Why are foreign banks exiting India or scaling down operations?

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[00:00:27] Hello and welcome to All Indians Matter. I'm a staff engineer.

[00:00:30] Over the past few years, several foreign banks have either exited India or scaled down their operations here.

[00:00:36] Among the latest ones was Citibank which sold its consumer banking business to Axis Bank.

[00:00:40] Why are foreign banks choosing to exit or shrink operations?

[00:00:44] Industry analysts point to a number of reasons.

[00:00:47] Tough competition from local banks, their share in the overall market reducing,

[00:00:50] an expanding number of players and stiff regulations.

[00:00:53] The last seems to be the most cited cause.

[00:00:55] So what do the exits of these foreign banks mean for you, the customer and India's banking landscape?

[00:01:03] All Indians Matter

[00:01:09] In March last year, Axis Bank completed its acquisition of Citibank's consumer business.

[00:01:13] Citibank had over the years steadily lost market share but had 30 lakh retail customers,

[00:01:18] 22 lakh credit cards and 12 lakh bank accounts as of March 2020.

[00:01:22] At that time, it commanded 6% of credit card spends but this share would have declined since then.

[00:01:27] However, despite the numbers, the retail business was struggling.

[00:01:31] In March 2020, Citibank's retail business accounted for 30% of total revenues in India with corporate at 50%.

[00:01:38] In 2018-19, the retail business accounted for 34% and corporate 46%.

[00:01:44] So retail revenues were in decline.

[00:01:46] Close on the heels of Citibank's decision to exit the retail business,

[00:01:49] South Africa's first trend bank followed suit.

[00:01:52] In 2012, British major Barclays closed a third of its branches in non-metro areas in India.

[00:01:57] In 2016, the Commonwealth Bank of Australia exited India following an evaluation of operations here alongside a new strategy.

[00:02:04] The same year, Royal Bank of Scotland or RBS too wound up its corporate retail and institutional banking business in India.

[00:02:10] Australia and New Zealand Bank, better known as ANZ, wound up domestic operations in 2000

[00:02:15] after selling its Grindley's bank unit to Standard Chartered for $1.34 billion.

[00:02:20] However, it re-entered the Indian market in 2011 through a branch in Mumbai.

[00:02:24] ANZ had been in India since 1984 as Grindley's bank.

[00:02:27] In 2011, Deutsche Bank sold its credit card business to Indusin Bank.

[00:02:31] In 2013, UBS exited India while Morgan Stanley surrendered its banking license.

[00:02:37] Merrill Lynch and Standard Chartered scaled down operations in 2015.

[00:02:40] In India, foreign banks have set the standard for almost four decades.

[00:02:44] However, after the economic reforms of 1991, many new private banks were set up

[00:02:48] and the industry's competitive landscape was altered forever.

[00:02:52] No longer were foreign banks the sole providers of great client service.

[00:02:55] Domestic banks knew they would have to do the same and rolled out services accordingly.

[00:03:00] Domestic players also understood the market well and introduced great innovations in products,

[00:03:04] especially in consumer banking.

[00:03:06] The biggest advantage they had was access to cheap funds through their current and savings accounts.

[00:03:11] Also, foreign banks asked for higher fee-based services,

[00:03:13] but the dependence on such services in retail banking is low in this competitive landscape.

[00:03:18] As far as view the customer goes,

[00:03:20] the biggest loss would be the quality of customer service that foreign banks offered.

[00:03:24] This quality had forced the entire banking ecosystem to raise its standard.

[00:03:28] Sadly, at some stage, the risk-adjusted return on retail accounts

[00:03:31] stopped justifying the service foreign banks were providing.

[00:03:34] The other implication is on jobs and choices before the banking talent pool.

[00:03:38] The exits, scaling down of operations and acquisitions means job losses.

[00:03:41] It also means fewer employment options for talent.

[00:03:44] There are several operational and policy reasons too for the exits.

[00:03:48] Analysts have suggested that the difference in the credit process from their home markets

[00:03:51] has also hurt foreign banks.

[00:03:52] In fact, foreign banks have expressed several concerns with the regulatory landscape.

[00:03:56] Chief among them is the priority sector lending policy,

[00:03:59] under which they have to earmark 40% of their loans for sectors mandated by the government.

[00:04:03] Failure to meet these quotas invites penalties.

[00:04:06] In 2013, the Reserve Bank of India or RBI released guidelines for foreign banks

[00:04:10] mandating that they either operate through branch presence

[00:04:12] or set up fully-owned subsidiaries to be treated at par with Indian banks.

[00:04:17] This followed the global financial crisis of 2008.

[00:04:20] However, there haven't been too many opting for the wholly-owned subsidiary model.

[00:04:23] The rash of loans going bad has also spooked foreign banks.

[00:04:26] Several financial institutions have crumbled as a result of such loans or scams.

[00:04:31] These include ILNFS, DHFL, Daxmi Vilas Bank and others.

[00:04:35] Foreign banks, therefore, began to find it less enticing to continue in India.

[00:04:39] Citigroup's global CEO Jane Fraser had said,

[00:04:41] and I quote,

[00:04:51] The foreign bank narrative began differently from the so-called universal banking regime.

[00:04:56] They were relied on mainly for their expertise in global investment

[00:04:59] and banking operations viewed as niche providers.

[00:05:02] Traditional banks, on the other hand, aimed to push domestic banking inclusivity.

[00:05:06] Foreign banks thus came to focus on lending to wealthy urban consumers.

[00:05:10] Meanwhile, local banks and shadow lenders moved quickly

[00:05:12] to capture the marginal lending and large retail servicing spaces.

[00:05:16] The problem was that despite their limited operations,

[00:05:19] foreign banks faced tight compliance requirements.

[00:05:21] It's been a major worry.

[00:05:23] For instance, the RBI insists on maintaining a single class of banking license

[00:05:27] and uniformity in deposit insurance, capital adequacy ratio,

[00:05:30] exposure limit, asset classification, etc.

[00:05:33] Don't get me wrong, I'm not saying the regulations are bad

[00:05:35] or not needed to secure Indian consumers' interests.

[00:05:38] I'm saying that foreign banks are not used to operating in such a tight framework

[00:05:41] or being told who they can or cannot lend to.

[00:05:44] All told, many of them felt it simply wasn't worth the trouble.

[00:05:48] Naturally, as India and the banking sector grow,

[00:05:50] so do the risks and compliance costs.

[00:05:52] So foreign banks often find it smarter to stick to their domestic markets,

[00:05:56] thus slashing costs and protecting profits.

[00:05:58] The competition, of course, isn't going to ease.

[00:06:01] India's financial space is expanding to include institutions

[00:06:04] such as small finance banks, payment banks as well as digital lenders,

[00:06:08] so foreign banks would feel the heat even more.

[00:06:10] Most likely, India will witness more foreign banks exiting

[00:06:13] or scaling down operations even as the overall banking space expands

[00:06:17] and so do the services on offer.