The Return of T-banking

The US subprime meltdown has shifted the focus back on stable banking businesses worldwide. Globally, transaction banking, which, shorn of bankerspeak, is really good old-fashioned commercial banking, contributes between 15 per cent and 40 per cent of the overall revenues of banks.

In India, the T-banking business is spreading fast to beyond the top 200 companies. Today, banks are even pitching for small corporate clients with turnovers as low as Rs 50 crore.

From the small, 10-branch Deutsche Bank India to foreign biggies like Citibank and Standard Chartered Bank to homegrown private sector biggies like ICICI Bank and HDFC Bank, the T-banking space is fast becoming a new battleground for banks. The goal: bag the next customer, preferably a mid- or smallcap company, and offer it the whole gamut of transaction banking products.

But why this sudden resurgence of interest in what is probably the oldest segment of the banking industry? Ashish Bajaj,Managing Director (Transaction
Banking) at Citibank, says: “Transaction banking is an annuity business, and has stable and predictable revenues flows.” In volatile times, that’s a huge attraction. Then, the business is growing at over 40-50 per cent annually. No wonder every banker is keen on this segment.

T-banking, which involves banks providing working capital, trade finance and securities and custodial services to companies, also helps build relationships that lead to more business. “It allows us to offer other value-added products like forex, mergers and acquisitions and corporate advisory services,” says Sameer Sawhney, MD & Regional Head (Transaction Banking), Standard Chartered Bank.

The T-banking business has been a money-spinner for foreign banks in India because of their international linkages. Today, this segment contributes about 40 per cent of the corporate banking revenues of Citibank India. HSBC, a late entrant in this business (it entered the spaceonly in 2004), has seen the segment grow at over 50 per cent per annum over the last three years. Another huge advantage: banks don’t need thousands of branches as the correspondent banking (through PSU banks) model works very effectively for them. “The correspondent banks (mostly PSU banks) provide last-mile connectivity in remote areas for doing T-banking. This model is very cost-effective,” says a banker.

Standard Chartered Bank claims that its T-banking products have led to significant working capital savings for India Inc., and estimates this figure to be more than Rs 30,000 crore annually. Deutsche Bank, one of the smaller foreign banks in India, claims to have the largest number of cash collection points in India—10,000—to serveonly in 2004), has seen the segment grow at over 50 per cent per annum over the last three years.

Another huge advantage: banks don’t need thousands of branches as the correspondent banking (through PSU banks) model works very effectively for them. “The correspondent banks (mostly PSU banks) provide last-mile connectivity in remote areas for doing T-banking. This model is very cost-effective,” says a banker.

Standard Chartered Bank claims that its T-banking products have led to significant working capital savings for India Inc., and estimates this figure to be more than Rs 30,000 crore annually. Deutsche Bank, one of the smaller foreign banks in India, claims to have the largest number of cash collection points in India—10,000—to serve the needs of its cash management clients. And Citibank claims that it was the first custodian to offer crossborder custodial services to Indian mutual funds for overseas investments.

Within T-banking, cash management is the largest contributor to revenues (See The T-Banking Pie).In fact, it’s one business that is easily growing at 16-18 per cent per annum. But banks need innovative solutions to attract new customers. “We are proactively working on building innovative solutions for sunrise industries like insurance, retail and infrastructure, rather than being just a reactive solution provider,” says Sawhney. A cash management client also brings trade business to a bank. Over the years, banks have been handling remittances and opening letters of credit (LCs) for their clients. Today, the trend is of clients shifting from the traditional LC system to electronic channels as this is more efficient. “There is an opportunity for banks to do more open account financing as they understand the risk better,” says Ramesh Ganesan, head (Transaction Banking) at ABN Amro Bank. This is a new trend; banks are taking exposures through open accounts where there are no bank guarantees; the traditional LCs are backed by a guarantee. All this requires a high level of technology integrated from the front- to the back-end, both within India and across the globe.

Kaushik Shaparia, MD (TBanking), Deutsche Bank, says: “Germany is among the largest exporters in the world. So, as a German bank, our understanding of country risks is very high from the trade finance perspective.”

This gives foreign banks a clear advantage over their homegrown counterparts. Even large private sector Indian banks such as ICICI Bank and HDFC Bank are finding it difficult to expand aggressively in this space. Result: their T-banking business is largely confined to cash management of government departments and PSUs. And public sector banks are largely absent from the cutting edge of this business.

Many banks also offer valueadded services like advising on booking forward contracts in order to mitigate any currency risks for exporters. For example, the recent appreciation of the rupee caught exporters who had open positions off guard, whereas those who booked forward contracts gained.

Then, the securities and custodial services business is also booming on the back of increased FII inflows. Today, banks service fund managers, brokers, dealers and asset managers end-to-end from the transaction perspective. For example, if an MF wants to make a redemption, all it has to do is send the relevant file to its bank, which handles the preparation of thousands of cheques and the logistics of sending them to individual beneficiaries.

This business offers banks very high margins. But strong competition in the T-banking space is resulting in a fall in the (still high) margins. Result: the “float” income of banks is down and many are now making a strong case for a “fee” system. Today, about 70 per cent of a bank’s earnings come from the former and only 30 per cent from fees. “Companies don’t pay any fees for cash management services because of the float advantage enjoyed by banks,” says a banker. “There is a need to price the transaction scientifically,” says Natasha Patel, Head (Global Payments and Cash Management), HSBC India. This, however, does not always happen.

Following the gradual rise in the popularity of electronic paymentsand increased efficiencies, companies are able to take advantage of funds at a faster rate. "The electronic mode has also reduced the settlement risk," says Ganesan. In a Real Time Gross Settlement (RTGS), the funds are transferred electronically within seconds and there are no movements of cheques and clearing hassles. Says Bhavesh Zaveri, Head (Wholesale Banking Operations), HDFC Bank: "High transaction charges levied by many banks on RTGS is one of the key roadblocks to the higher usage of electronic payments in India."

Clearly, banks have, till now, only scratched the surface of this segment. With the economy growing exponentially, many more companies will need these services, and those that are already on board, will require more, and more sophisticated, products. And with the buzz about full capital account convertibility gathering steam, the cash registers at banks will continue to jingle for a long, long time.and this time the sound pattern will be more predictable than in the past.