Exit of foreign banks - What does it mean for the Indian consumers

Foreign Banks in India have always been the Gold standard of banking and set the tone for the rest of the financial institutions in the country for over the past 4 decades. However, a lot of banks post the economic liberalization in the early 90s came into existence and the competitive landscape of banking changed.

Impeccable client service was no longer just the domain of the foreign banks, but a lot of domestic banks also started emulating the practices, but the foreign banks still led the way and still do especially in the corporate and institutional banking space.

Innovation in products and services to customers resulted in significant advantage for the domestic players, especially in consumer banking. The biggest advantage of consumer banking has been access to low cost of funds through the CASA route, which lowers the overall cost of funding and thereby improves the NIMs for the Banking business.

Secondly, even though the foreign banks would want higher fee-based services, the dependence of fee-based services within retail banking is low, given the competitive landscape. While the services from a foreign bank might have come at a price, the level of customer service is impeccable.

Quality of Customer Service

The biggest loss for the Indian consumer is the quality of customer service that the foreign banks bring to the table, thereby forcing the banking ecosystem to keep their level of customer service high. From a foreign bank standpoint, the risk adjusted return on a retail banking account does not justify the level of service that they are providing.

Implications on India's Banking Talent Pool

Hence, the desire to refocus themselves to the corporate and institutional banking businesses and the HNI segment. India’s banking ecosystem owes a lot to the foreign players, because of the way in which they have been servicing clients over the years and structuring products and services in an innovative manner within the remits of compliance, has set the template for Indian banks and not to forget the phenomenal talent
pool that they have historically provided to the banking sector.

Guidance Foreign Banks provided to the Regulator

In fact, one of the most significant and the most underrated contributions that the foreign banks have brought to the banking sector is in terms of engagement with the regulator and guiding them on how to maintain a fine balance between supervision and business needs, leveraging on their international experience with other markets.

This contribution will become all the more important going forward into the future, as we move towards a far more open economy. Lot has come from the foreign banks in terms of market reforms and regulations. Not to take away the fact that the domestic banks do not do the same. In fact, the level of regulatory engagement is very high and is a very important component of the bank strategy.

Potential Reckoning on Foreign Exchange & Derivative Market

But it is so today, only because of the success that the foreign banks achieved. On the corporate and institutional banking side, the ability to provide seamless treasury and trade services to corporates, due to their presence in the overseas markets, not only makes for good customer service but also helps deepen the Foreign Exchange and Derivative market in India.

Likely Exodus of Talent to Global Insourcing Centres

Most of the foreign banks may want to exit India, but would want to continue to leverage the talent pool in India, to service their global businesses through the Global Insourcing Centres route. The GIC would have far deeper pockets to take talent away to their centres away from the onshore banking ecosystem.

This could potentially result in a rise in cost of banking professionals, thereby significantly increasing the manpower cost for the onshore banking businesses. The cost per employee for various onshore Banks is not a metric that is falling by any measure and this will only aggravate the same in the long run.

Potential loss of Intellectual Capital in Governance Tech Space

Another key difference between the foreign banks and Indian banks is the equity of technology spent between the business and governance functions. Foreign banks have always managed to achieve a good balance and the Indian banks are still under-invested in the governance space from a technology standpoint.

Some of the governance systems of the foreign banks are state of the art and very well integrated with businesses, which may not be the case with Indian banks necessarily. Exit of foreign banks could potentially result in a loss of this intellectual capital in the governance technology space.

Having foreign banks in India enables to foster the right level of competition and signifies the existence of a market economy with competitive forces, which only raises the overall bar of performance within the banking sector.

The success of foreign banks has always resulted into a success of the overall banking system. It would not be a bad idea for the regulator to constitute a committee to specifically engage with the foreign banks and understand what would help them to be more successful.

The article was first published on ETBFSI.

Read the previous article where we talked about why are foreign banks exiting India.