More foreign banks may shut shop in India after Citi consumer biz exit (2024)

Global giant Citibank's exiting consumer business in India has put the spotlight on other foreign lenders operating in a tight market.

Tough competition from local banks, a rising number of new players and stiff regulations are likely to hurt foreign banks' prospects in India, probably forcing more lenders to wind up local operations or to confine to specified services such as wealth management or corporate banking, experts said.

"Most of the global banks are reducing their footprint and would operate only when they can operate on a scale and have some competitive advantage in a particular market segment,” Rajnish Kumar, former Chairman of State Bank of India, told Moneycontrol.

The share of foreign banks in the banking business has come down progressively, he said.

Citi biz sale to Axis Bank

On March 1, Axis Bank completed the acquisition of Citibank’s consumer business after receipt of approval from the Competition Commission of India (CCI). The deal was closed with Axis Bank paying a total purchase consideration of Rs 11,603 crore to Citibank India.

In April 2021 Citigroup announced plans to exit consumer banking 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.

The decision surprised customers, employees, and even some competitors of Citi in India. The bank’s employees had no inkling of the decision till it was announced globally.

Why did Citi exit India?

Over the years, Citibank has lost market share in India to competition. 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.

Analysts said a different credit process from their home markets and fierce competition in the Indian banking industry are hurting foreign lenders operating in India.

"One of the two things happen here, either the global risk officers are too stringent and it doesn’t work or they let the Indian operations develop their own risk systems but then these might not necessarily be based on a deep understanding of Indian retail customers," says Vikas V Gupta, CEO & Chief Investment Strategist, OmniScience Capital, a Global Investment Management firm.

Presently, there are 45 foreign banks in India as on January 31, 2023, according to Reserve Bank of India data. Among the foreign banks operating in India, the bigger ones include Standard Chartered and HSBC.

Standard Chartered Bank is the oldest foreign bank that came to India over 160 years ago. HSBC entered India in 1867 and Citi began its India operations in 1902.

Challenges for foreign banks

After the financial crisis of 2008, the regulatory expectations and compliance burden on foreign banks have increased manifold, more so for the banks operating in multiple jurisdictions the requirement of capital has gone up and it’s difficult to generate enough returns.

"Around nine foreign banks have left the Indian market since 2011 starting from Deutsche Bank and Citi Bank in 2023," said Narayani Ramachandran, Director, NMIMS, Bengaluru.

Currently, foreign banks in India account for only one percent of the country’s branch network but they contribute 11 percent of the country’s banking sector profits.

The RBI insists that foreign banks need to 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.

Further, the RBI rules state that if a foreign bank wants to incorporate locally and 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 to be given to specific sectors of the economy.

The central bank wants 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.

Foreign banks had to choose one of the above two modes of presence and would be governed by the principle of a single mode of presence. But there weren't too many takers for the WoS model, with the exception of DBS.

Compliance a major worry

For foreign lenders, the privilege of 'near-national treatment' came with a big burden of compliance. Among the rules that hurt foreign banks, the most were those related to priority sector lending (PSL). PSL refers to mandatory lending by banks to specific sectors of the economy like agriculture and allied activities, education and housing. Failure to meet this target invites penal actions.

PSL guidelines issued by RBI were last reviewed for commercial banks in April 2015 and for UCBs in May 2018.

"Non-achievement of priority sector targets and sub-targets will be taken into account while granting regulatory clearances/approvals for various purposes," according to RBI guidelines.

The way ahead

Going ahead, foreign banks may face even tougher competition as the Indian financial space is opening up to multiple layers of institutions such as small finance banks, payment banks and, most recently, digital lenders, analysts said.

India has a total of 12 Scheduled Public Sector Banks, 21 Scheduled Private Sector Banks, 12 Small Finance Banks (SFBs), and four payment banks in India as on January 31, 2023, according to RBI data.

More private banks would mean intense competition for foreign players which don't have a level playing field here.

"If foreign banks will not be able to scale up further more banks will exit India with an increase in domestic competition," said Gaurang Shah, Geojit Financial Services.