Our banks should come together overseas

Even as bankers are busy debating various models for bank consolidation in India, the time has come for Indian banks operating in some of the developed markets, especially in the UK, to realign their structure, business model and resolution planning in overseas territories.

This is in the wake of UK’s Prudential Regulatory Authority (PRA) putting in place guidelines for supervising UK branches of banks based outside Non-European Economic Area (EEA).

The State Bank of India, Punjab National Bank, ICICI Bank, Bank of Baroda, Axis Bank, Bank of India, Canara Bank and Syndicate Bank are among the leading Indian banks currently operating in the UK either through their subsidiaries or through the branch route.

The recent PRA decision on the new guidelines is in line with the thinking of monetary authorities in the developed markets since the 2008 global credit crisis. The PRA guidelines allow EEA branch banking subject to certain conditions.

Basically, this implies equivalence or consistency between regulation by the home state supervisor (in this case, the Reserve Bank of India) and the PRA. Besides, retail activities beyond the de minimis level (which is defined as £100 million in account balances or 5000 customers) will be allowed if there is a high level of compliance. Where the PRA is not satisfied, it will consider refusing authorisation of a new branch or cancelling an authorisation of an existing branch.

Where banks make the cut, the PRA and the RBI will work out their respective supervisory responsibilities in a clear-cut manner.

The State Bank of India, Bank of Baroda, Bank of India, Canara Bank and Syndicate bank have branches under dual supervision of UK PRA and Reserve Bank of India (RBI). Indian banks have been operating in UK for more than six decades and largely cater to NRIs and the ethnic Indian community. Banks like SBI, BoB and BoI may be affected by these guidelines as the three of them put together have more than 1.5 lakh retail customers. Canara Bank and Syndicate Bank, with retail operations far below the threshold levels prescribed by the guidelines will not be affected.

In order to face the tough regime, the banks can come forward and create a joint subsidiary based on the Malaysian model. In 2010, Malaysia awarded a commercial banking licence to a locally incorporated bank, India BIA Bank (Malaysia) Bhd, jointly owned by Bank of Baroda (40 per cent stake), Indian Overseas Bank (35 per cent stake) and Andhra Bank (25 per cent stake). The strategy for Indian banks operating branches in UK would be:

(a) To exist as branch for wholesale activities (so as to continue with its brand) and for maintaining its presence in the overseas territory;

(b) To set up a joint venture of banks, which are inclined to carry out retail activities in UK. This model would benefit the players in terms of cost savings and economies of scale, host country taxation and supervision costs, capital costs, and sharing of capital requirement, and other managerial compliance issues. This model would facilitate the UK incorporated bank to branch out into other EU countries.

Perhaps, the department of financial services, along with senior bankers, could step in to sort out the issues that could crop up during the subsidiary formation stage.

The most challenging aspect would be for all banks to come together and have a uniform approach towards forming and governing the subsidiary. However, the joint subsidiary model would increase Indian banks’ reach in the global markets, and with a bigger brand they can attract host country retail customers. Further the banks would be able to withstand shocks, if any.

Indian banks business does not exceed more than 1 per cent of the total market share in the UK. Most of them will require capital for Basel III compliance. Consolidation of branches under a common joint venture can be a precursor to a similar consolidation of public sector banks back home. A common brand of Indian banks could be created. The success of this model could pave way for venturing into other overseas markets in future.

The writer is a managing partner at RRCA & Associates. The views are personal