Editorial: Better bank for the buck

Comments 0
SummaryBanks need to weigh the WoS pros and cons.

Given the rush for new bank licences, one would have expected Reserve Bank of India’s (RBI) opening up the market to foreign banks, to have been met with a little more enthusiasm. The central bank said on Wednesday it would allow foreign banks in the country to roll out branches freely, subject to the same rules that apply to domestic banks. In return, foreign banks need to operate here through wholly-owned subsidiaries (WoS) of their parents and not as branches as most of them now do. RBI has also given them a chance to grow via the acquisition route allowing them to buy into private sector banks. If the response to the guidelines has been guarded, it’s probably because foreign banks don’t want to make public their intentions before having studied the rules and assessed the implications. The prospect of being able to scale up at will must seem exciting given that their quota of branches is now capped at a collective12 branches a year in line with WTO norms. However, even if there is a huge catchment waiting to be tapped, customer acquistion costs remain high. Locating a fourth of their network in unbanked areas—Tier 5 and Tier 6 cities—would mean living with lower profitability. Branches in the hinterland take far longer to break even—anywhere between three to five years—though it’s possible the use of technology will change the economics of the business. Nevertheless, taking a call on whether the Tier I branches will be profitable enough to support the branches in the smaller towns—the total number of branches set up in Tier I cities, in any year, cannot exceed the total opened in Tier 2 to Tier 6 cities—will not be easy.

What would also weigh on them is the increased exposure to the priority sector—the mandatory lending to this segment, for a WoS, will be 40% of advances. While the scope of the priority sector has been broadened over the years, direct lending to the space is fraught with difficulties and not always a profitable proposition. Under the circumstances, much of what is gained by way of lower

Single Page Format
Ads by Google

More from Edit & Columns

Reader´s Comments
| Post a Comment
Please Wait while comments are loading...