Foreign lenders seek to cash in on India’s swift economic growth
▶ HSBC opens largest Indian branch in a sign of renewed interest, writes Rebecca Bundhun in Mumbai
India’s banking sector landscape has never been an easy one for international lenders to navigate.
Yet, global banking major HSBC last week launched its largest branch in India, in the city of Bengaluru, offering banking and wealth management services to affluent clients.
HSBC India, which has 26 branches in the country, said the latest addition to its network was “a strategic move to tap into the vibrant economic landscape and growing affluence, in one of the world’s fastest-growing economies”.
The push to expand operations in Asia’s third-largest economy is a reversal of some foreign lenders’ moves to scale back retail operations in India in recent years. HSBC also halved its number of branches in 2016 – as competition from domestic banks and unfavourable regulations made it a tough market to operate in.
There are 44 foreign banks in India, according to official data. They have a 4.6 per cent share of total deposits in the country and account for 6.4 per cent of total banking assets.
But the number of branches run by foreign banks declined for the second consecutive year to 782 in the financial year that ended in March 2023, from 861 the previous year.
The RBI said this drop reflected “rationalism for cost optimisation” by lenders.
Last March, Citi announced it had completed the sale of its consumer business in India to Axis Bank, one of the country’s largest private banks, in a $1.4 billion deal. However, the US lender excluded its institutional client businesses in India from the sale, saying the country remained “a critical institutional market”.
BNP Paribas, Barclays and RBS are also among the foreign banks that have downsized or scrapped their retail businesses in India.
The landscape of the retail banking segment in India is particularly difficult, says Jyoti Prakash Gadia, managing director at Resurgent India, an investment bank.
“The retail segment specifically involves lesser profit margins, greater handling costs and competition from both private sector and public sector Indian banks who have put a lot of thrust on the retail segment in the last several years,” he says. Meanwhile, the business plans for foreign banks are largely determined by strategies based on alternative opportunities at the global level and their comparative strengths in niche areas.
“The overall cost-benefit analysis for a particular segment, the past experience as regards asset quality and emerging trends lead to such decisions [to exit the country] by the respective banks,” Mr Gadia adds.
Sujan Hajra, chief economist and executive director at Anand Rathi Shares and Stock Brokers, says the “extensive branch network of Indian banks” limits the appeal for many foreign lenders in terms of collecting deposits from retail operations.
“Foreign banks’ operating expenses in India are frequently high, which can pose a challenge to the sustainability of some branches.”
Akshar Shah, founder and chief executive of digital investment marketplace Fixed Invest, says the recent reduction in physical branches by foreign banks allows them to “cater to the specific needs of Indian customers more effectively”.
India, expected to be the world’s fastest-growing major economy this year, offers several opportunities for overseas banks.
“The overall expansion of the economy and greater spending power of the middle class will create large volumes of retail business in the middle to long term,” Mr Gadia says.
The number of people in the country with assets worth more than $1 million will more than double by 2027 from five years earlier, Knight Frank India said. The number of people with a net worth of more than $30 million is expected to increase by about 58 per cent.
Corporate banking is one of the main areas offering growth potential.
“Foreign banks can help Indian corporations raise funds overseas and offer non-fund-based services, particularly those related to cross-border operations like international letters of credit or international bank guarantees,” Mr Hajra says.
But Sameer Singh Jaini, founder and chief executive of consulting firm Digital Fifth, believes only a small number of foreign banks will succeed in achieving substantial growth in India.
“The previous allure of foreign banks, once associated with premium services, has diminished due to the enhanced performance of Indian-owned private sector banks,” he says.
But for those that do succeed, the rewards can be significant.