Short Essay on the History of Overseas Bank of India

Overseas business of Indian banking dates back to 1921 when the Imperial Bank of India opened its branch in London. Then in 1946, the Bank of India opened its branch in London. By the end of 1950s, however, Indian banks were operating at many international centres.

In June 1969, there were 7 Indian banks with 56 offices in 12 countries. A rapid expansion of Indian banks on international front took place during 1976- 1984.

At the end of 1984, there were 13 Indian banks with 141 overseas branches. During 1985-87, however, several unprofitable overseas branches of the Indian banks were closed down. Thus, at the end of 1987, there remained only 9 Indian banks with 122 overseas branches.

At the end of 1969, the total overseas assets of Indian banks were Rs. 205 crores. It increased to Rs. 14,590 crores at the end of 1986.

Indian banks have a narrow international spread. It is mostly confined to six countries, viz., the U.K., the U.S.A., U.A.E., Fiji Islands, Sri Lanka and Singapore. This is because of the business potential created by ethnic groups in these countries and the direction of Indian's foreign trade.

There are many inherent weaknesses in the overseas branches of Indian banks:

1. Their capital base is miserably low. The capital- assets ratio of other Indian banks abroad is much lower in comparison to other international banks. For instance, the capital-assets ratio of the State Bank of India is 1.52 as against 4.64 of Citicorp or 2.38 of Dai-Ich Kangyo Bank of Japan.

2. The interest costs of their funds is high and unstable.

3. Their operations are mainly confined to retail banking.

4. Their scale of operations is also very small in comparison with that of other international banks.

5. Their profitability is adversely affected by low capital funds and high cost of lendable resources.

6. Their opening costs as well as operational costs are relatively high.

7. There is lack of consultation, co-operation and co-ordination among the overseas branches of the Indian banks.

8. Lack of efficient management information system, and absence of risk assessment system have also contributed to high risks and less profitability of overseas branches of Indian banks.

9. Overseas branches of Indian banks are basically serving the traditional and protected market by patronising ethnic interest. They lack initiative to diversify their business in the foreign countries.

They also lack the required competitive skills and efficiency to build up their business against other most sophisticated international banks.

10. They also lack expertise and guidance from the top management.

11. There is lack of a consistent and coherent policy for the growth and expansion of the business of Indian overseas banks.

12. There is lack of appropriate control and monitoring systems to guide the overseas branches' business in the changing environment of dynamic world economy.

A recent study (1988) made by the RBI on Indian banks abroad suggests that Indian banks operating abroad may have to adopt a prudent strategy of rationalising and consolidating their branch network abroad.

NonĀ­viable branches of these banks may have to be closed down. At the same time, Indian overseas banks have to explore the possibilities of expanding their business in other countries like France, Japan and Netherlands and the U.S.A.

It has also been suggested that Indian overseas banks should take steps to minismise risks by introducing a proper loan and investment portfolio management and central information system which can help monitor risk evaluation and management and credit exposure assessment.

These banks should also acquire the requisite expertise and necessary management capabilities so as to withstand the complex behaviour of international banking and expand the size of their operations. The problem of adequacy of their capital base should also be considered on a priority basis.

As on October 20, 2005, fourteen Indian banks nine from the public sector and five from the private sector had operations overseas spread across 42 countries with a network of 101 branches (including 6 offshore units), 6 joint ventures. 17 subsidiaries and 30 representative offices.

Bank of Baroda had the highest overseas presence, followed by State Bank of India and Bank of India.

Approval was given to State Bank of India to acquire majority equity stake and management control in Indian Ocean International Bank Ltd. (IOIB), Mauritius. The bank acquired 51 per cent stake in IOIB on April 19, 2005. The bank is in the process of taking management control of IOIB.