As his three-year term as State Bank of India's regional head for the UK draws to a close, Mrutyunjay Mahapatra talks to Stefania Palma about SBI's regional expansion, regulatory developments and the importance of emerging markets and their banks to the UK.

The Cypriot and Icelandic banking sector crashes in 2012 and 2008, respectively, terrified Europe and its banking regulators. Since then, fears of potential crises in foreign banks' domestic economies have spurred the UK's Prudential Regulatory Authority (PRA) to tighten its controls on global banks setting up operations in the country. It is also revisiting existing banks' branch statuses, even for foreign banks such as State Bank of India (SBI), which has been operating in the country for 95 years.

“The corporate structure of the retail business of SBI UK is currently under consultation with the PRA,” says Mrutyunjay Mahapatra, regional head for the UK at SBI. SBI currently operates as a branch, which has potential backing from SBI’s headquarters in capital and buying power terms. Becoming a subsidiary could make even relatively small deals expensive in capital terms, and SBI’s domestic balance sheet would no longer support its UK operations.

Health checks

While he understands the reasons behind PRA's defensive stance towards foreign banks, Mr Mahapatra points out that not all underlying foreign economies pose the same threats.

"In our case, we are looking at India, not at Cyprus or Iceland whose economies – which failed – are very small and dependent on external sectors. [In the case of] the Indian economy, 95% is sustained by domestic demand, so the chances of a Cypriot or Icelandic crisis arising does not worry regulators," he says.

In Mr Mahapatra's view, the PRA should be more lenient towards strong emerging economies. He believes that China and India will soon account for 25% of global foreign direct investment, private equity investment and foreign institutional investment.

"It will not be prudent for UK regulators to discourage Indian institutions from operating here, as both the UK government and regulators are keen to preserve the status of the UK as home to global financial activity," he says.

Opportunities abound

Targeting the Indian community and Indian companies remains SBI UK's forte, both in wholesale and retail. The UK Indian community's income increased by 5% during the financial crisis, according to Mr Mahapatra, while nationally income dropped by 1.5%. Mr Mahapatra puts this down to the fact that the Indian community operates in sectors that did not suffer cycles as much as others. These include UK real estate, re-development, convenience stores, hospitality and supply chain management of small manufacturing firms (such as those making switchboards and PC components).

SBI has also successfully acquired a significant proportion of non-Indian clients. In retail, Indians and persons of Indian origin account for 55% of SBI UK’s retail business while the rest is from the high street. Clients, Mr Mahapatra says, are pulled in by SBI's competitive savings rates of between 1.25% and 1.5%.

SBI UK has also diversified its corporate clients. “Two years ago, 90% of our business serviced trades with at least one leg involving India. This has dropped to 65% to 70%. Many deals have no India legs nowadays; it is a very good shift,” says Mr Mahapatra.

The bank has captured trade flows out of commodity-rich regions, including the Middle East, Africa and Brazil. In the manufacturing sector, SBI UK services Chinese and Indian imports and some machinery manufacturing out of Germany. It is also increasingly involved in oil and energy trading within the UK.

SBI UK is also well placed to capitalise on London's growth as a loan distribution hub, with tax optimisation becoming key. "Many of the loans on the table are based on tax efficient jurisdictions, such as Amsterdam, Mauritius or the Virgin Islands. London is becoming more of a distribution hub rather than a utilisation hub. If £2bn-worth [$3.14bn] of loans gets distributed out of London, it is quite likely that no more than 10% is getting utilised in the UK,” says Mr Mahapatra.

Future growth

Achieving the right blend of risk management and business development has defined Mr Mahapatra’s term at SBI UK. “Business development is important, but we cannot overlook risk. At the same time risk management is not self-sufficient [by itself],” he says.

According to him, SBI’s HR policy continues to be just as key to the bank’s success, creating a good ethic even with sector-standard salaries. “SBI believes in treating people as family, not as machines who must be run to maximum possible capacity. If you take a longer period view [15 to 25 years], our people policy has worked,” says Mr Mahapatra.

Mr Mahapatra’s three-year tenure at SBI UK will come to an end in 2014, after which Sanjiv Chadha will take on the UK regional head role, and SBI UK is likely to focus even more on emerging markets.

“In the coming two decades a large part of global growth will come from countries such as India, which are currently at a very low base but have all the right ingredients for high growth. Markets have to develop instruments, abilities and players to service this phenomenon. This is one thing in which SBI is well poised,” says Mr Mahapatra.

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