The Hindu Business Line : Global ambitions

Welcome as the growth is this fiscal of Indian banks’ international operations, such activities are still a long way from giving the domestic banking industry the comfort of a geographically well-diversified business model. An analysis of the RBI data on international assets and liabilities of Indian banking institutions reveals two distinct features of their overseas operations. One, the international business is still largely confined to mobilising deposits of non -resident Indians for on-lending to domestic borrowers at a significant premium to the cost of such funds overseas. Since these deposits are also designated principally in Indian rupees, banks do not run the risk of exchange rate losses at the time of redemption, thus making them an even more attractive source of finance. Two, they are often a temporary storehouse of funds mobilised abroad by Indian corporates to finance overseas acquisitions or to pay for assets purchased as part of domestic capacity expansion. This suggests that the overseas operations of Indian banks differ from the conventional view of the banking business as one that has close links with the local community.

The established global success of the software industry and the prospects of a similar success by the nascent private civil aviation industry that has started to spread its wings in international skies suggest that Indian enterprises have a natural advantage in delivering all manner of services in a cost-efficient manner. By that yardstick, it could be argued, the case of the banking industry ought to be no different. Historically, banking businesses wishing to foray overseas have encountered, world-wide, a regulatory environment that has sported a strong local bias. Customers too tend to prefer local entities as opposed to those from abroad seeking their patronage. Banks from third-world countries such as India suffer the added disadvantage of having to overcome the negative brand equity of the country of their origin before they can make a successful appeal to potential customers in a foreign country.

Given such structural constraints the indigenous banks’ present business model of seeking institutional business of Indian corporates or the patronage of non-resident Indians is quite understandable. But most Western countries, particularly the US, which has a large expatriate Indian population and substantial business dealings with Indian companies, have been lukewarm to requests from Indian banks to open new branches or representative offices. Indeed, the relative lack of reciprocity was commented upon by the RBI Deputy Governor, Mr Leeladhar, recently at a conference of Indian bankers. It is ironic that these countries which want India to open up its market for financial services or bemoan the ownership restrictions imposed by it should themselves be guilty of restrictive practices in granting market access to other countries.