Column: Banking on India

Nov 09 2013, 01:49 IST
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SummaryTill RBI spells out the details of M&A for foreign banks, the disadvantages of WoS outweigh the benefits.

What could be the response of foreign banks to the new set of RBI guidelines which gives them greater scope for expansion if they convert their Indian operations into subsidiaries? This follows up on the guidelines released by RBI earlier and seeks to provide some momentum to India's expanding banking sector in the manner that was followed for private banks. While offering sops like greater number of branches, the guidelines include several caveats to buffer the system against any risk that could emerge from the opening up of the sector as well as eschew domination by foreign banks.

It is necessary to evaluate and grasp the importance of these banks for our financial set-up. Foreign banks were considered models to be emulated when we went in for liberalisation in the nineties which led to the creation of new private banks—Indian private banks, in a way, were much like the one abroad, bringing in all the goodies offered to the masses. This was in the form of more products and technology which helped to unleash competition. As on March 31, 2013, there were 43 foreign banks with 334 branches in a total of 92,114 in the sector. Their share in the net worth of the banking sector was 15.3% while it was 2.3% for employment. Quite clearly, these are technology-driven banks with deep pockets that rely less on headcount. However, they are better pay masters with the staff cost being 18.2% of the total expenditure as against the 13.0% average for the entire sector.

In terms of business, they accounted for 3.9% of deposits, 4.5% of credit and 8.7% of investment, which is not bad given their number. In terms of operations, they do better than the rest of the sector primarily because their perimeter of operations is limited. Their cost of funds is lower at 4.05% as against 6.12% for the sector, while the return above the cost of funds is higher at 5.50% (4.21% for the sector). The return on assets was higher at 1.94% (1.03%) and their net NPAs were lower at 1.01% (1.68%). Quite clearly, in case these became benchmarks that are emulated, the sector would be healthier provided this

is scalable.

What could be the level of interest of these banks in becoming subsidiaries? Looking at this list of 43 banks, there are only 6 which are significant players. Out of them 2 have over

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