Why Citigroup and other foreign banks missed the India growth story

Regulatory framework also stifled Citi's growth in India despite its conscious efforts to make inroads in the country

In 2000, the foreign banks’ market share in advances, among all commercial banks, was 8%. In 2005, it declined to 6.5% and then dropped to 4% by 2020. Contrast this with the private sector banks – the loan market share went up from 12.5% in 2000 to 36% in 2020. If one considers the loan market share of non-banking finance companies, which has grown leaps and bounces over the last decade, foreign banks' performance in the overall credit market will look further dismal.

Loans extended by banks in India tripped in the last 11 years, from Rs 32.4 trillion rupees at the end of 2009-10, to Rs 105.5 trillion at the end of 2020-21.

The foreign banks seem to have missed the India growth story. Average gross domestic product of India, after slumping from 8.2 per cent in 2009-11 to 5.3 per cent in 2011-13, following the global financial crisis, moved upward from 2013-14, reaching 8.3 per cent in 2016-17, which is considered to be one of the longest cyclical upswing in the post-independence period. Growth had slowed down since 2017 and contracted in the last financial year due to the Covis-19 pandemic.

In 2015, UK-based Standard Chartered Bank -the largest foreign bank at that time in terms of branches - decided to reduce its unsecured retail and corporate business in India as a part of its global restructuring exercise.

Some months later, another foreign lender, HSBC, decided to cut the branch network from 50 to 26, citing its strategy was to conduct retail business through digital banking channels. Recently, South Africa’s second largest lender FirstRand Bank decided to shut down its only branch in India and will operate through a representative office.

“Foreign banks never had the appetite for India,” said a banker who has a stint with a foreign bank and later worked with a private sector bank.

“May be they did not understand the market. Non-performing assets are also an issue as they think loan repayment culture is not there in India,” the person added.

“The top bosses of these banks are fine to do a business with a large conglomerate like the Tatas and the Mahindras. But they don’t have time for a Rs 100 crore loan to a SME in a smaller city like Bhubhaneshwar,” said another banker.

Now, Citigroup has decided to exit retail banking from India, apart from 12 other markets, citing lack of scale to compete.

“While the other 13 markets have excellent businesses, we don’t have the scale we need to compete,” Citigroup’s global CEO Jane Fraser said while announcing the bank’s exit from consumer banking in 13 countries including India.

“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,” Fraser said. The lender will continue to focus on institutional business.

Citibank, which has been present in India for more than a century, started the consumer banking business in 1985. The question is what hindered it from growing scale even after so many years of operations?

The US-based lender, which was one of the top five credit card issuers of the country till a few years ago, has been cutting down on this business since the last one year. The Suvidha salary account has 1 million customers from premium companies. In the wealth management business, Citi has been among the top five players. And it has met the priority sector lending targets organically in the last few years.

The bank had 2.8 million cards in March 2020, which came down to 2.64 million in February 2021. Customers spent around Rs 314 crore in March 2020, which fell to Rs 307 crore in February this year.

All the other major credit card players have increased their card issuances during the same time.

Citi, unlike other foreign banks, made a conscious effort to penetrate into India’s growing affluent segment though it never accepted the wholly-owned subsidiary route. In 2013, the banking regulator announced new guidelines for foreign banks operating in India, asking them for local incorporation to get treatment at par with Indian banks. Apart from a handful, like DBS headed by an Indian origin CEO Piyush Gupta, none of the bigger foreign banks converted their branches into a wholly-owned subsidiary.

Bankers said that without WoS route, growth of foreign banks is not possible in India.

“Despite all the handicap that was there like geography etc Citi still became PSL [priority sector lending] complaint,” said a former Citi banker. “The reason Citi actually continued to stand out for so long because Citi actually made an effort to be PSL compliant, organically,” the person added.

Here is an example of how growth was stifled due to regulation. Foreign banks were not allowed to offer loans in the cities that they do not have a branch presence. After the 2013 WoS norms, foreign banks that denied local incorporation, only got a few licences to open fresh branches. Since they cannot open more branches, growth plateaued.

Citi actually made a plea to RBI to issue credit cards in locations where they were not present. Citi had a branch in 17 locations in India. The request was turned down.

“Growth was not happening in Delhi, Mumbai and other metro cities. All we requested is that we are not originating liabilities that you [RBI] are stuck up on the branch, our request was to originate assets. Allow me to only originate priority sector assets. But even that was not allowed,” the former Citi official said.

“Essentially there is no game for foreign banks except for the subsidiarization route,” the official added.

Citigroup declined to comment on the story.

Citicorp Finance (India) Ltd, the NBFC arm of Citi group in India, which originates commercial vehicle Loans, construction equipment loans, loan against securities and trade for the bank, through a painstaking process.

“People who worked in these businesses were transferred to the NBFC and posted in these cities where the business is. Then we would transfer that in the bank’s book to qualify for PSL. Think about the unnecessary hassle like the stamp duty cost etc, but that is how we run it,” said the person.

On the other hand, foreign lenders that complied with the WoS route handsomely. DBS’s Indian subsidiary was allowed by RBI to acquire old generation Lakshmi Vilas Bank, which helped the Singapore-based lender to scale up operations in India as its branch network jumped from 34 to nearly 600 following the takeover.

The Indian regulatory framework forced Citi to hibernate, contrary to the claim that it never sleeps!