Citi Global has decided to exit the Consumer Banking Business in India. First Rand Bank has decided to move to a representative office structure from its existing branch structure. While these are two banks of a different size and scale, it does make one think of the reasons that resulted into the exit of these Banks.
While both the Banks have made official statements on the reasons for the exit, they do reflect some of the challenges inherent within the Indian financial system, that the organizations no longer have a risk appetite for. While it would not be right to assume that all these challenges led to the decisions of the two proposed banks in question to re-evaluate their position in India, these might have had some role to play.
It would also be worthwhile to note that a lot of Australian Banks also exited from India over a period of time, with the exception of ANZ being in India, though only with a Corporate and Institutional Banking focus.
Differential treatment of the foreign banks vis-à-vis the Indian Banks
The level of compliance expectations between foreign banks and Indian Banks especially around aspects on Priority Sector Lending and Taxation have always been a thorny issue. While the Wholly Owned Subsidiary suggestion was made with an intent to resolve this disparity, there were not many takers, because the rupee was still not fully convertible.
Poor Asset Quality issues due to structural imbalances in the financial system
The IL&FS crisis created a chain of events that resulted into a full-blown liquidity crisis, which impacted the loan servicing ability of some NBFCs and Corporates. This resulted in exposure write offs for foreign Banks despite strong credit quality ratings for the corporations at the time of granting loans. In an environment of challenging times, this does not bode wellwith global Banks, who find it much more sensible to cut exposure on markets where they see a lot of potential financial instability.
Surplus Liquidity & Ultra-low interest rates
Because of the pandemic, the fiscal policy of governments and the monetary policy of the central banks are going to be loose for the foreseeable future. This will result in surplus liquidity and ultra-low interest rates. Most of the Banks are interested in the retail business primarily due to the access to low cost of funds and the inherent access to liquidity.
Retail Banking is not a high margin business but a high-volume business, a fact that the Banks always knew, but got into the business due to the low cost of funds. With that no longer being an attraction, it made sense to rationalize capital allocation to higher margin businesses.
Retail Banking no longer a hedge against poor corporate banking performance
Usually, whenever the corporate book is stressed, the retail book provides good risk diversification. However, with the pandemic and the lockdowns and the corporate balance sheet problems still not being full resolved, the risks of the corporate loan book and the retail loan books are no longer asymmetrical. Given this asymmetry, it made sense to exit the low margin consumer banking business.
Increased competition from the domestic players
The domestic financial services players have really upped their game in terms of technology and their ability to respond to changing market needs. While the management of the foreign banks is Indian, a lot of decisioning still happens at a global level, which reduces the pace at which the foreign banks can respond to the changes in the Indian market. The foreign banks' local management have been aware of what needs to be done, but the decision bureaucracy from overseas has held them back. It is extremely important to be nimble footed in today’s times.
The objective of highlighting this perspective is to not just speak about the challenges that resulted into these exits, but to see in terms of how to keep the market interesting and relevant for these players. Each of these Banks are critical and important for the trade corridors that our country runs and hence it is important to see what can be done to reverse this seeming trend.
The regulator should consider removing the differential aspects between the foreign banks and the domestic banks to start with. The harmonization exercise is important to keep the market conducive for foreign banks to stay inIndia. Representations for the same has been made over a period and it is important to prioritize them now and also a good place for the regulator to start with.
The article was first published on ET BFSI.com.