Foreign banks may increase domestic spread, says Fitch
Our Banking Bureau in Mumbai
Published : November 7, 2003
Larger foreign banks which are operating in India are expected to seek a greater market share which would be aided by benign regulatory attitude towards branch expansions and the easing of investment norms in private sector banks.
The proposed option of setting up a subsidiary in India would also help the foreign banks in this regard, said Fitch Ratings.
The rating agency, in a report titled “Foreign Banks in India – 2003 Results”, said while foreign banks account for only around 5 per cent of total bank deposits and 7 per cent of total bank loans in India, they comprise an important part of the banking sector in metropolitan areas.
The report looks at the financials of 21 foreign banks that account for 97 per cent of the total assets held by foreign banks in India.
The four largest foreign banks with full service presence across all products account for over 70 per cent of the total assets of all foreign banks in India as at end-March 2003.
Standard Chartered Bank leads the race with 24 per cent of the total assets followed by Citibank at 22 per cent, HSBC 18 per cent, ABN Amro Bank 8 per cent and Deutsche Bank at 5 per cent.
According to the rating agency, foreign banks have generally enjoyed strong support from their parents. The capital adequacy ratios of most foreign banks in India were above the regulatory minimum level of nine per cent.
In the last fiscal HSBC and Standard Chartered received additional capital from their parent amounting to $150 million and $80 million, respectively, following the revision made by RBI in the calculation of Tier-I capital.
Four smaller banks (Amex, Credit Lyonnais, Credit Agricole and Societe Generale) with low capital adequacy ratios also received capital infusions from their parents.
The report added that the asset quality of large foreign banks is better than the average for Indian banks.
While loan quality has been a problem for some medium and small foreign banks, loan loss coverage ratios are usually high and are supported by the periodic capital infusions by the parent.
Fitch added that a locally incorporated subsidiary would enjoy greater scope for growth through increased freedom in opening branches or acquiring other Indian banks.
Also, the income-tax rate applicable to the subsidiary would be at 35 per cent as against 42 per cent for a branch’s operations in India.
The subsidiary would also have greater flexibility of raising equity or subordinated debt from the domestic capital market.
It would, however, be subjected to a higher proportion of directed lending and be required to open lesser profitable rural branches.
“Foreign banks have so far been lukewarm to the idea of establishing a locally incorporated subsidiary as their near-term expansion needs in the urban centers have been aided by the increasing liberal approach of RBI towards issuing branch licenses to foreign banks, especially to the larger ones. The subsidiary format would therefore be attractive to foreign banks that have significant growth plans in the Indian market,” said Fitch.
