For customers of Citi, there is no immediate change in the near relation with the bank.
After Citigroup's announcement to exit consumer business in India as part of a global plan, another foreign bank has decided to cut its presence in the country. South African lender FirstRand Ltd wants to scale back its presence in India by converting its branch to a representative office but won’t wind down its operations in the country, according to a Bloomberg report.
“Whilst it has proved difficult to build a meaningful in-country franchise, the Indian business has successfully focused on facilitating trade and investment activity in the Indo-Africa corridor,” the Johannesburg-based lender said, Bloomberg reported, adding FirstRand, which has operations across Africa and a representative office in Shanghai, already reduced its consumer banking in India almost five years ago.
Not a major player
Firstrand doesn’t have significant operations in India but this is the second foreign bank announcing scaling down of operations in India back to back. According to its website, FirstRand Bank India is a licensed financial services provider in India and operates as a "branch" of FirstRand Bank Limited South Africa. In 2019, FirstRand Bank celebrated ten years of successful operations in India under its Corporate and Investment Banking franchise. According to its annual report, the total investments in India as on March 31, 2020, stood at Rs 1208. 86 crore. It has total deposits of Rs 318 crore as on that date.
A week ago, Citibank said it will exit India consumer business as part of a global business strategy in 13 markets. The 13 nations Citibank --the largest foreign bank in India --will pull out from are Australia, Bahrain, China, India, Indonesia, Korea, Malaysia, the Philippines, Poland, Russia, Taiwan, Thailand, and Vietnam. Citi will continue investing in its institutional business in India, the bank said.
Foreign banks struggle in Indian market
Foreign banks have struggled to catch up with their local competitors, especially in the retail business.
The Reserve Bank of India (RBI) has been insisting that foreign banks should have wholly local-owned subsidiaries (WoS) to get 'near-national' treatment. But, that would mean banks will have to bring in more capital to India compared to the model of operating from their home markets through the branch model. For this reason, only DBS and State Bank of Mauritius have set up wholly owned subsidiaries.
In the aftermath of the global financial crisis and building on the lessons from the crisis, the RBI issued a discussion paper in January 2011 on the mode of presence of foreign banks in India. It was decided to allow foreign banks to operate in India either through branch presence or they could set up WOS with near-national treatment, which refers to equal treatment on regulation with local banks.
The foreign banks had to choose one of the above two modes of presence and would be governed by the principle of single mode of presence. But, there weren't too many takers for the WoS model, with the possible exception of DBS among big banks.
That’s because, besides capital, the privilege of 'near-national treatment' came in with a big burden of compliance to the local rules, mainly the priority sector lending, which refers to mandatory lending (PSL) to economically weaker sections.
Priority sector lending
Among the rules that hurt foreign banks the most were those related to PSL. The RBI rules state that if a foreign bank wants to incorporate locally and wants to be treated at par with local banks, they will have to comply with a norm that requires at least 40 percent of the overall loans be given to economically weaker sections. This wasn't feasible for foreign banks, which were mostly confined to metros and urban centres. It was tough to break even in rural branches with Citi's business model and cost structure.
"To compete in retail, you require feet on the ground. Foreign banks, due to their high cost structure (on staff and infrastructure), couldn't expand like local banks," said Naresh Malhotra, former SBI banker and a senior banking consultant.
For those foreign banks which wanted to expand through a branch-only model, getting fresh permits from the central bank was tough. Consider this: Standard Chartered Bank, which is the largest international bank (in terms of branch network) in India, has only 100 branches in 43 cities--and it has been operating in India since 1858! Compare that with the State Bank of India, which has over 22,000 branches or the HDFC Bank that has over 5,600 branches.
And the competition has been getting tough for foreign banks over the years.
Banks like ICICI, HDFC Bank and Kotak, along with a bunch of small and mid-sized lenders, were aggressively upping their game to get a bigger pie of the retail business. Reason: Low rate of defaults and decent margin; in short, a safer bet compared to risky corporate loans.
Take for instance Citi. Citi's retail revenue contributed 30 percent to the total in March 2020, while corporate pitched in with 50 percent. In 2018-19, retail contributed 34 percent and corporate 46 percent, according to the details available. Thus, the retail business had been struggling. The percentage of non-performing assets (NPAs) to net advances has gone up to 0.56 percent as of March 2020 from 0.51 percent in the previous year.
Return on assets slightly moderated to 2.55 percent from 2.57 percent and business per employee improved to Rs 43.6 crore in FY20 from Rs 37.6 crore in the previous year. Interest income declined to 6.73 percent from seven percent during the period. To sum it up, there was no compelling reason for Citi to hold on to this market; an exit made sense.
Compared with this, HDFC Bank’s retail portfolio has grown by around seven per cent as on March 2021 from the year-ago period. Within the retail, HDFC Bank grew its credit cards business by 12 percent and home loans by around 10 percent. Similarly, Axis Bank has increased the share of retail loans by 9 percent on a year-on-year basis as per the data available till December 2020.
"India's retail banking industry is turning more competitive, more intense and more local. Foreign banks are at a disadvantage here compared to Indian banks," said Ashvin Parekh of Ashvin Parekh Advisory Services. "This is the right time for Citi to put their retail assets on the block or gradually wind it up," he points out.
That argument makes sense given that India has now opened up banking to multiple layers of lending institutions such as small finance banks, payment banks and, most recently, to digital lenders. More number of private banks would mean intense competition for foreign players who don't have a level playing field here.
(This is an updated version of an earlier story published on Moneycontrol)