As part of the government's effort, reduction in international business is helping lenders improve focus on domestic growth thereby improving their net interest margins and reducing operating expenditure
Large Indian banks have of late seen their offshore operations shrinking as part of planned consolidation in the overseas businesses.
Such measures are helping public sector banks (PSBs) focus on domestic growth improving net interest margins (NIMs) and cutting operational expenditure.
Karthik Srinivasan, Senior Vice President at rating agency ICRA, said, "The consolidation is largely to help control their opex and focus on high yielding domestic business (around 2-3 percent) than the low margin (1-2 percent) in the international business."
"Some who have subsidiaries may also be helped with getting some capital back which would be locked overseas...But overall, it is just a measure to get the house in order domestically, which also has better deposit franchise than overseas," he said.
Country’s largest private lender ICICI Bank’s overseas business has shrunk from 25.3 percent in March 2013 to 12.5 percent of total portfolio as at the end of June 2018.
SBI has also planned a rationalisation of its overseas operations from 207 offices in 35 countries currently. It has decided to shut 10 offices in the UK where the operations will be spun off into a subsidiary. The government-owned bank expects the advances at overseas offices to remain at around 13 percent of the total advances by FY19.
“In the international banking operations, consolidation is going on for the last three years and nine offices have been identified for closure this year,” said Rajnish Kumar, Chairman of SBI.
He said the overall growth (advances) is lower due to international banking book. The buyers' credit which was being given against Letter of Undertaking (LoUs) had an impact of around Rs 45,000 crore. The bank also carved our subsidiary in the UK where it transferred Rs 10,000 crore. This impacted the capital.
After the Rs 14,000-crore plus scam at PNB, the Reserve Bank of India (RBI) banned the use of LoUs, which was a decent share for many banks’ doing international business. This also impacted business of several banks.
PNB is also looking to shut its four representative offices in Sydney, Dhaka, Dubai, and Shanghai soon. Bank of India’s foreign business has declined 22.7 percent while BoB’s international business de-grew by 13 percent.
Dinabandhu Mohapatra, CEO and MD of Bank of India, said, “We have identified some 9-10 branches, offices and will take 6-7 months to complete the process. Some branches have good capital but there is no scope for further business and so it is the right time for us to close it down. We have closed down 2 offices already.”
He added this consolidation is also helping the NIMs. “Right type of asset is important. They were dragging down the NIMs earlier but instead growth is happening where required, in the domestic regions."
Govt orders closure of offshore operations
The reduction in the overseas business is part of the government’s initiative at the PSB Manthan in November last year.
In February, it was reiterated that currently, public sector banks have about 165 overseas branches, besides subsidiaries, joint ventures, and representative offices. SBI has the largest number of overseas branches (52) followed by Bank of Baroda (50) and Bank of India (29). The state-owned banks have the largest number of branches in the United Kingdom (32) followed by Hong Kong and the UAE (13 each) and Singapore (12).
Financial Services Secretary Rajiv Kumar in a tweet said, “PSBs to consolidate 35 operations. 69 operations identified for possible consolidation. Includes bank branches, remittance centres, and representative offices.”
He added: “All 216 PSB operations to be examined. Non-viable operations in the overseas market to be closed for cost efficiency and synergy. Operations in some geography to be consolidated. Consolidate equity stake in joint ventures having multiple PSB partners.”
While BoB is rationalising some of its international book including the controversial South African operations, it is growing its international book (over 20 percent of total business) in locations with upcoming business opportunities like the Indo-Korea trade or Indo-Japan trade.
PS Jayakumar, CEO and MD of BoB, in an interview to Moneycontrol had said, “(We are) looking at these locations to reach out on account of changed economic relationships, nature of assets and businesses are also changing like the LoUs."“So, our balance sheet is declining but revenues are going up. We have an NPA problem but have extremely high provision coverage ratio (PCR at 59.94 percent, up from 58.42 percent in March). Also, companies are becoming more global now where they need local banks, so there is a good room for growth,” he added.