Tamal Bandyopadhyay: Four years to manhood

What do Citibank India head Sanjay Nayar, ABN Amro CEO Romesh Sobti, HSBC India head Niall S Booker, United Western Bank CEO Satish Marathe, Lord Krishna Bank managing director R M Nayak and Laxmi Vilas Bank chairman A Krishnamoorthy have in common?

All of them heaved a sigh of relief on Monday after the Reserve Bank of India (RBI) released the guidelines on ownership in private banks and acquisition norms for foreign banks.

The first three were relieved because they can now build their India strategy based on the road map laid out by the banking regulator for foreign players in India.

The rest were pleased because they were spared the recurrent nightmares of being gobbled up by large foreign entities.

After all, market capitalisation (number of shares multiplied by the market price of these shares) of most of the private sector banks is still very small "" less than the quarterly profits of the Citis and HSBCs of the world.

Had there been no protection given by the regulator, foreign banks operating in India could have had several private sector banks for breakfast, almost at will.

What Finance Minister P Chidambaram could not do in his Budget speech under the glare of the Left, RBI Governor Y V Reddy did with ease. He served an ultimatum to the private banking industry to shape up or ship out.

These banks have been given four years "" up to March 2009 "" to put their house in order. From April 2009, the regulator's protection ring will be withdrawn and they will have to fight it out with the deep-pocket, technology and product savvy foreign banks.

While foreign banks will have to wait for four years to play the acquisition game, they can, in the meanwhile, pick up stressed local banks with the RBI's permission.

So, who has won and who has lost? How will the new norms "" released after eight months of publication of the first draft on these guidelines and the differences of opinions between the RBI and the finance ministry "" change the banking landscape in the country?

Here's what a banking consultant says: "It's a remarkable balancing act by the central bank. It has accepted the fact that the banking sector cannot be protected forever.

He has also given a reasonable time to the local players to consolidate, converge and compete." Before we get into the nuances of the norms, let's first take a close look at the banking universe in the country.

It is dominated by the public sector banks. Twenty-seven players account for 88.5 per cent of bank branches across the country, 77.89 per cent of the deposit base, 65.67 per cent of banking capital, and 74.50 per cent of assets.

Thirty-one private banks (both old and new) account for 11.04 per cent of branch network, 17.05 per cent of deposits, 13.55 per cent of capital and 18.60 per cent of assets.

Within this group, nine new private banks have about 3 per cent of the branch network but over 10 per cent of deposit base and capital and over 12 per cent of assets.

In contrast, 33 foreign banks account for 0.41 per cent of branch network, 5 per cent of deposits, 20.8 per cent of capital, and only 6.9 per cent of total assets of the banking industry.
 

Foreign banks get room to grow
	Old private banks (21)	Private banks (both old and new, 31)	Foreign banks (33)
Branches	4,423 (8.3%)	5,860 (11.0%)	217 (0.4%)
Employees	53,041 (6.2%)	83,350 (9.8%)	14,662 (1.7%)
Deposits	Rs 1,09,805 cr (7.0%)	Rs 2,68,549 cr (17.1%)	Rs 79,756 cr (5.1%)
Capital	Rs 698 cr (3.1%)	Rs 3,028 cr (13.6%)	Rs 4,645 cr (20.8%)
Reserves & Surplus	Rs 6,909 cr (7.3%)	Rs 19,495 cr (20.7%)	Rs 10,201 cr (10.8%)
Total assets	Rs 1,26,093 cr (6.4%)	Rs 3,67,276 cr (18.6%)	Rs 1,36,316 cr (6.9%)
(Figures in brackets represent per cent of total industry)

This debunks the myth that foreign banks have been giving Indian banks a run for their money. In fact, over the past few years, foreign banks' share in the banking pie has reduced.

The gainers are the new private banks "" ICICI Bank, HDFC Bank, UTI Bank, IDBI Bank. They have already driven out some of the foreign banks from the car loan market. Even in the credit card business, pioneer Citibank has been overtaken by ICICI Bank.

"In the retail segment, we are not competing with the foreign banks. They are competing with us. Look at how their net interest margin (the spread between the cost of funds and earnings on deployment of funds) has been shrinking over the years," points out the CEO of a new private bank.

A foreign banker admits this but blames regulations that come in their way to access cheaper funds because they are not allowed free expansion of their branches.

This is one area where the RBI is still not comfortable about giving freedom to foreign players.

The guidelines allow foreign banks to set up wholly-owned subsidiaries to conduct business in India but do not change the existing branch licensing procedure, even though they propose to go beyond the existing World Trade Organisation commitment of 12 branches in a year.

New private banks have edge over the foreign banks on four counts: their cost of operations is low; technology model is cheaper; they are comfortable with comparatively lower return on assets; and their risk perception about emerging markets is better than their counterparts in foreign banks.

Still, why do we need more and more foreign banks? Primarily for two reasons: newer products and capital. The new norms have made it clear that all banks need to have a minimum net worth of Rs 300 crore within a reasonable time frame.

At least six listed private banks have capital less than Rs 300 crore as on March 31, 2004. These include Bank of Punjab, Lakshmi Vilas Bank, City Union Bank, Centurion Bank and Dhanalakshmi Bank.

Over half a dozen unlisted banks have a low capital base. This list includes Catholic Syrian Bank, Bharat Overseas Bank, Lord Krishna Bank and a few others. These banks are left with no choice but to merge with others and consolidate within the next four years if they do not want to be gobbled up by a foreign entity.

Once the field is opened up, there will be no room for small and the so-called niche players.

So, they need to consolidate and build a bigger balance-sheet. But only a big balance-sheet cannot be a protective shield for them to thwart any takeover bids by foreign banks.

They are vulnerable on account of lower market capitalisation. As on February 1, ICICI Bank "" the biggest private sector bank and the country's second largest commercial bank "" had a market capitalistion of about $ 6 billion.

HDFC Bank's market capitalisation on the same day was less than $ 4 billion. Both these banks are listed on the New York Stock Exchange. The third largest private bank in terms of market capitalistion is UTI Bank (over a $1 billion).

Some of the old private banks have market capitalisation as low as $ 22 million to $ 30 million. This means that most of the foreign banks operating in India will not even need to bring in money from their parents overseas for acquisitions as their local balance-sheets are big enough to stomach a couple of players in the old private banking space.

The onus is now on the private banks to protect their turf by gaining financial muscle and raising their market capitalisation. They have got four years to do so.

The beleaguered Indian textile industry prepared itself over the past few years to face the abolition of the quota regime. The pharmaceutical industry too did its home work to usher in the patent regime.

Now, it will be the turn of the private banks to graduate to manhood.