Foreign banks keen to bolster foothold in India

According to media reports, the foreign banks have been in India for more than 150 years but more overseas lenders are now queuing up to set up operations, amid signs that tough restrictions on entry may be eased.

Five to eight foreign banks are seeking to come to India, with the country viewed as attractive because of gaps in the market and a buoyant economy that has created wealthier clients.



"India is in focus. It is a high-growth market," added Abizer Diwanji, head of financial services at consultancy KPMG India. "Foreign banks are building their base here, focusing on high-net-worth clients".

Last week Britain's Standard Chartered Bank raised $530 million in a novel share sale through Indian Depository Receipts, which gives Indians an opportunity to get a global exposure to banking.

The London-based lender, which as The Chartered Bank opened its first overseas bank in the eastern city of Calcutta in 1858, called the fund-raising issue -- which was oversubscribed by more than double -- a "homecoming."

Australia's third-largest bank, ANZ, has been given the go-ahead for retail and wholesale banking operations. Credit Suisse, which already has an Indian investment banking, wealth management and mutual fund arm, is following suit.

Embattled bank Goldman Sachs is also keen to enter India.

"India is a real market of substance," ANZ's chief executive for Asia Pacific, Europe and America, Alex Thursby, has said.

The presence of foreign banks has brought changes to the way India banks. They were instrumental in bringing automated teller machines (ATMs) and credit cards to India.

But they have still played a limited role in India's vast lending space, which has traditionally been dominated by state-run banks, mainly due to restrictions and entry barriers in place until economic liberalisation in the early 1990s.

Operations still cater to a niche market of wealthy clients in big cities, offering specialised products, forex and financial transaction facilities, advisory and wealth management services.

Thirty-four foreign banks are currently operating in India with Citibank, Standard Chartered and HSBC currently accounting for 70% of their total business.

In the last five years to March 2009, foreign banks have seen a net profit compounded annual growth of 27%, led by interest and fee-based income, a report from Mumbai-based HDFC Securities shows.

India has concentrated on consolidating its domestic banking system over the last five years but the Reserve Bank of India (RBI) says the next phase of expansion will see foreign banks' role "gradually enhanced in a synchronised manner".

The RBI has approved an average 15 bank-branch licences every year for the past few years, which is above its commitment of 12 to the World Trade Organisation.

But predictions about when foreign banks will arrive is difficult to assess.

One issue that could delay entry is the current trouble in the Euro zone, which could affect strategic decision-making.

"Typically, foreign banks are dependent on the fortunes of their head office," said one banking analyst.

Foreign banks could also face stiff competition from Indian lenders, despite the country having a relatively low penetration of financial services, as more private banks have come into the sector in the last decade.

Interest margins for banks have been falling since 2000, according to a report by investment bankers and securities firm Execution Noble, as banks fight for market share across the board.

In the decade to September 2009, private banks doubled their market share to 20%, while foreign banks slipped from eight percent to six percent, said Execution Noble's Aditi Thapliyal.

In today's trade, BSE Bankex closed at 10587.41, down by 1.73%, while the Sensex closed at 16781.07, sheding 1.97%. The banking stocks like ICICI Bank closed at Rs842.20, down by 2.79%, with a volume of 3.16 lakh shares on the BSE. Even stocks like Axis Bank and HDFC Bank fell by 1.98% and 0.40% respectively at the close.