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Banking

A new worldof banking

Indian banks are following theircustomers overseas.

But they have grander ambitions.An India Now report.

K V KAMATH: Looking at the next horizon of growth

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On 13 March 2006, the ReserveBank of India (RBI), the coun-try's central bank and mone-tary authority, okayed an

unusual experiment. It allowed Bank ofBaroda (BoB), Bank of Maharashtra andOriental Bank of Commerce (OBC) to setup a joint venture bank in Malaysia. Thethree Indian public sector banks will holdthe $77 million equity in a 40:30:30 pro-portion. The bank will eventually be listedon the Malaysian bourses.

For BoB, going abroad is not particular-ly novel. It styles itself "India's internation-al bank". For the others, smaller in size, it'sa new adventure. And it is an indicationthat even the relative minnows of thebanking pack in India are eyeing foreignshores for expansion. Says an OBCspokesperson: "The bank is looking atopportunities to open branches or repre-sentative offices in Dubai, Malaysia andSenegal to reap the benefits of its brandequity."

Till a few years ago - until liberalisationtook off - this would have been heresy.The accepted wisdom was that India washugely underbanked, particularly in therural areas. It was the social obligation ofpublic sector banks to spread in the boon-docks. Besides, how could you go abroadand compete with the likes of Citibank andHSBC. Even as recently as a few yearsago, overseas branches were regarded asparking lots for senior executives over thehill.

Today, however, there has been a newdawn. Take the action in just one country- China. More than a dozen Indian bankshave applied to the RBI to set up shopthere. Several have already flagged off rep-resentative offices. They will convert tobranches in two years, the timeframe stip-ulated by the Chinese authorities.

According to the RBI, as on 28 February2006, there were 101 branches of Indianbanks abroad. There were also 17 sub-sidiaries and 28 representative offices.Many of these are of recent origin. Butthey reveal only part of the picture. TheRBI does not publish details of applicationsmade. Banks, however, say that almosteveryone is looking for a piece of theaction.

What action? Indian banks are bit play-ers on the world stage. The largest Indianbank - State Bank of India (SBI) - was No93 in the list of the world's top banks,according to the July 2005 ranking by TheBanker. Is it really worth the effort to goabroad?

Some see it as a simple survival strate-gy. The WTO norms say that severalrestrictions on foreign banks operating inIndia must be lifted. That's begun happen-ing and these banks are going all out torope in more corporate customers. Theyhave the advantage of being able to offernetworks and services in other countries.This is important because Corporate Indiais on a takeover spree, gobbling up scoresof companies abroad. If their Indian banker

cannot aid in this effort, they will turn to aforeign banker. Aggressive foreign bankerswill then leverage their toehold to capturesome of the company's business in Indiaitself.

Others don't see this as a defensivemove. "The globalisation of the Indianeconomy has created opportunities forIndian banks to go global and offer a com-plete range of services to its customers,"says SBI chairman Arun Kumar Purwar. "Itis therefore natural on the part of SBI toaccord increasing importance to expansionoverseas."

The numbers at SBI give an indicationof the pace of change. In March 2004, thebank had 52 offices in 28 countries. Thishas now been increased to 70 offices in 30

HI-TECH NETWORK: Indian banks are keeping pace with technological improvements

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Many Indian banks had significant over-seas operations in the pre-Independencedays. Post 1947, they drew in theirhorns to concentrate on India, which wassignificantly under-banked. They are ven-turing abroad again or beefing up theirexisting operations. But progress hasnecessarily to be slow. Here's a look atsome of them:

BANK OF BARODABank of Baroda (BoB) openedits first branch outside thecountry in Mombassa, Kenya

in 1953. Since then it has built up a net-work of 59 offices in 21 countries includ-ing 39 branches of the bank, 17 branch-es of its seven subsidiaries and three rep-resentative offices. The bank also has ajoint venture in Zambia with nine branch-es. The latest additions are rep offices inMalaysia, China and Thailand. BoB willextend its branch network in the US andHong Kong and launch operations in

Canada, New Zealand, Trinidad &Tobago, Bangladesh, Maldives and SriLanka.

BANK OF INDIABank of India saysit is the first IndianBank to open a

branch outside the country (London,1946) and also the first to open a branchin Europe (Paris, 1974). The bank has asizable presence abroad, with a networkof 23 branches (including three represen-tative offices). The international businessaccounts for around 20 per cent of thebank's total business.

INDIAN OVERSEAS BANKIndian Overseas Bankhas five branches

abroad: two in Hong Kong, and one eachin Seoul, Singapore and Colombo. It hasa remittance centre in Singapore and repoffices in China, Malaysia, Dubai and

Abu Dhabi.

INDIAN BANKThe bank has branchesin Singapore andColombo. In 2005, it

raised $100 million through its Colombobranch. This money will be used to aug-ment the assets of its foreign branches.

PUNJAB NATIONAL BANKThe bank wasthe first Indianbank to open a

branch in Kabul, Afghanistan. It has repoffices in Almaty (Kazakhstan), London,Shanghai and Dubai (UAE).

CANARA BANKCanara Bank establishedits international division in1976. Although small insize, it has a presence inthe UK, a subsidiary in

BACK WITHOUT A BANG

countries."Indian banks are keeping pace with

global technological improvements in thebanking sector," continues Purwar. "Weexpect that with the further opening up ofthe economy, they will be in a position tooffer a comparable product range. In addi-tion, their vast physical networks will offerlinkages for global trade."

Purwar has launched a plan styledProject Vijay (Victory). Its objective is totake the bank into the Top 50 worldwideand among the first five in Asia in terms ofassets by 2008.

A component of Project Vijay is theacquisition of banks abroad. SBI hasbought 76 per cent of Giro CommercialBank of Kenya, 76 per cent of PT BankIndoMonex of Indonesia, and 51 per centof the Mauritius-based Indian OceanInternational Bank.

The budget for this exercise is $100million. That may seem a pittance when, togive just one example, Bank of Americapaid $3 billion for a 9 per cent stake inChina Construction Bank. But SBI, wherethe bankers are ultra cautious, is fundingits acquisitions from the profits of its over-seas operations.

The No 2 bank in India - ICICI Bank - isalso planting its flag in different countries.It is a newcomer to this area, having set upits International Banking Group (IBG) onlyin 2002. It is already present in 12 coun-tries. Some 15 per cent of its businesscomes from international operations.

Bhargava Dasgupta, head of the IBG,explains the reasons behind the foray."Three years ago, we needed to look at thenext horizon of growth. What we sawaround us was growing globalisation. We

evaluated different strategies. Finally, wedecided that the follow-the-customerapproach was the most appropriate.

"The business opportunity was, first,the Diaspora. Second, Indian companieswere going overseas. Our opportunityareas were: helping them to raise capital,acquire companies and set up greenfieldprojects. Third, India was opening up totrade. This was where we could also getinvolved."

ICICI Bank has taken a very differentapproach from SBI. While the latter is on atakeover trail, the former is setting up itsown branches. (The only takeover hasbeen of a small bank in Russia. Russianlaws require two years of operation beforepermission to accept retail deposits isgiven. The acquisition thus gave ICICI Banka two-year headstart).

Dasgupta explains that ICICI Bank hasnot seen any value in acquisitions as yet.It's possible to get a bank cheap, if youlook hard enough. But it is likely to comewith the baggage of people, technologyand non-performing assets (NPAs). ICICIBank has received permission to open rep-resentative offices in Malaysia, Kenya,Thailand and Malaysia. Its UK subsidiary

The globalisationof the Indian econ-omy has createdopportunities for

Indian banks to goglobal and offer acomplete range of

services.

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will open a branch in Antwerp soon.Why are two of the largest Indian banks

following totally different strategies in theirglobalisation quest? Which has the poten-tial to work better? The answer lies in thefact that they are starting from differentpositions. "These banks are not in thesame situation as us," says Dasgupta."They went out of the country at least 40years ago."

It's not just SBI. Bank of Baroda openedits first branch outside the country inMombassa, Kenya in 1953. Today it has59 offices in 21 countries. In 2005, itopened a new branch in the UK, taking itstotal overseas branches to 39. The firstIndian bank to open a branch outside Indiawas actually Bank of India, which set upshop in London in 1946. Even OBC, nowpart of the joint venture in Malaysia, had abranch there earlier. Changing Malaysiangovernment policies - which did not allowforeign banks owned by foreign govern-ments to operate in that country - forced itto exit. As a way out, the branches ofOBC, United Commercial Bank and Indian

Bank were merged to form United AsianBank, which was then taken over.

Despite the fact that globalisation hasbeen low key, there are several Indianbanks like these with some experience ofthe foreign markets. For ICICI Bank, it's allvery new. "We want to learn the ropes our-selves," says Dasgupta. "We want to getour hands dirty." But when it movesbeyond this learning curve, it could look atacquisitions too.

There is another reason, which nobodytalks about officially. SBI and the otherIndian public sector banks may be techni-cally independent, but they still suffer fromgovernment control. "The chairmen ofthese banks are appointed by the govern-ment," points out a banking analyst.

In an earlier era, the SBI chairman's jobwas regarded as a final resting place, areward for being a malleable handmaiden.In the nineties, SBI had more than eightchairmen in as many years.

Purwar has had a relatively longerinnings. He took over as chairman inNovember 2002 and his term ends on 31

A K PURWAR: Looking to expand overseas

Hong Kong, a joint venture with SBI inMoscow and a rep office in Shanghai.

UTI BANKA new generation bank,UTI Bank flagged off its

international operations in April 2006with a subsidiary in Singapore. It hasReserve Bank of India approval to set upa rep office in China.

On the Web

State Bank of India: www.statebankofindia.comICICI Bank: www.icicibank.comBank of Baroda: www.bankofbaroda.comBank of India: www.bankofindia.comIndian Overseas Bank: www.iob.comIndian Bank: www.indianbank.inPunjab National Bank: www.pnbindia.comCanara Bank: www.canbankindia.comUTI Bank: www.uitbank.com

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May 2006. It is to his credit that he hasnot chosen the easy way out.Globalisation is just one of his initiatives.Technology upgradation and a retailthrust are others. These have alreadydelivered results.

But the short time available to Purwarmeans that he has had to step on the gas."Takeovers are a quick entry strategy,compared to setting up your own branch-es," says a banking analyst.

ICICI Bank chief K.V. Kamath has nosuch reason to be a man in a hurry. (It's adifferent matter that he always is in ahurry.) Kamath took over as CEO in May1996. And everyone assumes that he willbe at the helm for many more years. Hehas time to plan his strategy.

The bank may have started off by fol-lowing its customers. Now it wants to takeon the world. "So far, we have picked thelow-hanging fruit - the Indian companiesand the Diaspora," says Dasgupta. "Now,we are leveraging our India cost advan-tage. Foreign banks are using India as a

back office. We have all the experienceand knowhow. Why shouldn't we?"

In the UK and Canada, ICICI Bank hasstarted retail banking operations. It is offer-ing 25 basis points higher interest thancompetitors. It can afford to do so becauseof lower costs. "The product has been so

popular that the bank already has 22,000customers, with 1,500 new ones signingup every week," BusinessWeek reportedlast year. ICICI Bank has also more thandoubled the staff strength based in India tosupport global operations. "We want tocapture the entire value chain," saysDasgupta. It's reverse BPO (businessprocess outsourcing). ICICI Bank has theback-end sewn up. The front-end is wherethe action is starting.

No one is saying it out loud, but newgeneration bankers feel that the ICICIs cantake on the Citis and succeed. Their battle-ground will be the retail arena, where a lit-tle higher interest can make all the differ-ence to customer pull. A decade ago,nobody would have dreamt that Indiancompanies would go shopping abroad onsuch a scale. Nor can they conceive todaywhere the banks will be 10 years hence.Indians, as in individuals, are all over theplace in the international financial arenatoday. Indians, as in banks, could easily bethere tomorrow.

Indian banks arekeeping pace withglobal technologi-cal improvementsand will be in a

position to offer acomparable

product range.

GROWING COMPETITION: The front-end is where the action is starting

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