Mid-sized foreign banks struggle to turn retail operations in India profitable

BS :Somasroy Chakraborty  |  Kolkata :October 6, 2013 

However, in the current environment, corporate banking can no longer be the only focus area


Foreign banks' experience with the retail banking business in India has been rather painful.

Consider this: Two - Barclays and Royal Bank of Scotland (RBS) - of the four foreign lenders that entered this space in the past decade have exited some of their consumer banking businesses. Of the remaining two, FirstRand Bank is yet to achieve break-even, while Deutsche Bank turned the business profitable only in the last financial year.

"The decision to do retail banking in a non-home country is challenging as you are competing with other geographies and short-term revenue opportunities. Then, there is difficulty of achieving meaningful scale, organically or inorganically. Therefore, domestic banks are better positioned to attract low-cost deposits, which is an important success factor for retail," said Shinjini Kumar, director at PricewaterhouseCoopers.



However, in the current environment, corporate banking can no longer be the only focus area. India Inc is blamed for flexing its muscles - either refusing to borrow money or demanding restructuring of existing loans. Several Indian banks have now shifted their attention to small and individual borrowers to maintain the pace of business growth.



Foreign lenders that have retail presence in the country are expected to follow suit. "We have high aspirations for our retail bank and will continue to invest in mortgages and business banking. We believe there is significant headroom for growth in both the businesses," said Ravneet Gill, CEO of Deutsche Bank in India.

However, it isn't easy for most of these lenders to operate profitably. Barclays exited retail operations in India in December 2011, barely four-and-a-half years after starting it. It had incurred a loss of Rs 369 crore in 2010-11 and another Rs 88 crore in the next financial year in its consumer banking business here, data with the Reserve Bank of India (RBI) showed.

RBS, which took over the retail banking operations of ABN Amro in India as part of a global acquisition in 2007-08, announced a closure of a majority of its branches in the country this May. Three months later, the foreign lender said it would sell its business banking credit card and mortgage businesses in India to Ratnakar Bank.



FirstRand Bank and DBS Bank are yet to achieve break-even in their India retail operations.

 While FirstRand started consumer banking business in 2012, DBS Bank has been active in this space since 2009.

Deutsche Bank remains the only foreign lender that has entered the space of retail banking in India after 2003 and been making a profit in that business. "In the retail space, Deutsche Bank's approach was calibrated. Certain core areas were identified and pursued, while we stayed away from other vectors," said Gill.

The German lender realised that without scale, it would not be able to make a profit in credit card operations and sold the business to IndusInd Bank in 2011. It has also refrained from offering vehicle financing and personal loans.

The strategy appears to work. In 2012-13, Deutsche Bank made an operating profit of Rs 22.8 crore in its India retail operations, compared to a loss of Rs 2.1 crore a year earlier. Its bigger rivals, Hongkong and Shanghai Banking Corporation (HSBC) and Citibank, saw their India consumer banking profit before tax declining during this period.

"We want to do the basic things right. There is no revolutionary thought process that will drive our retail banking growth. Our advances growth will be complemented by a sustainable deposit franchise. We are aiming for a 25-30 per cent CAGR (compound annual growth rate) in retail banking revenues," said Prashant Joshi, head of private and business clients of Deutsche Bank in India.

For Singapore's DBS Bank, the losses have been mounting in the India retail business. The losses increased from Rs 9.43 crore in 2008-09 to Rs 62.5 crore in 2012-13. However, the bank remains confident that it will be able to turn around and make the business profitable by March 2016.

"For us, the real focus on retail banking started only in 2009. Typically, it takes six to eight years for a consumer banking franchise to break-even. In the last four years, we have achieved meaningful growth in our retail business, especially in the fee income line. The CAGR growth in retail banking fees, primarily through third-party product distribution, during this period has been 72 per cent," said Rahul Johri, executive director and head of consumer banking group at DBS Bank in India.

The lender is currently investing in strengthening distribution and revamping existing branches for superior customer experience. The bank's retail customer count has increased from 3,639 in March 2009 to 20,459 in March this year.

Bankers said due to restrictive branch licensing policy, foreign lenders need to be selective in choosing businesses to ensure their retail banking franchise in India becomes profitable. "We have been realistic in gauging the market. In the last two to three years, we have been working on refining our retail banking model. Though small we are nimble," said Rajiv Rai, chief operating officer of Deutsche Bank's retail operations in India.

Legal barriers delay RBI norms on foreign banks

First Post : june 5,2013Mumbai: 

The Reserve Bank of India expects to resolve within the next few months pending legal issues about whether to mandate that foreign banks incorporate in India, Governor Duvvuri Subbarao said on Wednesday.

RBI Governor Duvvuri Subbarao. Reuters

Final guidelines will be issued once that has been resolved, Subbarao said at a banking conference in Mumbai.

At present, all foreign banks are operating in India by registering their branches, but without establishing subsidiaries.

Subbarao also pointed out the need for regulatory oversight on non-banking finance companies, and said eventually only regulated banks should be allowed to take deposits.

Reuters

Rising trade, migration attract Australian banks to India

Joel Rebello :Live Mint :Tue, Nov 27 2012. 11 18 PM IST

All four top Australian banks, which command 96% of the total assets at home, now operate in India

Mumbai: Rising commodity-linked trade between India and Australia, a large diaspora of Indian migrants and increasing number of Indians studying in that country are attracting top Australian banks to start operations in Asia’s third-largest economy.

In 2012, two Australian banks opened branches in India to add to the two that had opened shop in 2010 and 2011. With this, all four top Australian banks, which command 96% of the total assets in the home market, now operate in India.

Westpac Banking Corp. is the latest Australian bank to open a branch in Mumbai earlier this month after its Australian rival National Australian Bank Ltd (NAB) opened one in February. Earlier, Commonwealth Bank of Australia had opened a branch in 2010 and Australia and New Zealand Banking Group Ltd (ANZ) made a comeback into India in 2011 after selling its business in 2000.

Bankers say the increase in trade between India and Australia in the last five years is the main trigger to look towards India as companies here are hungry for natural resources and commodities like coal and iron ore.

India has risen to the top five among Australia’s trading partners with annual two-way trade rising to Australian $21 billion ($22 billion) in 2010-11 from Australian $6.54 billion in 2003-04. Bilateral trade is projected to rise to $40 billion by 2017.

Indians became the largest nationality of migrants to Australia in 2011-12, ahead of people from the UK and China. At least 29,000 Indians migrated to Australia in 2011-12 and 15.7% of them entered the country under Australia’s permanent migration programme.

Bala Swaminathan, president, Asia at Westpac, said India is the logical choice for Australian banks because of growing demand for Australian resources by Indian firms.

“Australia-India trade has exploded in the few years and the current thinking is that it’s going to go much higher. Australia’s core strength is natural resources, commodities and Agriculture. In the last three to five years, those sectors have contributed to the trade,” Swaminathan said.

To be sure, trade with India is still very small compared with China, which traded more than $100 billion of goods and services with Australia in 2011.

Subhas DeGamia, chief executive officer of ANZ India, said the belief is that India along with China will remain at the forefront of global economics and hence have “vast potential” for growth in the years to come.

“India is a major engine for global growth,” DeGamia said, adding the fact that Indian trade has increased with other countries in Asia is also behind the growing interest in this market.

“India’s trade has increased significantly not only with Australia but also with other countries in Asia like China (India’s largest trading partner) and Indonesia (where trade is expected to double in the next two-three years)which is why India is seen as an attractive market in Asia,” DeGamia said.

ANZ, in fact, has made a comeback to India after exiting in 2000 by selling its Grindlays Bank unit toStandard Chartered Plc for $1.34 billion. Its global CEO Michael Smith admitted that leaving the country was a “mistake”.

Since all four banks have one-branch operation, they are focusing on corporate and institutional clients with services like lending, transaction banking, foreign exchange, structured trade finance and debt capital.

In an interview with Mint after opening its branch in Mumbai in February, Cameron Clyne, group chief executive officer of NAB, said banks are just following their clients into India. “One thing Australia has is energy in a number of forms; we have a range of relationships with those companies and we will be hoping to help them. It’s not just commodities but also technology and how we can bring that in. There is a very neat opportunity here—Australia is rich in resources and an emerging country like India needs that resource,” he had said.

There are other opportunities as well, according to Ravi Kushan, CEO at Commonwealth Bank which lists remittances, student and migrant referrals as its focus area.

“We are focusing on growing commercial banking and NRI (non resident Indian) business in India. We will continue to service (those) clients who have interest in both the countries,” Kushan said in a email reply.

Swaminathan from Westpac refers to the $4.5 billion investment by the Adani group to develop a coal mine in Australia. “India was only importing... Now there is also investment from Indian companies in Australian assets,” Swaminathan said, adding that presence in India was necessary to serve Indian clients.

Besides Adani, infrastructure companies such as Lanco Infratech Ltd, GVK Industries Ltd and state-owned miner NMDC Ltd have interests in Australia and large conglomerates such as the Tata Group and Aditya Birla Group are scouting for assets there.