At a time of global turbulence in the banking sector, Rana Kapoor, Founder and Chief Executive Officer YES Bank, believes further opening up of India’s banking sector to foreign players will be mutually beneficial. Pallavi Aiyar caught up with him in the Spanish capital Madrid, where he was awarded with the ‘India Business Leader of the Year’ award at a Global Indian Business Meeting hosted by Geneva-based networking organisation Horasis. Edited excerpts:
India and the European Union (EU) are currently negotiating an Free Trade Agreement which aims at further opening up the country’s banking sector to foreign players. Is this a move you will welcome?
Most certainly, because India is at a point where we are growing at 8.5 per cent and so we need more foreign direct investment and trade and investment in order to overcome our trade deficits. Foreign banks do add channels of investment apart from of course supporting trade and finance. But at the same time, we must keep in mind that the global turbulence of the last two years is not over. So from an Indian point of view there has been a hiatus of sorts. We were supposed to come out with a new roadmap for foreign banks entry into India in 2009 but because of the crisis, that plan was deferred. Nonetheless, foreign banks are getting licenses. Recently, Credit Suisse got one and Goldman Sachs is also expected to get one. We have seen the re-entry of ANZ banking group. So some baby steps are being taken and I believe banks of countries who have shown resilience to the global crisis like Australia, Nordic region and Canada stand a good chance of getting entry into India.
When we talk about India and Europe, is it all a one-way flow of European banks gaining entry into India? What about Indian banks making it big in Europe and elsewhere? When can you envisage Indian banks becoming global players of weight?
As far as rapid expansion overseas for Indian banks is concerned, there is a pause and the reason is the crisis. Indian banks with foreign operations were advised to be cautious. But the time has come now for some of the banks, certainly the larger banks like the State Bank of India (SBI) to look at catering to high density NRI populations, looking at acquisition opportunities in regions like Europe, where there are some attractive companies available. There are some interesting opportunities of reverse engineering looking at reducing cost structures of European companies by getting into front end collaborations and back ending manufacturing to India.
So what is it that holds Indian banks back from becoming big international players?
They are making some steady approaches. SBI has started looking at banks in the ASEAN region and there are efforts by Bank of Baroda to emerge as India’s international bank. Private sector banks are in some compression and looking at a steady growth strategy rather than an expansive strategy. And remember that the domestic opportunity is lower risk and more compelling at this stage.
So banks such as ours want to maximise on the domestic opportunities even as we continue to build bridges with European banks and companies. There are opportunities but there is reticence by Indian banks because they have to get their house in order first. There is in fact a global orientation towards working in home countries and home geographies and this is a mind set that will probably prevail for some time to come till there is further de-risking of the global economy.
YES Bank has just announced major plans to enter into retail. What makes you think you will be successful in such a competitive space?
A bank like ours by virtue of its name “YES” is destined to emerge as a retail, consumer bank. We spent the last six years building our foundation and the stage has come in our life cycle where we have critical size with 150 operating branches and 3,300 people. We got 91 new licenses from the Reserve Bank of India (RBI) in the first week of June and we are looking at topping 250 branches by June 2011. As for competition, given India’s growth rates of 8.5 per cent, credit growth of the entire system projected at around 18 per cent, deposit growth at a similar number, in my view banks like ours which are still at a high growth phase, should be able to grow at double or even triple the banking system growth rate.
We also have the advantage of our technology outsourcing decision which we made at the inception of the bank. So we have scalability at a marginal cost on our operational architecture. Actually, India is grossly under penetrated on retail services and has not found a formidable service proposition in banking yet. We will endeavor to create a superior client experience through well trained staff as well as our operational outsourcing model which allows us to scale the bank.
What sectors of the economy will be your main focus going ahead?
Agriculture, healthcare, hospitality, infrastructure, education and renewables. We believe these are industries where India will build competitive advantage and as a new age, non-legacy bank we aim to build skills which are going to meet the future requirements of our country.
The overall goal of the bank is to be a knowledge driven organisation, because we believe India will take centre stage in the world as a knowledge economy. As you crystal ball the future of India, our view is that we need to establish banking skills commensurate to the needs of our clients. So rather than a universal approach we are trying to adopt a specialised, solution driven approach.
Talking about crystal balls, what’s your prediction for what India’s banking landscape will look like 10 years down the line in 2020?
In 2020, Indian public sector banks will continue to strengthen and be the dominant players. There will be a little bit of consolidation there. SBI and its subsidiaries have a strong business case to consolidate. And it’s also quite likely that two or three of these public sector banks will, like the Chinese banks, emerge as global leaders or at least Indian leaders overseas. We should grow and replicate some of the successes of Chinese banks, not just in valuation but in outreach. And that should happen through steady consolidation.
The second segment of private banks will also be a strong development in India because these are banks with limited legacy, they are technologically savvy and understand cost structures and good management. Given the compelling domestic opportunities they will expand and scale up.
Foreign banks will become more and more niche players. They will still have an important role to play. I think they’ll maintain a market share of between 5-7 per cent, but increasingly for cross border products like equity raising, debt raising, trade finance support, foreign exchange support. That’s where their strength will be. Not to build strong domestic franchises but to build good cross border products.
You said Indian banks should learn from Chinese banks? But isn’t banking one area where India is usually considered ahead of China?
India’s banking regulation is world class but what we also need is the ability to understand scale. Chinese banks are truly the engines of growth whereas Indian banks merely support growth. They need to magnify and build long term instruments because India’s banking requirements are going to go through a metamorphosis. Right now banks are working capital lenders, project finance lenders but we have to become better and better at infrastructure lending, like what Chinese banks have done. Infrastructure in India by 2020 will be the biggest opportunity in the world. I’m not saying we should catch up with China. That would be foolish. But at least we should aspire to be second best in infrastructure.
And finally where do you see YES Bank itself 10 years down the line?
We will become India’s No. 4 private sector bank by 2015. By 2020, we hope to evolve as one of the best quality banks of the world in India. Our clear mission is that our young bank should not compromise on quality. Several Indian organisations have already emerged as world class in quality: Infosys, Wipro, Jet Airways, Oberoi Hotels. These companies may compromise on profits but not quality and our endeavor will similarly be uncompromising to build a high quality customer experience.
