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Business News/ Opinion / Online-views/  Global banks’ local woes in India
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Global banks’ local woes in India

Foreign banks are lobbying hard with the regulator and the govt for a longer time frame to meet the new priority loans norms and a wider basket that includes infrastructure and mortgages

File photo of an HSBC bank branch. If the foreign banks see growth opportunities in Asia’s third largest economy, they need to decide on their India strategy fast as new banks’ entry will intensify competition for business. Photo: BloombergPremium
File photo of an HSBC bank branch. If the foreign banks see growth opportunities in Asia’s third largest economy, they need to decide on their India strategy fast as new banks’ entry will intensify competition for business. Photo: Bloomberg

Addressing the press after the Reserve Bank of India’s (RBI) board meeting in Kolkata early this month, governor Raghuram Rajan said the federal government has asked the Indian central bank to review the so-called priority sector lending obligations to encourage foreign banks to turn themselves into locally incorporated subsidiaries. The RBI is reviewing these obligations in the light of the concerns expressed by the foreign banks, so that the costs and benefits are clearly understood.

In the recent past, this is the second instance of Rajan hinting at dilution of the priority loan norms for foreign banks. Currently, such norms do not distinguish between Indian and foreign banks with at least 20 branches. Earlier, in September, at an investor summit organized by Citigroup NA in Boston, Rajan had said as a way to encourage foreign banks’ participation in India’s financial inclusion agenda, the RBI would relook at the priority sector lending norms for them. One possible solution could involve domestic banks doing more agriculture lending and foreign banks doing more lending to small and medium enterprises (SMEs).

Foreign banks with 20 branches or more have a target of 40% priority sector lending of their total lending. This is on par with domestic banks. If the number of branches is less than 20, the priority sector lending target is 32%. Foreign banks have long been arguing for more liberal priority sector norms since they do not have an extensive branch network and access to rural areas.

Till March 2013, they were treated differently, with a much lower target for priority loans. Even the composition of such loans for them was different. Against the 40% target, which the local banks need to meet, foreign banks’ target was 32%, irrespective of the size of their branch network, and they could meet the target by extending export credit. Following the recommendation of a committee, it was decided that foreign banks with at least 20 branches would have to meet the priority sector targets and sub-targets by April 2019. Of the 40% priority loan target, 18% should flow into agriculture.

Unhappy with the new norms, the foreign banks have been lobbying hard with the regulator and the government. They have been asking for a longer time frame to meet the new norms and a wider basket that includes infrastructure and mortgages. In private, chiefs of a few relatively small foreign banks had even said that they would restrict their branch network to 20 to escape the new norms, which they find extremely difficult to achieve, given their focus of business. However, the RBI till recently had been pushing for it, possibly to force large foreign banks to locally incorporate. Local incorporation entitles them to near-national treatment in terms of branch network and even acquisition of local banks.

Till March 2013, there were 43 foreign banks and collectively they had 334 branches, less than 0.33% of the branch network across the nation. Standard Chartered Bank Plc leads the pack with 100 branches, followed by Hong Kong and Shanghai Banking Corp. Ltd, or HSBC (50), Citibank NA (43), Royal Bank of Scotland Group Plc, or RBS (31) and Deutsche Bank AG (17). Citibank has the maximum number of ATMs (605), followed by Standard Chartered (303), HSBC (142), RBS (120) and Deutsche (53). Foreign banks in India account for 3.9% of the total deposits in the banking system and 4.5% of advances.

Standard Chartered started its Indian operations by opening its first branch in Kolkata in April 1858; HSBC’s origins can be traced back to October 1853, when Mercantile Bank of India, London and China was founded in Mumbai. It was acquired by HSBC in 1959. Citibank in India is 111 years old.

Under a 1997 commitment given to World Trade Organization, RBI needs to give 12 new branch permits to foreign banks every year, including those given to new entrants, but the regulator has all along been allowing foreign banks to open more branches. In November 2013, the RBI decided that foreign banks with “complex structures" and banks that do not provide “adequate disclosure" in their home jurisdiction would have to compulsorily convert themselves into wholly-owned subsidiaries (WOS) of their parents in India. The “systemically important" foreign banks on account of their balance-sheet size in India have no choice but to convert themselves into WOS. Systemically important banks are those whose assets account for at least 0.25% of the total assets of all commercial banks. At least 12 foreign banks fall into the category.

However, those foreign banks that started operations in India before August 2010 have the option to continue their business through the branch mode.

Little more than a year has been passed since the RBI issued these norms but not a single foreign bank has shown any inclination for local incorporation. In fact, a few of them are actually closing down India operations. UBS AG has surrendered its commercial banking licence, and Goldman Sachs Group Inc. and Morgan Stanley, which had applied for a banking licence, decided not to go ahead with their plans while Nomura has refrained from moving the regulator for a banking licence, contrary to its earlier plan.

If indeed the foreign banks see growth opportunities in Asia’s third largest economy, they need to decide on their India strategy fast as new banks’ entry will intensify competition for business. Besides, once the new Basel norms kick in, they would need more capital as being branches of foreign parents, their exposure to Indian corporations will be capped by India’s sovereign rating unlike domestic banks who will take into consideration independent ratings of local entities. Lower rating of borrowers will carry more market risk and hence the requirement of capital. This will queer the pitch for foreign banks. I understand a few Japanese and Indonesian banks are planning to enter India through the WOS route ahead of others.

Tamal Bandyopadhyay, consulting editor of Mint, is adviser to Bandhan Financial Services Pvt. Ltd, India’s newest bank in the making. He is also the author of Sahara: The Untold Story and A Bank for the Buck. Email your comments to bankerstrust@livemint.com

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Published: 21 Dec 2014, 06:56 PM IST
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