Sunday, April 18, 2021

Citibank exit from Indian consumer business

Citibank's decision to exit the consumer business in India (except for wealth management) is no surprise. There have been several exits of foreign banks from the consumer business in India- HSBC, Bank of America, RBS, to name a few. 

Foreign banks lack the branch presence needed for retail business. Many of them have no more than a couple of dozen branches. This limits access to low cost funds and it limits access to retail borrowers. There is no way they can match either the public sector banks, with their large branch network inherited from the past, or the private banks that have rapidly expanded their branch network in recent years and continue to do so.

Foreign banks were restricted for long in expanding their branch network by reciprocity agreements under the WTO. In November 2017, the RBI announced 'national treatment' for foreign banks, that is, they would be treated on par with domestic banks for the purpose of branch licensing and in other respects, subject to their setting up a wholly-owned subsidiary in India.

But foreign bank subsidiaries are subject to onerous requirements. The governance requirements include such as having a board of directors with at least 50 per cent locals, one-third independent directors, etc. This is undoubtedly a deterrent for foreign banks that would like complete control over their local boards. Besides, a retail presence in India would entail a large commitment of capital. Ever since the global financial crisis of 2007, foreign banks have found it difficult to access capital or have developed a preference for conserving capital for their home markets. 

We are thus in a curious position today. After putting enormous pressure on the Indian government to open up to foreign banks, these banks have suddenly lost appetite for the Indian market. The RBI's policy of allowing domestic private banks to enlarge their presence before letting in foreign banks- a policy authored by Y V Reddy when he was RBI governor- has worked.

No comments: