In 2019, US banking major Bank of America (BofA), which has its India head office in Mumbai, decided to commence its investment banking practice in Bengaluru, India’s unicorn hub. Since then, BofA has doubled the strength of its investment banking team in Bengaluru as it eyes a bigger slice of the start-up space. This comes at a time when the volatile stock markets have played spoilsport in many a unicorn’s journey of going public and the ventures have been forced to go back to private equity or venture capital players. “We were the first bank to have an investment banking team in Bengaluru focussed on the unicorn space. We believe it is important to be present in an ecosystem that is enabling the rise of new-age companies,” says Kaku Nakhate, President & India Country Head, BofA.
Not far from BofA’s office in Mumbai’s BKC is the office of another US banking major, JPMorgan Chase Bank India, that has been steadily expanding its commercial banking practice. The aim is to serve local mid-cap companies while making huge investments in the payments and transaction banking vertical to help digitise its MNC and e-commerce clients to better manage their cross-border flows, among other things.
US banking majors are not the only ones active in India. Germany’s Deutsche Bank Group recently launched its IFSC Banking Unit or IBU in Gujarat’s GIFT City, the country’s first International Financial Services Centre (IFSC). And HSBC India, whose parent is headquartered in London, is trying to be a “more Indian” bank, according to CEO Hitendra Dave. “We are in the midst of very significant customer acquisition across all segments. We are spending money to attract customers. The real opportunity for us is to just acquire customers at a very rapid scale. We are resetting our aspirations and our ambitions in the country. The high-level strategies—significant expansion in customers on the back of that very meaningful desire to grow our balance sheet—[will help us] become a much more Indian bank,” Dave told BT in a recent interaction.
Meanwhile, British major Standard Chartered Bank, a full-service bank in India, is eyeing a bigger slice of the retail space, especially with the exit of Citi.
This assumes significance as a few months ago, global banking major Citi sold its India consumer business to private sector major Axis Bank. For the New York-headquartered Citi, the move was in line with its global strategy that saw it exiting the consumer business in 13 markets. But Citi is not scaling down in India; in fact, it plans to redeploy the capital in the institutional businesses in the country.
There have been exits, partial scaling down or restructuring of the business by foreign banks in India in the past as well. To name a few, banking majors like Barclays, Royal Bank of Scotland Plc (RBS), and UBS have either exited or reworked their strategies after starting their India operations. “Post the global financial crisis, many of the global banks had capital requirements on their main balance sheet. So, as they looked at their spread, they looked at what are the areas where they could get efficiency,” says Surojit Shome, MD & CEO, DBS Bank India.
So, what is happening in the foreign banking universe in India?
SMALL IS BEAUTIFUL
There are nearly 150 different commercial banks operating in India across categories—public sector banks (PSBs), private banks, foreign banks, small finance banks and payments banks. Foreign banks form the largest group, with 45 entities, while there are 21 private banks and 12 PSBs, as per 2021-22 data from the Reserve Bank of India (RBI).
In terms of the number of branches, however, foreign banks are nowhere near PSBs. Foreign banks have a branch network of 874, compared to the PSBs’ 86,311, as per RBI data. Despite the limited number of branches, foreign banks play a crucial role in the Indian economy at a time when local companies are looking outwards and global companies are looking at India for growth following the economic slowdown in Europe, the US and other parts of the world.
Historically, foreign banks in India have focussed on niche segments, but they are now further consolidating and re-evaluating their strategies given the new opportunities. And they have a vast and diverse area to choose from: MNCs, top Indian conglomerates, investment banking, cross-border services for foreign investors, fixed income & forex, institutional business, structured finance and even new-age sectors, with a focus on India’s growing population of unicorns.
These areas have been identified even as the overall share of foreign banks in total loans and advances has consistently fallen over the years. It was as high as 8 per cent in the early 2000s from where it fell to 6 per cent just before the global financial crisis. In 2020, it was at around 4.16 per cent, while 2021 saw it dipping to 3.92 per cent, as per RBI data. Simply put, overall competition in the Indian banking space is intensifying as domestic banks—both government-owned and private—are aggressively modernising and expanding, and foreign banks have to work harder to protect their share of the pie. In such a scenario, major foreign banks are focussing on areas based on their strengths.
FROM INDIA, FOR INDIA
What advantage do foreign banks bring to the table? “We make clients feel comfortable whenever they enter India and offer them the same bouquet of services they receive in their home market, say the US or Europe,” says BofA’s Nakhate. This is important considering the fact that, as per government data, India attracted a record $83.57 billion through foreign direct investment in FY22—a 20-fold rise compared to $4.3 billion in FY04.
This corroborates the heightened interest that global companies have in India and foreign banks play a key role in this segment as the parent companies of MNCs are used to banking with some of the biggest global banks. Hence, it comes as no surprise that MNCs are a key focus area for foreign banks. “We service multinationals with global needs while operating in India, such as in cross-border cash management, trade finance and lending and managing currency, interest rate and commodity risks,” says Madhav Kalyan, CEO, JPMorgan Chase Bank India & Senior Country Officer.
Citi, which has been in India since 1902, has a renewed focus on institutional business, including servicing MNCs, as it looks to redeploy capital received by exiting the consumer business. “Thirty per cent of all multinational companies in India bank with Citi. Around 30 per cent of all FPI flows come through Citi. We are the most global, and probably the broadest and the deepest [foreign bank] in the institutional space which is where we have decided to double down after the sale of the consumer businesses in India,” says Ashu Khullar, CEO, Citi India & Region Head, South Asia.
Foreign banks have gained in prominence as the definition of global companies has changed over the years—as many Indian conglomerates look to expand globally. Take, for instance, Frankfurt-headquartered Deutsche Bank Group, that has been present in India since 1980. “India has performed absolutely beyond our expectations over the last couple of years. The services we provide within India are north of what we currently have on a group level,” says Kaushik Shaparia, CEO, Deutsche Bank Group, India. “Owing to the rising number of multinational corporations coming from this part of the world, cross-border banking services are required, whether it is from hedging or the financing standpoint, transaction banking will come into play. That is the bridge into Europe or intra-Asia or the Americas.” Deutsche Bank has infused about $1 billion in capital in the last three years into its India unit.
Meanwhile, Zarin Daruwala, Cluster CEO, India and South Asia Markets (Bangladesh, Nepal and Sri Lanka), Standard Chartered Bank, echoes a similar view when she says that the London-headquartered global major is a “full-service bank” in India and its big balance sheet—both in India and across the globe—helps it service clients both within and outside the country. “That helps with the larger, big business houses; plus, the kind of global knowledge, contacts and global insights that we bring give us an advantage vis-a-vis a local bank,” says Daruwala. Standard Chartered is among a few foreign banks in India that have a strong presence in the retail segment and is eyeing a bigger role for itself in the space.
THE BUSINESS OPPORTUNITY
Given the size of foreign banks, one would assume that they would choose to work with only the biggest players of India Inc. But, given the progress—in terms of business volume, reach and growth—of some home-grown mid-sized companies, the lenders have started looking at the MSME space as a huge business opportunity.
“Providing innovative trade finance solutions for MSMEs, thereby bolstering growth in this segment, is another focus area [of Deutsche Bank India],” says Shaparia. For a foreign bank, a typical MSME would not be one that fits in the traditional definition of such entities. In fact, they would be much bigger, next only to A-listers in size. “Over the last three years, we have expanded our commercial banking business to serve local mid-cap companies in India, and we believe this business will scale significantly,” says JPMorgan’s Kalyan. In a similar context, Citi’s Khullar says that he expects the bank to expand its commercial banking practice by growing its client base by 50 per cent, by 2025. “More players are trying to get into the MSME space. Commercial banking, which focusses on emerging and mid-sized corporate clients, which includes multinationals, MSME clients as well as digital, new-age companies, and start-ups, is a large opportunity where we are trying to double our client base,” he says.
Meanwhile, start-ups and unicorns seem to be emerging as the new hotbed of competition with all the major foreign banks eyeing a slice of the lucrative market. Data from Tracxn shows that India has as many as 107 unicorns—the third-highest after the US and China—with 20 of those emerging in 2022.
Foreign banks are trying to partner with these ventures in every possible manner—cash management, M&A, payments processing and fundraising, among others. “The competition in the start-up space [for foreign banks] will remain huge. When a good company decides to tap the market, every bank will want to be associated with it. Though you will succeed only if you have a global reach, backed by extensive distribution capabilities,” says BofA’s Nakhate.
The year 2021 was a record one for IPOs with a cumulative Rs 1.19 lakh crore being raised. The highlight of the year was the entry of digital majors—Zomato, Paytm, Nykaa, Policybazaar, EaseMyTrip—in the public markets, with each of these IPOs seeing multiple foreign banks being on the list of merchant bankers.
Capital market operations—investment banking, research, equity capital markets (ECM), institutional sales, debt capital markets (DCM), M&A and FPIs—are big focus areas for many large foreign banks. “We facilitate around one-fourth of the total investments into equity and bonds markets each year. JPMorgan is a leader in the investment banking business in India across M&A, ECM and DCM. The global connectivity and industry knowledge that we bring to clients is unparalleled,” says Kalyan. For Citi, the capital market is a huge focus area as it commands a 30 per cent share of all FPI flows coming into India. “Last year, we were with every tech IPO. We have a big platform that we can leverage,” says Khullar.
As for BofA, which was the sole banker to manage the block deal through which Uber sold its stake in Zomato in August, investment banking is an area where it has been among the top players and it aims to maintain that position. “For Bank of America, M&A and capital markets remain our big focus areas. We are a leading investment banking franchise in India. We have a solid equities business with a large market share in the FPI space. This is backed by our world class research house,” says Nakhate.
For the Indian arm of Deutsche Bank Group, capital market-related activities hold significant importance. “We are among the largest in institutional securities services and fund management and hope to scale this segment further via our GIFT IBU,” says Shaparia.
A STRONG OUTLOOK
Standard Chartered’s Daruwala knows her bank has limited presence in terms of branch network but she says that her bank is present at the right places. “We are a small bank relative to large private sector banks, but we don’t see this as a constraining factor. We are present in about 42 locations in India, which is good enough. Nearly 70 per cent of the business that happens in India, happens in those 42 locations,” she says.
Foreign bank honchos are confident that going ahead, the role of these lenders will only increase as an increasing number of businesses—both Indian and global—look at cross-border expansions that would entail financing and advisory, among other things.
Dave of HSBC India doesn’t believe that foreign banks are losing market share in India. “The metric traditionally used to measure advances and deposit growth might not be the right metric for international banks,” he says. “For example, if you apply the metric of how many transactions the foreign bank industry has done, you will realise it’s much higher than the 4 per cent [market share of overall loans],” he explains.
DBS Bank India’s Shome says that India offers a very “competitive” market. “Domestic banks are very good; they have the technology… it is a competitive market where you have to be willing to stay the course,” he says.
The future play of foreign banks in India also depends upon the well-being of their global parents. The issues that global banking institutions are dealing with don’t seem to be getting any better. More than a decade after the Lehman crash, Credit Suisse Group AG, the world’s 45th largest bank by assets, has witnessed a massive collapse in its share price. Credit Suisse AG also has an Indian entity. Like its parent, the bank’s Indian entity has been focussing on investment banking, wealth management, and share brokerage services. While the loss-making bank’s new CEO, Ulrich Koerner, is scheduled to reveal a new strategy plan on October 27, the Indian branch is profitable and well-capitalised. But a setback at the global level will certainly have some implications for future capital allocation for the foreign banking pack in India.
