 "RAVNEET GILL")
The year 2013 has not been kind to banks in India. The deterioration in credit quality, the stress on profitability and the absence of loan demand have made life difficult for bankers. For many foreign banks the India opportunity has turned into a challenge. Often perceived as fair-weather friends, foreign lenders have now been asked to create subsidiaries in India.
While it is not mandatory, except for those who entered India after August 2010, the Reserve Bank of India (RBI) wants most of them to opt for subsidiary mode of presence. But at a time when battered by the global financial crisis many foreign lenders are re-evaluating their investments across emerging markets, not many are expected to commit fresh capital in creating subsidiaries in India. A few, however, are open to the idea of subsidiary mode of presence as it offers near-national treatment to foreign banks in terms of branch expansion in the country.
At the end of March 2013 there were 43 foreign banks from 26 countries operating in India through branches. In addition, 46 foreign banks from 22 countries were operating in India through representative offices. Business Standard spoke to a few of them to get their views on the opportunities and challenges in doing business in India and their outlook for 2014:
General Manager & CEO, India, DBS Bank
"2014 is likely to be a challenging year not only for foreign banks but also for the banking industry in general. Economic growth is likely to be sluggish and banks will witness some headwinds in terms of further deterioration in asset quality. Interest rate hikes to curb inflationary pressures cannot be ruled out and will likely result in higher funding costs and lower credit offtake. Unless economic activity picks up rapidly, which at this point does not appear to be the case, banks will continue to face a downward pressure on revenue and profitability metrics.
Continued political uncertainty and macroeconomic headwinds will definitely take some shine away from the story of India being a lucrative investment destination. Global factors, especially the US Fed tapering and stronger recovery in the US and Europe will lead to certain shift in asset allocations among global investors and may result in lower portfolio flows in India. However, long-term capital flows will continue to find favour among patient investors given the growth potential in Indian economy.
The wholly-owned subsidiary guidelines will be a game changer for foreign banks as it provides for a near-national treatment and subject to certain financial inclusion norms, allows for an unfettered access to the banking revenue pools in the country. This regulation opens the door for foreign banks to make further inroads in the retail and SME segments coupled with the possibility of even M&A (merger and acquisition) transactions once those guidelines are released."
CEO, India, Deutsche Bank
"On the back of improving local sentiment and positive global cues, the Indian economy should witness stronger momentum in 2014. The Indian rupee could face renewed pressure on account of QE (quantitative easing) taper, but robust equity inflows should cushion the impact. For us, transaction banking, retail and structured finance should be the key growth drivers this year."
MD & Head - International Banking, India & South East Asia, Royal Bank of Scotland
"2013 was a difficult year for the economy, business and consequentially the mood for inorganic growth and equity capital raising was muted. Given the small green shoots from an economic perspective and some element of tapering certainty, if the elections deliver a clear mandate there is likely to be several equity capital market fund raising in 2014. Another element for banking is the new bank licences, which will broad base banking and give further choice to the consumer. On wholly-owned subsidiaries, this will take more time as international banks think through both regulations and the business case."
Head - Treasurer, FirstRand Bank, India
"2013 was probably one of the worst years. So, in that sense, the worst is behind us as we move into 2014. The challenges, I believe, were a blessing in disguise. The qualitative restructuring has led to lower trade deficit, which will work well for the Indian rupee and from the ratings point of view.
The second half of 2013 has shown pick-up in exports and farm productivity. Sentiments have also improved. This will aid the economy and benefit the banking sector. The banking sector gains whenever the economy is doing well. But the worries are probably not over yet. Inflation is still high, there are structural issues in the infrastructure segment and high non-performing assets continue to pose a challenge for the banking sector. But the stage is certainly set for a better business environment."
