The FirstRand group has moved into India's retail banking space and its 700-million unbanked residents.
‘Main Aap Keliye Kya Kar Saktar hoon?—How can we help you?”
In 2004 when ICICI Bank, one of India’s largest retail banks, opened an office in South Africa, it had great aspirations to move into retail banking. The bank believed that its experience in dealing with rural populations and its ability to deliver low-cost banking solutions would give it a competitive advantage. Eight years later, its activities in South Africa remain focused on commercial finance as it struggles to break the dominance of the country’s “big four”.
Now the FirstRand Group, FNB’s parent company, has become the first African bank to hold a full banking licence in India and this week opened its first retail branch. Like ICICI Bank in South Africa, FirstRand believes it has a competitive advantage over local banks in India.
Having operated in the corporate and investment banking space in India since 2009, FirstRand Bank India chief executive Mahendren Moodley believes the bank is now in a position to expand into retail banking by moving into markets and products that will give it a competitive advantage.
By leveraging its existing corporate and investment banking activities, FirstRand aims to bring full-service banking to the Indian market and not just focus on the India-South Africa relationship. Its strategy is to be a niche player and find products and solutions that will be a differentiator, such as technological innovation - ironically, in a country known for its technological expertise.
In South Africa, FNB has used technology to move customers out of branches and to bring banking solutions to rural communities. These innovations have also driven down the cost of banking, sparking a price war among banks. FirstRand is hoping to adapt these alternative banking solutions to the Indian market to help to bank an estimated 700million unbanked Indians, many of whom are employed.
Abdullah Verachia, director and business division head at market research firm Frontier Advisory, believes FirstRand is well positioned to enter the Indian market. “The level of sophistication of South African banks is very high. We are right up there in terms of innovation. FirstRand will be able to service a niche market using its sophisticated architecture,” he said.
Bobby Madhav, head of commercial and retail banking at FirstRand Bank India, has made it clear that the bank is approaching the market cautiously and has learnt from the mistakes of other foreign banks that have failed. It will not undertake unsecured lending and will lend primarily against existing cash deposits as well as physical gold deposits, a popular asset class in India.
As the customer base develops a credit track record, the bank will expand its credit offering. It is offering standard platinum and gold accounts as well as an “easy” account for the mass market.
The challenge is that, like some parts of South Africa, India remains a cash-intensive market and the costs of holding and distributing cash are high. FirstRand Bank also has to apply to the Indian government for every branch it opens. A large branch network strategy would fail, but the bank aims to focus on virtual banking. It is signing an agreement with a large non-banking corporate as a “business correspondent”. The strategy would be similar to that of several South African banks, namely that a retailer can issue cash and accept deposits on behalf of the bank’s customers.
Building up a deposit base is central to its retail banking strategy and FirstRand Bank has already launched a savings product that offers the best interest rate in the market. Madhav says without any advertising the bank has already received R10-million in deposits. It has also targeted South African residents of Indian origin who have money invested with Indian banks. As a result, it has built up a nonresident deposit base of about $1-million.
FirstRand Bank will use existing relationships with large Indian corporates to market to their employees and aims to have 250 commercial clients and 1 000 retail clients within a year. Its style of innovation should appeal to the Indian public, which is highly price-sensitive but also values instant solutions. It is a public comfortable with technology and if FirstRand Bank India is able to deliver a low-cost mobile banking alternative, it may just have a winner.
India challenges China’s dominance in Africa
India is growing in importance as a major trading partner for Africa. Although its $51-billion trade with the continent is only half that of China, a recent study by African Economic Outlook on sources of fixed direct investment shows that, on average, 3% of it belongs to China and India—and India’s share is larger than China’s.
Abdullah Verachia, director and business division head at market research firm Frontier Advisory and an expert on India-Africa relations, said cumulative Indian investments in Africa stood at $90-billion in 2010 and were likely to rise dramatically.
“Although China dominates the African market, India will more likely gain the comparative advantage in the medium to long term given its 2.5-million strong diaspora in Africa, its proximity to the continent, its use of historical ties and special niches to promote its cause of African friendship.
“Its first-class education system and its enduring democratic tradition will contribute towards making it more competitive than China,” Verachia said.
The World Bank has also noted that Indian companies generally have a better record than Chinese companies in Africa for employing more locals, which will help Indian companies to secure government tender projects in Africa.
Verachia said India was emerging as South Africa’s foremost strategic partner in Asia.
“Japan, Malaysia and China previously held this title, but the rapidity with which Indian firms are investing in the local economy has increased India’s importance for the South African economy. As Indian firms are graduating to multinational status, South Africa has become a preferred investment destination.”
He said that more than 96 Indian companies had invested in South Africa and there was $500-million more in the investment pipeline. “India will soon become the largest foreign investor into the economy.”
Firms such as Tata, Reliance, Mahindra & Mahindra, Kirloskar, Ranbaxy and Dr Reddy’s are becoming household brands in the IT, healthcare, pharmaceuticals, biotechnology and automotive sectors in the developing markets of Africa. Since the start of the global financial crisis, a number of large and medium-sized Indian businesses have invested in South Africa. For example, they have been involved in the construction of hydropower plants, the acquisition of South Africa’s Kinky hair products and Cura’s risk management software for $19-million and Aegis’s acquisition of CCN.
The trade was not only one way and several South African companies were seeking opportunities in India, Verachia said. SABMiller has acquired several breweries and is now the second-largest player with a market share of 38%. Insurance giants Old Mutual, Sanlam and Hollard are also expanding their footprints in India.
Verachia said the Indian government had announced that $800-billion would be spent on infrastructure in the next five years, opening up new opportunities for South African firms.—Maya Fischer-French