August 2013. Markets across the world were on edge. An innocuous comment by the Fed had set off a sharp sell-off in markets three months ago in what came to be known as the ‘taper tantrum’. The rupee was weakening by almost 50 paise each day, and India had been dubbed one of the ‘Fragile Five’ — a group of nations too dependent on uncertain foreign investment to finance their growth.
However, in this climate of gloom, an Indian banker was rubbing his hands in glee. For Anil Kumar Verma, then chief financial officer (CFO) of a large bank with substantial overseas presence, every INR1 depreciation in the currency was inflating his overseas centres’ business by around INR500 crore, helping achieve targets. Later, during investor presentations, this surge would come in handy as proof of the relevance of those centres.
Cut to five years on. August 31, 2018.
Rajkiran Rai, managing director and CEO of Union Bank of India, says, “We are going to completely cease operations of our Antwerp centre within a year, as the expected volume of business has not materialised, especially from the diamond sector.” Thus, Union Bank joins ICICI Bank and Bank of Baroda, which have pruned their overseas operations. Because of the present stressful conditions, ICICI Bank significantly pared down the stake in its UK and Canada subsidiaries a few years ago to plough back capital worth INR1,500 crore.
A combination of factors, including regulatory compliance, high cost of operations, capital requirements, and stiff competition, are forcing foreign branches of Indian banks into loss-making propositions.With volumes that constitute about 25% of the total balance sheet of their respective banks, these overseas outposts could have acted as buffers to the domestic branches. However, because of rising bad debts and consequent capital erosion, banks are paring their foreign operations.
Business beyond the diaspora
A commonly held view is that Indian banks have an overseas presence only to cater to the Indian diaspora. But then, consider this:
The top five Indian banks boast of a presence in 32 countries with a network of more than 150 branches and a turnover of INR50 trillion.
None of these banks had an exposure to toxic derivatives during the 2008 sub-prime crisis.
With a little effort, the overseas branches could break out of the shell of being fringe players in global markets.
There are roadblocks, regulations being the biggest one. For instance, the Basel III norms for the minimum-capital requirement for Indian banks is 1% above global standards. But then, India’s banks have had a capital-adequacy ratio (CAR) of more than 10% even in stressful times.
There is a strong case for relaxing regulations, especially the onerous ones imposed by overseas regulators at their own discretion, which India must forcefully renegotiate. It also needs to explore the possibility of resolving such issues within the ambit of the World Trade Organization’s General Agreement on Trade in Services.
Genesis of overseas operations
While Indonesia, Kenya, and South Africa boast a sizeable Indian diaspora, locations like Singapore, London, Tokyo, and New York have the added advantage of being financial hubs.
Some of the overseas branches have history with them. For instance, the Singapore centres of Bank of India and State Bank of India are more than five decades old. Canara Bank’s London office has been in operation since 1984. Then there are places like China and Israel, where branches were opened to maintain diplomatic niceties and friendly relationships.
Key to the existence of overseas branches is forex business. Anil Girotra, former chief executive of Canara Bank,London, and former executive director of Andhra Bank, says, “Forex business of even small PSU banks is quite a bit. Even domestic customers bring forex business.”
However, only state-run banks and established private banks provide sizeable forex services and allied facilities. Asked why top performers like HDFC Bank are not growing their overseas play, Girotra says, “You cannot compare a 20-year-old bank with 100-year-old banks. They (the younger banks) can have only representative offices to start with.”
That brings us to the gestation period for overseas branches, and regulations, yet again.
According to regulations in various overseas locations, an Indian branch has to operate as a representative office there for at least three years before it can become a full-fledged bank. The minimum time needed to turn profitable is five years. Even established players operate on wafer-thin margins. This unfavourable risk-return trade-off could be the reason why many banks shy away from overseas operations.
Tied down by compliance
As overseas regulators tighten their hold, compliance has been becoming too difficult to handle, especially in the past five years.
The CEO of the Singapore centre of a large bank learnt it the hard way, when most of his juniors had to be repatriated to India on orders from the Monetary Authority of Singapore (MAS) following lapses in compliance with local regulations. The CEO too had to be subsequently recalled to India following stern directives by MAS.
Offices of Indian banks at centres like Jersey, New York, and London are facing an existential crisis. Many officials ET Prime spoke with say ensuring regulatory compliance takes up most of their time, leaving hardly any for business development.
Provisions like the Foreign Accounts Tax Compliance Act (Fatca), which foreign financial entities operating in US have to comply with, are making life more difficult for the banks. This is where India has to go to the negotiating table and make use of fora like the WTO.
The head of the international division of a prominent bank tells ET Prime, “The [regulatory] conditions are so onerous that we are able to carry on at many centres by complying only with the bare minimum regulatory requirements. At certain centres, we have even received notices from the regulators asking why our operations should not be discontinued. After repeated requests, they have granted us more time to improve compliance.”
However, the Reserve Bank of India (RBI) is also finding increasing instances of non-performing assets involving overseas branches of the banks. In one such instance, money had not been released on standby letters of credit (SBLCs) issued by the foreign branch of a big bank in favour of another bank, even after the mandatory 90-day norm. However, the account continued to be treated as standard for a long time despite many audits in the meanwhile. The case came to light during one of the annual inspections conducted by the RBI. Prompt corrective action (PCA) was initiated thereafter.
Have overseas branches served their purpose?
Yes — they make forex transactions seamless: For forex business customers, a domestic bank with an overseas presence is of great help. For instance, for a letter of undertaking (LoU) transaction, a domestic bank branch can transact more smoothly with its overseas entity rather than a foreign bank branch. The turnaround is faster, which benefits those engaged in the export-import trade.
No — they haven’t been able to draw non-Indian clients: Foreign branches have struggled to get non-Indian clients. Besides, even high-net-worth Indian clients have reduced their exposure, as an official with the Singapore centre of a bank says. “We have sanctioned huge limits for high-net-worth clients like Mustafa [a shopping mall], but they hardly utilise them. Most of these clients bank with foreign banks like DBS.”
No — because Indian banks are bunched up in one place: In certain centres like Tokyo, the customers are just the 50-odd Indian families living there. More than one bank branch to cater to them does not make much sense. Yet, both Bank of India and State Bank of India are there. The major source of business for them is float money from the Japan International Co-operation Agency (Jica), which partners India in infrastructure projects and transfers funds through these banks. A couple of years ago, a view emerged that if there are more than one Indian banks in the same centre in a foreign country, one bank could cease to operate. However, there has been no progress on this.
Except in cases where continuing business becomes unviable (like Bank of Baroda, which was forced to shut its South Africa operations over controversial banking transactions involving an Indian business family), the effort must be to continue operations and transform as many overseas centres as possible into profitable ones.
If nothing else, the overseas presence of banks represents India's soft power. However, the task at hand is to ensure that the compliance burden is lowered significantly to ensure enough leverage in operations.
Closing down foreign branches won’t help ease capital constraints faced by banks. For that, the only solution is strengthening the insolvency code and the resolution process. Overseas branches should stay on as a symbol of the country’s commitment to the vast Indian diaspora and to financial liberalisation.
(Graphics by Hemal Sheth)
However, in this climate of gloom, an Indian banker was rubbing his hands in glee. For Anil Kumar Verma, then chief financial officer (CFO) of a large bank with substantial overseas presence, every INR1 depreciation in the currency was inflating his overseas centres’ business by around INR500 crore, helping achieve targets. Later, during investor presentations, this surge would come in handy as proof of the relevance of those centres.
Cut to five years on. August 31, 2018.
Rajkiran Rai, managing director and CEO of Union Bank of India, says, “We are going to completely cease operations of our Antwerp centre within a year, as the expected volume of business has not materialised, especially from the diamond sector.” Thus, Union Bank joins ICICI Bank and Bank of Baroda, which have pruned their overseas operations. Because of the present stressful conditions, ICICI Bank significantly pared down the stake in its UK and Canada subsidiaries a few years ago to plough back capital worth INR1,500 crore.
A combination of factors, including regulatory compliance, high cost of operations, capital requirements, and stiff competition, are forcing foreign branches of Indian banks into loss-making propositions.With volumes that constitute about 25% of the total balance sheet of their respective banks, these overseas outposts could have acted as buffers to the domestic branches. However, because of rising bad debts and consequent capital erosion, banks are paring their foreign operations.
Business beyond the diaspora
A commonly held view is that Indian banks have an overseas presence only to cater to the Indian diaspora. But then, consider this:
The top five Indian banks boast of a presence in 32 countries with a network of more than 150 branches and a turnover of INR50 trillion.
None of these banks had an exposure to toxic derivatives during the 2008 sub-prime crisis.
With a little effort, the overseas branches could break out of the shell of being fringe players in global markets.
There are roadblocks, regulations being the biggest one. For instance, the Basel III norms for the minimum-capital requirement for Indian banks is 1% above global standards. But then, India’s banks have had a capital-adequacy ratio (CAR) of more than 10% even in stressful times.
There is a strong case for relaxing regulations, especially the onerous ones imposed by overseas regulators at their own discretion, which India must forcefully renegotiate. It also needs to explore the possibility of resolving such issues within the ambit of the World Trade Organization’s General Agreement on Trade in Services.
Genesis of overseas operations
While Indonesia, Kenya, and South Africa boast a sizeable Indian diaspora, locations like Singapore, London, Tokyo, and New York have the added advantage of being financial hubs.
Some of the overseas branches have history with them. For instance, the Singapore centres of Bank of India and State Bank of India are more than five decades old. Canara Bank’s London office has been in operation since 1984. Then there are places like China and Israel, where branches were opened to maintain diplomatic niceties and friendly relationships.
Key to the existence of overseas branches is forex business. Anil Girotra, former chief executive of Canara Bank,London, and former executive director of Andhra Bank, says, “Forex business of even small PSU banks is quite a bit. Even domestic customers bring forex business.”
However, only state-run banks and established private banks provide sizeable forex services and allied facilities. Asked why top performers like HDFC Bank are not growing their overseas play, Girotra says, “You cannot compare a 20-year-old bank with 100-year-old banks. They (the younger banks) can have only representative offices to start with.”
That brings us to the gestation period for overseas branches, and regulations, yet again.
According to regulations in various overseas locations, an Indian branch has to operate as a representative office there for at least three years before it can become a full-fledged bank. The minimum time needed to turn profitable is five years. Even established players operate on wafer-thin margins. This unfavourable risk-return trade-off could be the reason why many banks shy away from overseas operations.
Tied down by compliance
As overseas regulators tighten their hold, compliance has been becoming too difficult to handle, especially in the past five years.
The CEO of the Singapore centre of a large bank learnt it the hard way, when most of his juniors had to be repatriated to India on orders from the Monetary Authority of Singapore (MAS) following lapses in compliance with local regulations. The CEO too had to be subsequently recalled to India following stern directives by MAS.
Offices of Indian banks at centres like Jersey, New York, and London are facing an existential crisis. Many officials ET Prime spoke with say ensuring regulatory compliance takes up most of their time, leaving hardly any for business development.
Provisions like the Foreign Accounts Tax Compliance Act (Fatca), which foreign financial entities operating in US have to comply with, are making life more difficult for the banks. This is where India has to go to the negotiating table and make use of fora like the WTO.
The head of the international division of a prominent bank tells ET Prime, “The [regulatory] conditions are so onerous that we are able to carry on at many centres by complying only with the bare minimum regulatory requirements. At certain centres, we have even received notices from the regulators asking why our operations should not be discontinued. After repeated requests, they have granted us more time to improve compliance.”
However, the Reserve Bank of India (RBI) is also finding increasing instances of non-performing assets involving overseas branches of the banks. In one such instance, money had not been released on standby letters of credit (SBLCs) issued by the foreign branch of a big bank in favour of another bank, even after the mandatory 90-day norm. However, the account continued to be treated as standard for a long time despite many audits in the meanwhile. The case came to light during one of the annual inspections conducted by the RBI. Prompt corrective action (PCA) was initiated thereafter.
Have overseas branches served their purpose?
Yes — they make forex transactions seamless: For forex business customers, a domestic bank with an overseas presence is of great help. For instance, for a letter of undertaking (LoU) transaction, a domestic bank branch can transact more smoothly with its overseas entity rather than a foreign bank branch. The turnaround is faster, which benefits those engaged in the export-import trade.
No — they haven’t been able to draw non-Indian clients: Foreign branches have struggled to get non-Indian clients. Besides, even high-net-worth Indian clients have reduced their exposure, as an official with the Singapore centre of a bank says. “We have sanctioned huge limits for high-net-worth clients like Mustafa [a shopping mall], but they hardly utilise them. Most of these clients bank with foreign banks like DBS.”
No — because Indian banks are bunched up in one place: In certain centres like Tokyo, the customers are just the 50-odd Indian families living there. More than one bank branch to cater to them does not make much sense. Yet, both Bank of India and State Bank of India are there. The major source of business for them is float money from the Japan International Co-operation Agency (Jica), which partners India in infrastructure projects and transfers funds through these banks. A couple of years ago, a view emerged that if there are more than one Indian banks in the same centre in a foreign country, one bank could cease to operate. However, there has been no progress on this.
Except in cases where continuing business becomes unviable (like Bank of Baroda, which was forced to shut its South Africa operations over controversial banking transactions involving an Indian business family), the effort must be to continue operations and transform as many overseas centres as possible into profitable ones.
If nothing else, the overseas presence of banks represents India's soft power. However, the task at hand is to ensure that the compliance burden is lowered significantly to ensure enough leverage in operations.
Closing down foreign branches won’t help ease capital constraints faced by banks. For that, the only solution is strengthening the insolvency code and the resolution process. Overseas branches should stay on as a symbol of the country’s commitment to the vast Indian diaspora and to financial liberalisation.
(Graphics by Hemal Sheth)
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