Insight & Analysis

India Inc rethinking banking relationships

Published: Jul 2018

Technology investment by India’s private banks is paying off as Indian companies move business away from public sector lenders.

Indian treasurers are reconsidering how they choose their banking partners. As the trend to “de-couple” fee-based business from credit continues, corporates are increasingly striking single-product deals with India’s innovative private banks, no longer wishing to concentrate business with their biggest lenders

This is according to a new report from Greenwich Associates which highlights how companies using non-credit providers’ cash management and FX services jumped from 25% in 2016 to 35% in 2017.

Technology investment pays off

A big driver behind this trend is the technology investment made by India’s private banks. This is seeing them build state-of-the-art capabilities across the full spectrum of corporate banking activity.

YES Bank, India’s fifth largest private sector bank, announced last year it had developed a multi-node blockchain to digitise and automate vendor financing solutions for one of its clients, Bajaj Electricals.

ICICI Bank says it has on-boarded over 250 corporates to its blockchain platform for domestic and international trade finance. This follows the successful pilot transaction with Emirates NBD last year.

As India’s private banks continue to innovate, Greenwich Associates suggests that more corporates should consider their offerings. “Those that rely on their biggest lenders for critical services like cash management and FX without investigating the offerings of other competitors might find themselves at a disadvantage,” notes the report.

Regulatory disruption

The case for exploring other banking options only increases given the recent disruption in India’s banking sector. Driving this is the regulator’s ambition to curb the risk that non-performing loans (NPLs) pose to the balance sheets of the country’s public-sector banks.

India’s state-run banks announced combined losses of US$12.65bn in the fiscal year ended this March, according to Reuters – the highest figure in history. At the same time, the overall amount of NPLs in India increased by over 25%. This was due to the Reserve Bank of India (RBI) introducing stricter rules around the classification of bad loans, and India’s new bankruptcy regime coming into force.

In addition to these issues, several scandals have challenged the Indian banking sector recently, denting corporate confidence in the public-sector banks. The US$1.8bn fraud in Mumbai of Punjab National Bank and the US$2m cyber-hack of City Union Bank are two high profile examples.

Aside from damaging confidence, these issues have stunted the state-run bank’s ability to focus on innovation, thus giving private banks a chance to leapfrog them. Indeed, according to Greenwich Associates, India’s three largest banks, HDFC, ICICI Bank and Axis together are now ahead of the public-sector banks in terms of share of corporate banking relationships with Indian corporates.

Public resurgence

Although these are difficult times for India’s state-run banks, Greenwich Associates thinks they will make a resurgence. This is because dealing with the NPL issue will clean up these banks’ balance sheets, making them more competitive and secure. Additionally, tighter lending standards will drive a deeper reliance on fee-based revenue.

As a result, Greenwich Associates expects these banks to improve their transaction banking offerings and emphasise “cross-sell” when issuing credit lines to corporates. This may encourage corporates to revert to rewarding their biggest lenders with additional business.

No matter what, this will be good news for corporates in India. They should start benefitting from the increased competition and access to new and innovative services from their banks. Achieving maximum benefit will require treasurers to ensure they know what is available and continue thinking strategically about their banking group. Why not read this article on getting the best deal from your banking partners to get started?

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