Citibank has announced its intention to exit the consumer banking business in 13 countries, including India. The bank is now looking for a buyer for its retail book, including the credit cards business as part of its exit strategy.
While declaring its first-quarter earnings for 2021, Citigroup’s global CEO Jane Fraser made this announcement.
‘While the other 13 markets have excellent businesses, we don’t have the scale we need to compete. We believe our capital, investment dollars and other resources are better deployed against higher returning opportunities in wealth management and our institutional businesses in Asia,’ Fraser said.
The other 12 countries include Australia, Bahrain, China, Indonesia, Korea, Malaysia, the Philippines, Poland, Russia, Taiwan, Thailand and Vietnam.
Citibank India serves 2.9 million retail customers, with 1.2 million bank accounts and 2.2 million credit card accounts as of March 2020.
Market share of foreign banks has been declining
Since the global financial crisis, foreign banks have remodeled business strategies, focusing on key markets to manage their cost to income ratios and have fully or partially exited the Indian market.
From Barclays, Deutsche Bank, HSBC, Morgan Stanley, Bank of America-Merrill Lynch, RBS, UBS, Westpac, Standard Chartered- all these MNCs have either shut or sold parts of their portfolios or business, cut down on strength and scale, or
Reasons for exit
High capital requirements in India versus their parent countries, high costs of operating here have often pushed global banks to curb operations to protect profitability.
The regulatory costs are higher, priority sector lending norms, conditions to fulfil socio-economic objectives of governments — such as opening of Jan Dhan accounts, all this hurts the bottomline.
Due to the restrictive regulatory regime for branch licensing, foreign banks have not been able to build scale in consumer and/or institutional banking.
The Reserve Bank of India did offer a window to foreign banks for national treatment in setting up branches or acquisitions (M&As) provided they switch from the current branch only model to a wholly-owned subsidiary model. However, only Singapore-based DBS took the subsidiary route.
The cost of regulatory compliance has risen, especially after the implementation of Basel 3 requirements. Basel 3 is better for big banks, while these banks, though big globally, are small in India (in terms of capital) vis-a-vis PSU and private banks.
Foreign banks have equally good alternative platforms available to do business in India which require lesser regulatory supervision like Foreign Portfolio Investment, External Commercial Borrowings, Non Banking Financial Company, Representative Office, Alternative Investment Funds, etc.
The Indian market remains a bit under-developed for sophisticated trade/ treasury/ lending products. India is primarily a balance sheet driven lending market where name lending is very prevalent.
Cyclically, the last four years have been bad for wholesale banking business and foreign banks have fast losing their patience.
There is intense competition for the top 500 bankable corporates in India, the bastion for foreign banks, which drives down pricing. As most corporates in India are sub-investment grade on international scale of ratings, the risk-return framework is not conducive for most banks.
may also be cited as a major reason. In early 2018, the RBI mandated that overseas banks with 20 branches and more on Indian soil would have to lend 40% of their total loan book to the priority sector which includes agriculture, micro, small and medium enterprises (MSMEs) and rural infra.
Most banks have been saving on capital due to regulatory burden and to factor in black-swan events, like COVID-19. This has reduced their ability to lend, with smaller businesses getting the axe.
The COVID-19 pandemic has aggravated the situation. A recovering Indian economy has ceased to be a priority for multinational foreign banks and pressure from governments to conserve capital in home markets have forced them to retreat to save on costs and protect profitability.
The market opportunity is also not massive as envisaged. The size of bank loans outstanding as a percentage of GDP has remained flat at 51% during the last decade as tweeted by Vivek Kaul.
With Citi’s exit, boards of many other foreign banks could be faced with the tough question of whether to remain in or leave the Indian market.