensely competitive market.
Abhiruchi Ranjan is a writing analyst at Qrius.
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