Fgn units of PSU banks seen short on scale

Consolidation is the finance ministry's growth prescription for public sector banks as it believes economies of scale would be a bottomline imperative from here onwards.

And it seems the very same formula would apply to these banks' overseas ventures too, which have not been very successful so far.

The reason for the lack of success is not hard to find, according to A K Purwar, chairman of the State Bank of India (SBI).

"Size helps a bank to raise resources at a cheaper cost. It gives the muscle required to enlarge the product offerings abroad, which ultimately contribute to the bottomline of a foreign branch. Therefore, consolidation may be a good option to reach an economic size," he said.

Purwar said banks with branches in the east and south Asia appear to be seriously short on viable economic size.

In particular, the profits of banks operating in Singapore and Colombo have been dwindling. For example, the operating profit of Indian Bank and Uco Bank decreased during 2003-04, but the third player in the region, Indian Overseas Bank, improved its performance.

M B N Rao, chairman and managing director, Indian Bank, said the decrease in the operating profit of the bank's Singapore branch "" Rs 8.68 crore in 2003-04 from Rs 11.49 crore in 2002-03 "" was due to consolidation of long-term liabilities.

Uco reported a decline in operating profit to Rs 23.13 crore in 2003-04 from Rs 25.08 crore in 2002-03.

The public sector banks argue that the poor performance was because all banks were competing for the same pie, which is not growing any bigger.

Purwar said the strategy generally adopted in the overseas markets is to enlarge the revenue streams and minimise costs.

Therefore, any bank intending to operate in foreign lands must have complete control of its costs, especially the cost of funds and the administrative cost.

The cost of funds for a branch operating abroad invariably gets influenced by the size of its parent organisation. For example, the cost of inter-bank borrowings and credit lines of an overseas branch is influenced by the rating that the parent bank gets.

Also, ability of these overseas units to take non-fund exposure, which generate fee income, depends on the size of the balance sheet. Except SBI, Bank of India and Bank of Baroda, not many public sector banks have a presence in Europe and US.

Senior bank officials said it is far tougher for Indian banks to operate in an advanced country compared to developing ones.

The reason being the size of banks operating in advanced countries are much larger, which enables them to provide credit at cheaper rates. Also, the spreads available abroad are quite thin and continue to be under pressure in view of the alternative options available in the developed markets, Purwar said.