Shifting Citi

India has been a difficult market for foreign banks

Over the past few years, foreign banks have tended to cut back selectively on their exposures to India. While most such institutions have retained a presence in the institutional and investment banking domains, they have tended to pull out of the retail space. The latest to exit retail is Citigroup, which has just sold its business to Axis Bank in an all-cash deal worth about $1.6 billion. Prior to this, FirstRand, UBS, Barclays, BNP Paribas, HSBC, and RBS have all reduced their retail presence or exited altogether. This is partly due to onerous compliance requirements from the Reserve Bank of India, but it is also owing to the competitive nature of the retail banking sector. While India unquestionably has a large middle class, which is interested in financial products and increasingly sophisticated financial planning, it also has aggressively competitive local banks and non-banking financial companies (NBFCs) and a new class of fintech players looking to service that segment. The foreign banks cannot match the locals for scale and they are unwilling to invest in the technology required. Citi, for instance, says it can effectively deploy the $800 million in equity that will be freed up by this deal in other, less competitive segments elsewhere.

Citigroup is exiting, or has exited retail banking in 12 other nations for similar reasons, because this field is more about generating high-volumes than about high-margins. To be an effective player in this segment, the service provider needs scale and a presence across multiple market segments and regions. In addition, the Indian financial economy has already digitised to a very large extent, which means large investments in technology are required to stay competitive in India’s retail banking space. It is nearly impossible for a foreign bank to compete with local institutions, given these constraints, and it is rational not to even try. Axis, for example, has 4,600 branches across India whereas Citi has just 35. Axis also has an app-driven platform, which allows the user access to a wider range of services delivered on a single app. Other Indian financial institutions, including banks, NBFCs, and fintech players have similar app-driven platforms and profiles, which target retail customers.

The pandemic also led to a key change in risk management perceptions for banks. Institutional and corporate banking always had big ticket sizes and better margins, while retail had high volumes. However, until the pandemic, the risk of default in corporate banking was also far higher. It was almost a truism that retail customers defaulted rarely. This meant that banks saw their retail exposures as useful diversification against default risk. This attitude changed with the distress caused by the pandemic since the frequency of defaults in retail loans also went up. Given that the presence in retail no longer provides the same risk diversification or insulation factor, banks have reviewed their retail versus corporate strategy.

While the foreign banks are clearly becoming retail-averse, Indian banks will also have to consider their commitment to the retail landscape. The space is overcrowded with many large fintech players, a dozen large NBFCs (and hundreds of small local NBFCs), and 40-odd commercial banks, all vying for the same customers and all offering a wide spectrum of nearly commoditised services. In such a scenario, already low margins could shrink even further since a customer can shop around for loans, credit cards, hire-purchase services, etc, and choose the service providers with the best terms. We might well see a further shakeout in this space.