Big play for foreign banks unlikely

The global financial crisis may well have put off bigger play by foreign banks sine die.
For five years now, since the Reserve Bank of India (RBI) released its Roadmap for Presence of Foreign Banks in India on March 5, 2004, April 1, 2009, has held significance as the date banking in India would see a sea-change with the ground being laid for operations by foreign banks.

In that paper, RBI had promised to review foreign bank regulations in India in keeping with a World Trade Organisation agreement.

The review would include ‘dilution of stake and permitting mergers and acquisitions of any private banks in India by foreign banks.How quickly times change!

Back then, global economic growth was at its peak, foreign banks could do no wrong in their home country and liberalisation was the buzzword in India.

Today, global growth is almostnon-existent, foreign banks are regretting their sinful investments and India can well turn around and tell the world it was right in going slow on liberalisation.

As a result, less than a couple of weeks before this most anticipated April deadline, foreign banks are not lobbying for it as hard and the RBI too is not very keen.

What’s more, 2009 is the election year and banking analysts do not expect any crucial policy intervention till a new government is elected and firmly in charge.

Suresh Ganapathy, banking analyst with German Deutsche Bank, says these decisions are difficult to come by in an election year.

“It will depend on whether the government is willing or unwilling. Right now, the future is uncertain. Also, things were hunky dory when the RBI had made these commitments. It has changed drastically since.”

Ganapathy also draws attention to the rapid crumbling of top banks in the developed markets because of huge losses on investments they didn’t understand.

Central banks in the US, UK and the European Union have had to give away trillions of dollars to these banks just to help them keep afloat.

Citigroup, the most famous of the US banks, has got $45 billion from the US government. Its investment banking peer Lehman Brothers was not so lucky, as it was declared bankrupt in September 2008.

Given all these, bankers and analysts are asking if foreign banks entering India will add any value to the present setup, after their recent poor record in managing their own finances.

RH Patil, chairman of Clearing Corporation of India and noted banking commentator, asks why the RBI should allow more foreign banks in India when Indian banks don’t have the same liberty abroad.

“All WTO agreements are based on the principle of reciprocity. You allow our banks and we will allow yours. Most of the countries don’t treat our branches the same way,” he said.

That’s exactly the position of two top Indian bankers —- KV Kamath, chairman-designate, ICICI Bank, and Aditya Puri, CEO, HDFC Bank.

Bankers also give examples of lack of reciprocity. State Bank of India, the largest bank in India, is present in New York, Chicago, Los Angeles and Washington, but not all units are allowed to operate as branches.

While, New York and Chicago are branches, Los Angeles is an agency (it cannot accept deposits or extend loans).

The Washington facility is only a representative office. Compare that with Citibank in India — 40 branches in 28 cities and over 450 ATMs together with over 350 branches of its non banking finance company, Citi Financial.

Analysts said India has no compulsion to open up its banking sector further since RBI has already given foreign banks more than the initial agreement of allowing setting up of 12 branches per year.

Patil said after the recent global developments, the RBI should be more cautious in letting them in.

“I do not faith in these foreign banks. They have created problems for their own government. Indian banks are much better placed. Even in the committee to study capital account convertibility for the rupee in 2006 we believed foreign banks were only after the creamy elite layer in India. They don’t want to do banking to the people who need it most,” he said.

Patil has been a part of various recommendatory panels in the banking sector.
Experts are wonder whether these foreign banks will be keen in the first place given that they themselves are dependent on capital from their governments.

Ananda Bhoumik, senior director, banking, at Fitch Ratings said foreign banks are facing enough challenges in their own markets, which will dissuade them from charting new territories.

“Though there is no clarity on what will happen, there is clarity on what won’t. Foreign buy outs are now a non-issue for these banks. They will now focus on their home countries,” he said.

But an analyst with a foreign brokerage, who did not wish to be named, contests saying foreign banks will like to have a pie of the Indian growth story.

“They may also have the risk appetite and capital to take over smaller private banks like Federal Bank, Development Credit Bank and Yes Bank. It’s also not necessary that these may be names we have heard. Banks from China, Japan and the Middle East may also have a lot of money and would like to diversify,” he said.

Deutsche Bank’s Ganapathy said foreign banks can’t be expected to be allowed to buy out private banks in India.

“These agreements are non-binding on the RBI. The regulators can just go about not commenting on it. At the most may be they will increase the single foreign shareholding limit in private banks to 10% from 5%,” he said.

However, foreign banks have given enough indications that they are ready to take the opportunity whenever it comes.

For example, in August last year, US-based JP Morgan hired Kalpana Morparia, who was for a long-time No. 2 at ICICI, to head its operations in India, thus positioning itself for the retail push whenever the opportunity arises.