Is the foreign banking landscape changing in India?

In April, HSBC announced former captain of the Indian cricket team, Virat Kohli, as its brand influencer for its India operations. A month later, HSBC India’s CEO Hitendra Dave was seen sharing the stage with Shah Rukh Khan and his wife at the launch of Gauri Khan’s coffee table book, My Life in Design, at the Chambers at Taj Lands End. The bank co-sponsored the event.

HSBC India seems to be going all out to grab the space that Citibank NA in India has vacated after exiting retail banking, selling the franchise to Axis Bank Ltd.

A Reuters report last week says HSBC, Europe’s largest lender by assets, could sell or streamline business in 12 countries to sharpen its focus on expansion in Asia. This is when Citi is exiting consumer businesses in 14 markets globally, including India, to invest more in businesses where it enjoys competitive advantage and has scale.

Is the landscape of foreign banks in India changing? Yes, and no.

These banks constitute roughly one-third of the total scheduled commercial banks, which include public and private sector banks, payments banks, small finance banks and regional rural banks. But their share in business is pretty small.

There are 45 such banks with 861 branches (and 34 representative offices) and 1,797 ATMs as of March 2022. Their share in assets is 6.3 per cent, deposits 4.92 per cent and that of the loan book even smaller, 3.85 per cent.

In contrast, 21 private banks (both old and new) have 37,872 branches and 75,543 ATMs. Their share in assets is 34 per cent, deposits 31.8 per cent and loans, 37.8 per cent.

Twelve public sector banks (PSBs), with 84,256 branches and 1,38,056 ATMs, have 59.7 per cent share in assets, 63.2 per cent in deposits and 58.3 per cent in loans.

In absolute terms, the PSBs have assets worth Rs 127 trillion against Rs 73.7 trillion for private banks and Rs 13.7 trillion for foreign banks. Similarly, the advance book of PSBs is to the tune of Rs 70.44 trillion and that of private banks Rs 45.63 trillion. Foreign banks have just Rs 4.64 trillion advances.

When it comes to physical presence, DBS Bank India Ltd, one of the two locally incorporated foreign banks, has the largest network. After acquiring Lakshmi Vilas Bank Ltd (LVB), it has 592 branches. Among others, Standard Chartered Bank has 100 branches, Citibank 35 (before it sold its retail business), HSBC 26 and Deutsche Bank AG 17.

DBS Bank has 1,021 ATMs, followed by Citi’s 488 (before the sale of retail business), Standard Chartered’s 167, HSBC’s 74 and Deutsche’s 32.

No other foreign bank has either branches or ATMs in double digits. (SBM Bank India, the first foreign bank to go for local incorporation in December 2018, now has 12 branches.) Foreign banks with at least 20 branches need to lend 40 per cent of their aggregate credit to the priority sectors along the lines of local banks.

The State Bank of India is the banker to every Indian but foreign banks are not.

The largest foreign bank in India doesn’t have even one per cent of total loans and deposits but the share of these banks in the profit pie is far higher. Why? Their business model is different from that of local banks. The relative off-balance sheet exposure, such as derivatives of each set of banks, illustrates this. Here, the foreign banks’ share is 49.7 per cent, while that of private banks and PSBs is 31.8 per cent and 18.5 per cent, respectively.

Incidentally, even though the share of foreign banks in deposits is less than 5 per cent, they are competing with the local banks for low-cost current and savings accounts, or CASA. Both PSBs and foreign banks have 43.8 per cent CASA in total deposits; private banks’ share is higher — 47 per cent.

Simply put, the foreign banks here should not be gauged by the conventional metrics such as assets and liabilities. Look at their profitability.

Not all foreign banks disclose their India financial numbers; two exceptions are HSBC and Standard Chartered. In the first quarter of 2023 (they follow calendar year), Standard Chartered has made a profit before tax (PBT) of around $100 million on a revenue base of $311 million. A year ago, in the first quarter of 2022, the comparative figures were $166 million and $344 million. HSBC India’s 2023 first quarter PBT is $325 million on over $550 million revenue. The comparable figures for the year-ago quarter in 2022 were $240 million and $450 million.

HSBC India has 12 per cent share in the foreign exchange business, 9 per cent in exports, and close to 20 per cent of foreign direct investment has been done through this bank.

The constraints on opening branches was a handicap for the foreign banks but that’s no longer the case as digitisation and use of data have changed the contours of the playing field. Still, local banks dominate the retail banking space as foreign banks are not willing to invest in this business. In the past, a few of them had made half-hearted attempts; now, most have given up.

The future, for them, lies in institutional and corporate banking.

After exiting the retail business, Citi’s focus is on the institutional clients in India where it has substantial presence. On its radar are also medium-sized players that are globalising as well as those that are growing rapidly from a relatively small base and need a financial partner to advise them on their growth aspirations. More than 30 per cent multinational companies in India — over 1,000 — bank with Citi. It manages 8 per cent of India’s trade flows and 5 per cent of domestic electronic payments flows.

HSBC India, which is keenly eyeing the space vacated by Citi, is into multinational banking in a big way (45 per cent of the multinational companies in India bank with it) besides emerging and large Indian corporations. It has a mutual fund under its belt and an insurance joint venture. Now, it plans to launch private banking (part of its retail initiative), a space it had left a few years ago. Looking at its profile, HSBC seems to be readying to play the role of a universal bank in India.

Standard Chartered is the most local among the foreign banks since it primarily lends to local corporations. It has history and legacy on its side, having acquired the Grindlays Bank early this century.

DBS India is positioning itself as a digital local lender. It’s a work in progress. The bank’s focus is on the smaller end of the business segment and the digitally savvy retail customers, using a mix of digital and physical, riding on the LVB branches it acquired.

SBM is into the retail space through a string of collaborations with digital players along with focusing on private banking and wealth management.

Among American banks, JP Morgan has been doing well in the corporate and institutional banking space. Bank of America is a niche player sticking to its core strength — equity, investment and transactional banking.

Deutsche Bank, too, has its own niche — high-yield, complex credit business (it’s one of the lenders to Go Air along with Bank of Baroda and Central Bank). Barclays Plc, known for its penchant for the FCCB (foreign currency convertible bonds) business, is into private banking and capital markets businesses, raising debt and private equity.

The Indian market offers limitless possibilities. International banks are aware of this but not many seem willing to explore it. While Citibank is busy focusing on its institutional business, backed by its global platform, HSBC India is betting big on its international network and India’s affluent class. Among the rest, most are either happy being niche players or still crossing the river by feeling the stones. Let’s wait and watch how the story evolves.

The writer, a consulting editor of Business Standard, is an author and senior adviser to Jana Small Finance Bank Ltd

His latest book is Roller Coaster: An Affair with Banking

To read his previous columns, log on to https://bankerstrust.in

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