On 16 April, global banking behemoth Citibank said it will exit consumer/retail operations in 13 countries across Asia and Europe, including India.
The other markets are Australia, Bahrain, China, Indonesia, Korea, Malaysia, the Philippines, Poland, Russia, Taiwan, Thailand, and Vietnam.
Although Citi's exit from consumer business is part of a global decision, it had its own – and good - reasons to review retail operations in India as well.
Over the years, Citibank has been facing challenges from local competitors in India. The lender has been steadily losing market share. "If you are not among the top three players in a market, then the question is whether you want to be in that market at all," said Sanjiv Bhasin, former India head of DBS Bank and a veteran Indian banker who has spent long years abroad in the business.
Citi’s share in retail business has been falling over the years and local competition has intensified.
Here's how the business stood till last year.
The bank had close to 30 lakh customers in retail, 22 lakh credit cards and 12 lakh bank accounts, as of March 2020. It had around six per cent market share of credit card spends in December 2020, but this percentage would have declined further since then.
The bank had advances of Rs 66,507 crore and deposits of Rs 1,57,869 crore. 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, Citi’s local rivals have been increasing share of retail business increasingly using digital channels. For instance, HDFC Bank’s retail portfolio has grown by around 7 per cent as on March, 2021 from the year-ago period. Within the retail, HDFC Bank grew its credit cards business by 12 per cent and home loans by around 10 per cent. Similarly, Axis Bank has increased the share of retail loans by 9 per cent on a year-on-year basis as per the data available till December, 2020.
Focus on institutional business to continue
Citi will henceforth focus on institutional business, which wouldn't require a lot of branches and people. That's a relatively safer bet for the global bank in India.
Ashu Khullar, CEO Citi India said in a statement post the global announcement: "We will continue to deliver our innovative digital solutions, backed by our global network, and devote our resources to large and mid-sized Indian corporates and multinationals, financial institutions, start-ups in the new age sectors, amongst others. India is a strategic talent hub for Citi. We will continue to tap into the rich talent pool available here to continue to grow our five Citi Solution Centers which support our global footprint."
India-a tough game for foreign banks
It’s not just Citi. Most foreign banks have struggled to catch up with their local competitors. The RBI insists that foreign banks have wholly local owned subsidiaries to get 'near-national' treatment. 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 a wholly owned subsidiary (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.
The privilege of 'near-national treatment' came in with a big burden of compliance.
Among the rules that hurt foreign banks the most were those related to priority sector lending. 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. "In the last two or three decades, Indian banks have garnered much more meaningful share of retail banking and with digital penetration, their reach has more market share," said Bhasin. "Citi has been challenged by ICICI Bank, HDFC Bank and Kotak Mahindra Bank quite impactfully," he added.
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.
"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 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.
The only major foreign bank which has prospered is Singapore-based DBS that got its permission in 2017 to set up a local subsidiary. The bank is in the process of building its retail business along with the SME (small and medium enterprises) book, which it secured through acquiring the Lakshmi Vilas Bank in November last year.
For others, retail continues to be a tough game in India.