This article is written by Sabaat Fatima, from HILSR, School of Law, Jamia Hamdard. The article will give you a brief knowledge about what challenges are faced by the foreign banks that are hoping to operate in India. 

Introduction

In 1992, the Indian financial sector launched foreign investment that has seen an entry of many foreign sector banks. Being a member of WTO, India had gained access to many foreign markets and the Indian Government sequentially asked the Reserve Bank of India to allow the establishment of 12 foreign banks every year in India. Presently, foreign banks in India have 331 branches. The establishment of foreign banks in India is based on reciprocity, economic and political bilateral relations. Since the 1860s, foreign banks have been operating in India. The first branch was elevated in Calcutta by Comptoir d’Escompte de Paris (which later combined with three other banks to form BNP Paribas). HSBC is the oldest one – having set up a branch in 1853. Standard Chartered Bank has been running in India since 1858, while Citibank began functioning in the country in 1902. The reason that the banks functioned and flourished in India for so long is that they have accomplished meeting the challenges imposed by the Indian banking environment.

In July 2011, Barclay, a foreign sector bank in India, planned to wind up its small business division which operated in India. Not being the first time that any foreign bank has drawn out its retail banking functioning in India. The functioning of Australia and New Zealand Banking Group Limited (ANZ) was also closed in India. Currently, if a foreign bank wants to enter the Indian market they have to face many tough and unique challenges. This article will analyze the barriers faced by foreign banks. It will also discuss why despite the numerous roadblocks foreign banks are keen to establish their branches in India and examine the regulations and guidelines given by the Reserve Bank of India (RBI) to foreign banks.

India as an enticing market for foreign banks

The huge Indian market, the adults who do not have their bank account, underbanked people, and the corresponding business inception are some of the more clear reasons why foreign banks are hoping to grow in India. There is a sum of 43 foreign banks working in India through 331 branches. Another 46 banks have a presence in the form of a representative office. Out of the 43 banks, Standard Chartered Bank, HSBC, Citibank and The Royal Bank of Scotland lead as far as the number of branches, with 101, 50, 42, and 31 branches as of 31 March 2013. There is likewise interest for specialized banking services, which 85 banks, other than the four referenced above, have set up and maintained a restricted presence in India – either as a branch or a representative office. These banks see changes in areas such as; private banking and wealth management; investment banking; cash management; trade finance; and particular lending services, for instance, which don’t require a large branch/ATM network and customer base.

Few reasons responsible for foreign banks to enter India are:

Growing HNI population 

The High-Net-Worth Individual (HNI) markets are majorly located in the Asia-Pacific region. The private banking and wealth management business forms a substantial portion of the revenue of the foreign banks. India recorded a 22.2% increase in its HNI populations. Due to its growing HNIs, India is the obvious choice.

Growth of international trade

Trading relations with other countries are secured due to the increase in trading activity. To improve these trading relations, the banks of different countries are setting up their branches and representative offices in India and the other way round, as they want to explore the possibility of expanding the traditional banking services. The working of foreign banks in India has increased from 28 (2007-2008) to 43 (2012-2013), while the number of branches in the same period has gone up from 277 to 331. As per RBI data, at present, there are 46 foreign banks in India (2020-2021). Asiamoney has announced that DBS Bank in India is the ‘India’s Best International Bank 2021’. Although these figures are not quite impressive yet one must take into notice that the number of foreign banks wanting to get a license to function in India could have been substantially higher had not the RBI been so strict about declaring bank and branch licenses. 

Demand for investment banking services

With the expansion of Indian institutions in size and scope, there is a need to open cheap and new sources of funds, thereby asking for the help of foreign banks is the only solution as they are experts in such activities. This trend will continue as the Indian corporations look for cheap sources to raise their funds to reduce their leverage and to reorganize their balance sheets.

Obstacles for foreign banks

Several unique and tough challenges have been imposed on foreign banks who want to start working in India. The contrast is that the risk that is connected with the establishment and functioning of a bank will be much higher than in any other type of business. 

Regulatory issues

The major challenge for the banks wanting to operate in India, foreign or domestic is to comply with the strict challenges imposed by RBI.

No differential licensing

Business models which do not take into account the objective of RBI’s financial inclusion are not encouraged by RBI. Foreign banks looking forward to entering India to offer specialized banking services must apply for a universal banking license that obligates the roll-out of full-fledged banking services in the country. So, prioritizing financial inclusion may not be applicable for all the foreign banks that are entering the banking sector. This issue will be resolved soon.  “Banking Structure in India – The Way Forward”, a discussion paper of RBI supported differential licensing for banks in India and stated that it is an advisable step in this changing economic environment.

Issues in financial inclusion

Conceding the RBI’s rules on financial inclusion requires offering banking products and administration to unbanked and underbanked regions and customers, this will however include costs that foreign banks with few branches and fewer sources of raising minimum cost funds may find hard to execute. Starting on 31 March 2013, out of the 331 branches of foreign banks in India, just 17 were situated in the rural and semi-urban areas. Out of the absolute 1,261 ATMs set up by foreign banks, just 51 were in rural and semi-urban areas. More rigid checking and follow-up by controllers may somewhat correct this slanted proportion. Nonetheless, a superior arrangement is advancing a plan of action that empowers foreign banks to profit by opening rural and semi-urban branches.

Setting up of Wholly- Owned banking subsidiary (WOS)

At present, foreign banks in India work as branches of the parent bank established abroad. Notwithstanding, RBI has recently delivered rules for setting up wholly-owned subsidiaries (WOS) by foreign banks in India. A WOS would need to be a privately consolidated institution. These new rules will bring about banks losing the advantages of a branch structure (more prominent operational adaptability, support from the parent, diminished corporate administration prerequisites, and so on). Such new organizations are additionally liable to pull in critical tax liabilities that emerge with working a WOS.

Longer gestation period

Generally, RBI has been thrifty about giving financial licenses. Banking licenses in the private area were last given in 2003, then in 2014, and recently in 2019. Licenses for foreign banks are considerably harder to come by because of the intricacies in question. Aside from administrative issues, licenses to foreign banks are given based on relations between India and the nation of origin of the foreign bank, and equal arrangements between the banking controllers of the two nations. This resulted in a wide delay between applying for and in the end getting the license. Meanwhile, the expense of setting up and working a bank in India is probably going to go up generously and may require a revision of the marketable strategy. 

Challenges in the marketplace

Dynamic environment

Foreign banks looking to enter India face immense competition from the existing players with a great number of branches/ATMs and a big loyal following of customers. Presently, foreign banks are limited to start their operations in India’s Tier 3- Tier 6 towns and cities but the guidelines proposed by RBI may remove this prohibition. This will pave an opportunity for foreign banks because the existing players do not have a significant presence in such areas. The new players will have to face competition from non-banking finance corporations (NBFCs), credit cooperative societies, and individual money lenders operating beyond the ambit of regulations retarding any formal set-up. 

Unique product mix

Indian banks offer products that are by and large slanted towards the retail banking business. For most banks, the primary source of cheap funds and fee income is their retail customers. What the retail customer cannot make in esteem is made up in volume. Therefore, product innovation additionally centers around these customers. For foreign banks that get value to a great extent from specific financial administrations, like private banking, investment banking, trade money, and so forth, it is a test to offer creative retail banking products, since domestic competitors effectively offer them. Likewise, products offered by foreign banks in their nations of origin may not be allowed by the controller in India.

Social issues

Branding

Banking in India is based on the principles of relationship and trust. In such a manner, public sector banks score heavily over the private sector and foreign banks because of their administrative precursors. Foreign banks particularly are related with significant expenses and charges and aggressive advertising strategies and are inclined to disturbances in the global financial markets. Foreign banks who want to start their operations in India should counter this insight with brilliant and powerful marketing. They can highlight their qualities, for example, innovation headways in banking, a superior comprehension of financial markets, or potentially a demonstrated history in different geologies.

Social integration

As mentioned above, banking in India is based on relationships and trust. For instance, the customers expect that the bank should contact them when the balance is low in their account so that the customers can cover a check they issued, even though the banks are not mandated to do so. Such practices may not fit the model for foreign banks. The bank would moreover need to appreciate the baffling guidelines that are given by the RBI from time and time, and how they apply to their foundation. The RBI, particularly on account of regulatory reporting, is known to leave it to banks’ carefulness to precisely report numbers.  

Infrastructural issues

System challenges  

The best core banking solutions available in the market are utilized by the banks in India. The most developed lines of business space (LOBs) in India are retail and commercial banking since the innovation and product application concentrate on these areas. Foreign banks having strong wealth management, private banking, trade finance, Anti Money Laundering (AML), and investment banking systems and processes may not discover a lot of utilization for them until the market achieves a specific degree of development. The current volume of exchanges here may not legitimize the execution of the frameworks.

Branch infrastructure 

The number of branch openings is much greater in India as compared to other countries. In other countries, the aim is to keep customers engaged through the medium of internet, mobile, and phone banking. The foreign banks need to develop an infrastructure (both physical and human) furnished to handle more profitability. A good example is CTS (Cheque Truncation System), which has yet to be executed across the country even after 10 years of launching the pilot program. 

Strict RBI policies for foreign banks

• Only those banks will be permitted to enter who set up a WOS i.e., such banks need to provide adequate disclosure in their home country, should not have complex structures, and are not widely held to represent types of banks.
• A “full national treatment” will not be provided to wholly-owned subsidiaries of foreign banks, even though they are locally incorporated. This is done to prevent foreign banks from dominating domestic banks.
• Foreign banks that have become “fundamentally significant” as a result of their balance sheet size in India need to change themselves into wholly-owned subsidiaries. Fundamentally, significant banks are those whose benefits account for at least 0.25% of the total assets of all commercial banks. 
• The commencement of banking business in India by the foreign banks before August 2010 have the choice to continue their business through the mode of the branch. Although, they will be stimulated to convert themselves into WOS as it is being treated on par with national banks.
• The initial minimum amount enrolled for the equity capital for a WOS for new entrants is 5 billion rupees. The existing foreign bank branches that are in a desire to convert into WOS will pay a minimum net worth of 5 billion rupees. 

Opportunities for consulting firms

Defining operational processes, listing key requirements

The foreign banks must understand the Indian banking sector before planning to start functioning in India. Newcomers should gain the knowledge of the services and products to be offered, the staffing essential to operate a branch, and the business and IT processes to be in place apart from the general rules, regulations, and guidelines defined by the regulator to the foreign banks. To gain this kind of knowledge in a limited period is a tough task. To consult the firms working in the banking domain which have experience and expertise in their field can help to form a strategy and a set of requirements for banks hoping to begin their functioning in India. 

Internal process consulting

In addition to business processes, internal process consulting can be offered by qualified consulting firms that can be offered to banks entering India’s banking market. Internal process consulting points on processes are executed by the bank’s “in-house” departments, such as legal, finance, and human resources.

Selecting a core banking product

With different banking solutions (CBS) available, and thinking about banks’ unique requirements, choosing the right one becomes critical. A foreign bank entering the Indian market may hope to execute its current CBS. Selecting a core banking product should consider the following:

• The bank’s objective operating model.
• The bank’s size and scope of applications.
• Expected transaction volumes.
• The feasibility of utilizing an “off-the-shelf” product.
• Customizations needed and costs involved.
• Implementation, maintenance, and upgrade costs.

Role of Automated Data Flow (ADF)

Indian banks are required to submit a set of reports to the RBI at various periods throughout the year. These are utilized by the regulator to study a bank’s financial growth and its submission with other regulatory directives. Some of these reports have been prepared physically by banks, which builds the chances of producing and reporting incorrect data. Given this, the Reserve Bank of India launched its automated data flow (ADF) program, whereby “clean” data from a bank’s source system is caught, arranged, and submitted to the RBI in the recommended format. Since this is a new area of focus for banks, ADF consulting and implementation is an excellent chance for consulting firms with expertise in the regulatory reporting area. Consulting firms acting as SIs can be the connection between the bank and the ADF product seller.

Banking license consulting

Banking licensing consulting is a recess area of consulting with huge potential as it includes consulting services for acquiring a banking license in the country. Services in this area involve end-to-end services.  

Conclusion

Though there are stringent guidelines imposed by RBI yet India will continue to establish foreign bank branches or representative offices to expand their trade and commerce in their domestic markets. Some banking organizations are hoping to form full-fledged banks in India to provide an entire scope of banking services and to imitate the success attained by Citibank or an HSBC or SCB. The unique and tough challenges faced by the foreign banks in the Indian markets provide a significant opportunity for IT and business consulting firms to position themselves, provided they responsibly check the bank’s requirements and offer appropriate solutions at cutthroat prices.

Foreign banks ought to likewise take a gander at the still undiscovered rural market. With an immense rural population, the rural market in India represents another boondocks of the fight for banking organizations. Foreign banks can dominate Indian public sector banks because of their larger financial strengths and by bringing more customers into their fold. India’s essential need in the financial system is to offer innovative financial services in unbanked zones. Just when they can energize the retail customers, they would receive the full reward for their investments in India.

References

• https://www.cognizant.com/whitepapers/Challenges-for-Foreign-Banks-Entering-India-Open-New-Opportunities-for-Consulting-Firms.pdf
• https://kumarshreyas.blogspot.com/2012/05/problems-faced-by-foreign-sector-banks.html  
• https://www.prnewswire.com/in/news-releases/dbs-bank-india-recognised-as-india-s-best-international-bank-2021-by-asiamoney-863511372.html
• https://www.mymoneymantra.com/blog/top-10-foreign-banks-india-2019/
• https://silo.tips/download/challenges-for-foreign-banks-entering-india-open-new-opportunities-for-consultin#:~:text=Infrastructure%20Issues%20Foreign%20ba nks %20entering,solutions%20available%20on%20the%20market

LawSikho has created a telegram group for exchanging legal knowledge, referrals and various opportunities. You can click on this link and join: