Reasons for foreign bank enter in India

* India's GDP is seen growing at a robust pace of around 7% over the next few years, throwing up opportunities for the banking sector to profit from.

* The credit of banks has risen by over 25% in 2004-05 and the growth momentum is expected to continue over the next four to five years.

* Participation in the growth curve of the Indian economy in the next four years will provide foreign banks a launch pad for greater business expansion when they get more freedom after April 2009.

* RBI is following a liberal branch licensing policy for those foreign banks who want to go to the unbanked pockets. They have started sensing enormous business opportunities in financing trade and small and medium sectors in small towns in the world's second fastest growing economy.

WTO and India about foreign banks operations

India had committed to the World Trade Organzation (WTO) in 1997 to give 12 new branch licenses to foreign banks every year, including those given to new entrants and the existing players. However, the Indian regulator has all along been allowing foreign banks to open more branches, going beyond its commitment to WTO. In fact, in the last four years till October 2007, it has given its nod to 75 new foreign bank branches and many more ATMs (which do not come under WTO norms).

Standard Chartered Bank, the oldest foreign bank that came to India 150 years ago, now operates the maximum number of branches, 83. It is followed by HSBC, which entered India in 1867, with 47 branches. Citibank has 39 branches and ABN Amro, 28 branches. The only other bank that has a double digit branch presence is Deutsche, 11.

Despite their growing presence, foreign banks still have a very small market share in the Indian banking industry—6.11% of total deposits and 6.83% of total loan advances. But their returns from Indian operations are far higher than those of their local counterparts. For instance, the average net profit per branch for foreign banks in India was Rs11.99 crore last year against Rs33 lakh for the public sector banks that account for close to 70% of the industry. The return on assets for foreign banks last year was 1.65% and return on equity, 14.02%. The comparable figures for public sector banks were 0.82% and 13.62%. Now you know why foreign banks are ready to walk the extra mile to do business anywhere in India

The Reserve Bank of India would like foreign banks to get a flavour of semi-urban India and the rural hinterland. Going by the statistics provided in the RBI's annual report, it appears that foreign banks are being gently nudged away from metros, when they apply for permission to open a new branch.

The branches of foreign banks that have been approved between July 2006 and June 2007 are mostly in smaller towns and tier-2 and tier-3 cities. Of the 13 branches for which permission was given, only one branch belonging to Shinhan Bank has been allowed in New Delhi.

Smaller cities

Hong Kong and Shanghai Banking Corporation (HSBC) received approvals for three branches in Raipur, Jodhpur and Lucknow. ABN Amro got approvals for branches in Kolhapur, Salem, Udaipur and Ahmedabad. Barclays Bank received approval for branches in Kanchipuram and Bangalore.

Most foreign banks follow a strategy of first setting up base in metros – Mumbai, New Delhi, Kolkata and Chennai. Then, in the next stage, they move to the mini-metros such as Bangalore, Hyderabad, Pune and Ahmedabad. Over the last few years, some banks have talked about expanding their reach beyond the conventional circuits of these eight places.

Foreign banks in India have got approval from the Reserve Bank of India to open 10 branches and seven representative offices during the July 2006- June 2007 period. In the calendar year 2006, the RBI issued approvals for opening 13 branches of foreign banks in India. Under the WTO agreements, India is required to allow the opening of 12 foreign branches every year.

More foreign banks rush to India

A large number of foreign banks are now keen on opening shop in India to gain a critical mass by April 2009, when private banking space is expected to open up for foreign players.

The latest addition to the list of foreign banks wishing to set foot in India is the Royal Bank of Scotland, which has total assets of over $806 billion.

The sudden interest in India follows the Reserve Bank of India's roadmap for according foreign banks greater freedom in India.

Switzerland's UBS, ranked the world's best private bank by EuroMoney magazine, has been preparing itself for India launch. Merrill Lynch and Goldman Sachs too are believed to be showing interest.

It is not known whether they will go alone or partner with an Indian entity in the new venture. Some of the new players are targeting the derivatives market to grow in India. The huge retail space is also an enticing factor.

Merrill Lynch has a joint venture in Indian investment banking space -- DSP Merrill Lynch. Goldman Sachs holds stakes in Kotak Mahindra arms.

US-based GE Capital last week announced its intention to set up a bank last week soon after the banking sector roadmap was unveiled. It already has wide presence in consumer finance through GE Capital India.

The RBI roadmap said the removal of limitations on the operations of wholly-owned subsidiaries of foreign banks and treating them on a par with domestic banks to the extent appropriate will be designed and implemented after reviewing the experience till April 2009.

A total of 33 foreign banks are present in India and had total assets of Rs 1,36,315 crore (Rs 1363.15 billion) as at end-March 2004. Roughly they account for about 7 per cent of the total banking space.

The list of foreign players includes banks like Citibank, Bank of America, Bank of Nova Scotia, ABN-AMRO Bank, Deutsche Bank and JPMorgan Chase Bank, which figure in the top 25 global banks ranked by The Banker magazine.

The other top banks like Credit Suisse Group, Industrial and Commercial Bank of China, are still to start banking business in India.

India is expected to find a place in the strategy of these banks given the country's growth prospects. There have been cases of foreign banks closing shops in India too. Dresdner Bank and Commerzbank fall in this category.

India's GDP is seen growing at a robust pace of around 7 per cent over the next few years, throwing up opportunities for the banking sector to profit from.

The credit of banks in India has risen by over 25 per cent in 2004-05 and the growth momentum is expected to continue over the next few years.

Participation in the growth curve of the Indian economy in the next four years will provide foreign banks a launch pad for greater business expansion when they get more freedom after April 2009