HSBC’s weight-loss drive in India could leave the country’s banking system feeling a little breathless. But the health benefits will eventually show up.
The U.K.-based lender will close half its branches in the country, which last year accounted for 3.2 percent of the group’s pre-tax profit.
Assuming that the bank’s strategy of serving more of its Indian customers via the Internet plays out well, cost savings could trump loss of business. That ties in with CEO Stuart Gulliver’s single-minded devotion to boosting HSBC’s return on equity to at least 10 percent.
In the short run, a shrinking HSBC isn’t exactly a glowing advertisement for the Indian banking system. Since the 2008 financial crisis, the country has seen a steady outward trickle of foreign lenders. Morgan Stanley, Goldman Sachs and UBS have returned their domestic business licenses and approvals; Standard Chartered has curtailed its exposure after raking up massive losses on corporate loans; having failed to sell its $2.8 billion business in the country, Royal Bank of Scotland is closing shop; and while Barclays is still braving it out on the banking side, it has shuttered its India equities business as part of a broader plan.
In December, all foreign lenders combined expanded loans by about 12 percent, less than half the growth rate chalked up by homegrown private-sector banks.
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Still, it’s not all gloom and doom. To the extent HSBC and Singapore’s DBS are serious about using technology to serve the Indian market, they will be keeping the non-state-owned Indian banks from turning fat and lazy. As of now, the likes of HDFC Bank and Kotak Mahindra Bank are salivating over a double sundae. On the one hand, government-run lenders are struggling to cope with a splitting bad-debt hangover. On the other, foreigners are scaling back because staying put and waiting for India to turn into a big banking market one day isn’t going to cut it, neither with shareholders who want higher returns nor with regulators who are insisting on more capital.
Online competition won’t be without benefits. In the brick-and-mortar world of branches and ATMs, no overseas bank could have challenged a decent-sized private lender. That’s because of India’s archaic licensing policy for foreign banks, which kept them from growing when they had the stomach for it. Now that they have lost the appetite, and would rather compete via digital banking and fintech, homegrown Indian lenders will have to raise their own technology game. That could be a booster shot for overall efficiency of what is still a stunted industry. State-run banks’ outsize control of assets and deposits will weaken because physical reach, their only advantage, will increasingly count for less. That will put pressure on New Delhi to hasten its consolidation plan for government-controlled banks.
Only three foreign banks in India have more than 20 branches, in a country of 1.2 billion people. After 163 years, HSBC is one of them. The lender’s pruning will leave it with 26 branches. Such a hefty sacrifice of a hard-won privilege might be motivated by cost savings. But the slimming session also shows that the nature of banking competition in India is changing.
Rather than being rooted in a system in which their 0.5 percent share of branch ownership keeps them going as niche players, more global banks might prefer to embrace the ether, where they can make a bigger dent. That could lead to more healthy outcomes. Not just for them but for their rivals and customers, too.