So far, foreign lenders such as South Africa’s First Rand Bank and Abu Dhabi Commercial Bank have completely exited India, while others such as Citi Bank, Barclays, and BNP Paribas have scaled down their operations. This leaves around 44 foreign lenders operating in the country.
There have been some murmurs about how these exits are linked to stricter compliance requirements for foreign lenders, and more banks may leave Indian shores, which doesn’t augur well for the economy as a whole. Foreign banks have been lobbying for changes in Indian banking regulations, arguing for a level playing field, but the fact is that most of these exits are linked to global business strategies.
Supported by resilient domestic demand, India’s growth story is only going to get stronger. Already, India’s state-run banks have turned around, and private sector lenders are also well placed to meet the demands of a growing economy.
As per a report from Goldman Sachs Research, India may emerge as the world’s second-largest economy by 2075. It makes little business sense if foreign lenders choose to stay away or continue here with restricted operations. In this context, the question arises: Do foreign banks need to reinvent themselves to stay relevant in India?
The +1 Dice…
After the COVID outbreak, the China+1 strategy, especially for the manufacturing sector, has been on the discussion table in the boardrooms of all big corporate firms. Already, some countries, like Vietnam, are reaping the benefits. With the growing appetite of Indian companies, low inflation, and a positive demographic dividend, India is set to emerge resilient and stronger. The green shoots have sprouted and are set to climb faster. This is also reflected in a report by Dealogic, which states that foreign banks in India in FY23 earned $231 million in mergers and acquisitions fees till December 2022, surpassing the $204 million earned in China over the same period.
Foreign Banks will do well if they start to revaluate their existing business models in India and explore more opportunities. A case in point is BNP Paribas, which shut down its India wealth management operations in June 2020 and is now setting up a wealth management joint venture with the Agricultural Bank of China (ABC). A report by Real estate consultant Knight Frank states that India’s ultra-high-net-worth individuals (UHNWI) with net worth over $30 million are estimated to rise by 58.4% in the next five years. While China might have its strategic advantages, any bank with global ambitions that chooses to ignore Indian markets will do so at its own peril in the long run.
In the same vein, it will be only to India’s advantage if it can use these foreign banks as a catalyst to further its agenda of Rupee settlement trade mechanisms or bring in expertise and innovative products through GIFT City in Gujarat.
Demands Galore…
Foreign Banks have a list of exemptions that they seek from India, from paying lower taxes (at present they pay as much as 42% as against 22-23% by Indian banks) to changes in regulations like meeting priority sector lending targets. Indian banking regulations require lenders to direct 40% of their adjusted net banking credit towards defined sectors, including agriculture.
The most used and almost stale argument presented by foreign lenders is that how can a one- or two-branch operation be asked to meet the same capital and other compliance requirements applicable to the country’s largest bank, State Bank of India.
It doesn’t seem that the regulator or the government will relent to such persuasion given that Indian Banks operating in foreign jurisdictions face similar challenges, and in cases such as Hong Kong, most Indian Banks have closed their operations on account of various such restrictions.
Besides, data indicates that foreign lenders are not slipping behind. As per the latest data from the Reserve Bank of India, survey on International Trade in Banking Services (ITBS), the return on assets for foreign banks in India was 5.8% in 2021–22, 80 basis points less than the previous year, but they expanded their consolidated balance sheet by 10.3% in Rupee terms and by 7% in dollar terms.
Gujarat Bound…
A report by Grant Thornton states that Foreign Banks have enabled global supply chain migrations and enabled multinational companies to set up a base in India by supporting capital raising, external commercial borrowings (ECB), raising funds in rupee-denominated bonds (masala bonds). The report also makes a case for an enabling environment for foreign banks so that they can help achieve momentum in the Aatmanirbhar initiative.
The enabling environment is already in place through Gujarat International Finance Tec-City (GIFT) International Financial Services Centres (IFSC). Already, eight banks have set up shop, and more are likely to follow. In the FY 24 budget, a string of sops have been announced, which include permission for acquisition financing by IFSC banking units of foreign banks.
Despite all the challenges, state-run banks have turned around and posted a cumulative profit that crossed the Rs 1 lakh crore mark in the financial year ending March 2023. There is no doubt that the government is keen on more consolidation and having at least 2-3 banks the size of the State Bank of India.
Foreign lenders demand for concessions may have some grounds, and possibly the government and banking sector regulator, the Reserve Bank of India, will agree to a few of them. But till that happens, foreign banks need to reinvent themselves, or else Indian Banks will catch up fast, leaving little space.
(Views are personal)