Ashraf Engineer
August 3, 2024
EPISODE TRANSCRIPT
Hello and welcome to All Indians Matter. I am Ashraf Engineer.
Over the past few years, several foreign banks have either exited India or scaled down their operations here. Among the latest ones was Citibank, which sold its consumer banking business to Axis Bank. Why are foreign banks choosing to exit or shrink operations? Industry analysts point to a number of reasons: tough competition from local banks, their share in the overall market reducing, an expanding number of players and stiff regulations. The last seems to be the most cited cause. So, what do the exits of these foreign banks mean for you, the customer, and India’s banking landscape?
SIGNATURE TUNE
In March last year, Axis Bank completed its acquisition of Citibank’s consumer business. Citibank had, over the years, steadily lost market share but had 30 lakh retail customers, 22 lakh credit cards and 12 lakh bank accounts as of March 2020. At that time, it commanded 6% of credit card spends but this share would have declined since then. However, despite the numbers, the retail business was struggling. In March 2020, Citi’s retail business accounted for 30% of total revenues in India with corporate at 50%. In 2018-19, the retail business accounted for 34% and corporate 46%. So, retail revenues were in decline.
Close on the heels of Citigroup’s decision to exit the retail business, South Africa’s FirstRand Bank followed suit. In 2012, British major Barclays closed a third of its branches in non-metro areas in India. In 2016, the Commonwealth Bank of Australia exited India following an evaluation of operations here alongside a new strategy. The same year, Royal Bank of Scotland – or RBS – too wound up its corporate, retail and institutional banking business in India. Australia and New Zealand Bank, better known as ANZ, wound up domestic operations in 2000 after selling its Grindlays Bank unit to Standard Chartered for $1.34 billion. However, it re-entered the Indian market in 2011 through a branch in Mumbai. ANZ had been in India since 1984 as Grindlays Bank. In 2011, Deutsche Bank sold its credit card business to IndusInd Bank. In 2013, UBS exited India while Morgan Stanley surrendered its banking licence. Merrill Lynch and Standard Chartered scaled down operations in 2015.
In India, foreign banks have set the standard for almost four decades. However, after the economic reforms of 1991, many new private banks were set up and the industry’s competitive landscape was altered forever.
No longer were foreign banks the sole providers of great client service. Domestic banks knew they would have to do the same and rolled out services accordingly.
Domestic players also understood the market well and introduced great innovations in products, especially in consumer banking. The biggest advantage they had was access to cheap funds through their current and savings accounts.
Also, foreign banks asked for higher fee-based services but the dependence on such services in retail banking is low in this competitive landscape.
As far as you, the customer, goes, the biggest loss would be the quality of customer service that foreign banks offered. This quality had forced the entire banking ecosystem to raise its standards. Sadly, at some stage, the risk-adjusted return on retail accounts stopped justifying the service foreign banks were providing.
The other implication is on jobs and choices before the banking talent pool. The exits, scaling down of operations and acquisitions mean job losses. It also means fewer employment options for talent.
There are several operational and policy reasons too for the exits. Analysts have suggested that the difference in the credit process from their home markets has also hurt foreign banks. In fact, foreign banks have expressed several concerns with the regulatory landscape. Chief among them is the priority sector lending policy, under which they have to earmark 40% of their loans for sectors mandated by the government. Failure to meet these quotas invites penalties.
In 2013, the Reserve Bank of India, or RBI, released guidelines for foreign banks, mandating that they either operate through branch presence or set up fully-owned subsidiaries to be treated at par with Indian banks. This followed the global financial crisis of 2008. However, there haven’t been too many opting for the wholly-owned subsidiary model.
The rash of loans going bad has also spooked foreign banks. Several financial institutions have crumbled as a result of such loans or scams. These include IL&FS, DHFL, Lakshmi Vilas Bank and others. Foreign banks, therefore, began to find it less enticing to continue in India. Citigroup’s global CEO Jane Fraser had said: “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.”
The foreign bank narrative began differently from the ‘universal banking’ regime. They were relied on mainly for their expertise in global investment and banking operations, viewed as ‘niche’ providers. Traditional banks, on the other hand, aimed to push domestic banking inclusivity. Foreign banks thus came to focus on lending to wealthy, urban consumers. Meanwhile, local banks and shadow lenders moved quickly to capture the marginal lending and large retail servicing spaces.
The problem was that, despite their limited operations, foreign banks faced tight compliance requirements. It’s been a major worry. For instance, the RBI insists on maintaining a single class of banking licence and uniformity in deposit insurance, capital adequacy ratio, exposure limit, asset classification, etc.
Don’t get me wrong, I’m not saying the regulations are bad or not needed to secure Indian consumers’ interests. I’m saying that foreign banks are not used to operating in such a tight framework or being told who they can or cannot lend to. All told, many of them felt it simply wasn’t worth the trouble.
Naturally, as India and the banking sector grow, so do the risks and compliance costs. So, foreign banks often find it smarter to stick to their domestic markets, thus slashing costs and protecting profits.
The competition, of course, isn’t going to ease. India’s financial space is expanding to include institutions such as small finance banks, payment banks as well as digital lenders. So, foreign banks would feel the heat even more.
Most likely, India will witness more foreign banks exiting or scaling down operations even as the overall banking space expands and so do the services on offer.
Thank you all for listening. Please visit allindiansmatter.in for more columns and audio podcasts. You can follow me on Twitter at @AshrafEngineer and @AllIndiansCount. Search for the All Indians Matter page on Facebook. On Instagram, the handle is @AllIndiansMatter. Email me at editor@allindiansmatter.in. Catch you again soon.
