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Global banks may not be in a hurry to set up subsidiaries

Top global banks such as Citigroup, Hong Kong and Shanghai Banking Corp and Deutsche Bank may not rush to set up an Indian subsidiary.

, ET Bureau|
Updated: Nov 08, 2013, 06.49 AM IST
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Top global banks such as Citigroup, Hong Kong and Shanghai Banking Corp and Deutsche Bank may not rush to set up an Indian subsidiary for their businesses here since their focus on corporate lending does not require a vast branch network.
Top global banks such as Citigroup, Hong Kong and Shanghai Banking Corp and Deutsche Bank may not rush to set up an Indian subsidiary for their businesses here since their focus on corporate lending does not require a vast branch network.
MUMBAI: Top global banks such as Citigroup, Hong Kong and Shanghai Banking Corp and Deutsche Bank may not rush to set up an Indian subsidiary for their businesses here since their focus on corporate lending does not require a vast branch network, and they have an option of retaining the branch model.

Many big banks facing capital constraints may not even chase to acquire a local bank to expand their presence barring afew such as DBS which has stated its desire to incorporate locally and buy banks to grow. But the central bank, if the response is poor, may nudge big ones to set up local units in the years ahead as countries across the globe are moving to ring fence their financial system after the 2008 credit crisis exposed the fault lines of a global financial market. “There is nothing dramatic or distinctive that is going to happen,’’ said Abizer Diwanji, leader financial services at consultants Ernest and Young. Among the big banks, there is no real, compelling reason to convert. If they have the intention of having 2,000 branches, yes, they would. But most of them are operating at optimal level.’’

The Reserve Bank of India on Wednesday said foreign banks which choose to operate registering under the Indian Companies Act will be given near national treatment, which means setting up branches at will and taking over rivals. But it also provided an option for banks operating before August 2010 to choose between being branch-led, or through local subsidiary.
Global banks may not be in a hurry to set up subsidiaries
“For banks that have been here for a long time, it would be in a sense retrospective legislation for us to say now you will have to change the form,’’ governor Raghuram Rajan had said. “They have come in with some ground rules and we can’t overnight change the rules on them. So we have to give them some incentive and the incentive we are giving them is near national treatment on a reciprocal basis.’’

At least seven big foreign banks, including Standard Chartered and Hong Kong and Shanghai Banking Corp, which ET attempted to seek comment from, declined to do so. That very little could change in the market place was reflected in stock prices of private sector banks such as Federal Bank, South Indian Bank and Dhanlaxmi Bank which speculators fancy as likely targets whenever there is a sign of RBI relaxing rules. Though most stocks rose, they ended well off their highs.

“Expansion, entry of foreign banks will also depend on foreign banks’ retail expansion strategy – at present, foreign banks are largely into corporate banking,’’ says Sumeet Kariwala at Morgan Stanley. “Whether the benefits outdo the operational, taxation-related hurdles will also be an important factor.’’

The tightening capital needs in the West with the implementation of Basel III higher capital buffers for the so- called systemically important institutions, may restrain them to invest more in India though for many it still remains a key market.

 
Retail strategies of lenders such as Citi, HSBC and Standard Chartered have misfired in the past with them running up huge losses. Many of them reduced their operations in the country. British bank Barclays wound up its retail business, and Deutsche Bank sold its credit card unit to IndusInd Bank. “Capital is going to be tight for many banks,’’ said Ananda Bhoumik, senior director at India Ratings, a unit of Fitch Ratings. “Some of them may not want to expand and they, as a group, have lost market share in the last few years.’’

The mandatory 40% of total lending to small companies and farming sector is also cited as a hurdle for them to aspire to be a local bank. But with financial inclusion on top of policy makers’ agenda, there could be no respite on that. If international banks, which have been complaining about RBI’s rigid stance for their lack of growth, do not come forward to use this red carpet welcome by Rajan, the regulator may come up with other ways to ensure that they do.

“Some of them may not be enthused now, but RBI may nudge them later,’’ said India Ratings’ Bhoumik.
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