CitiBank, like other foreign banks operating in the Indian subcontinent, failed to operate its own wholly-owned subsidiary or WOS and seize the growth opportunities presented.
Even though the Reserve Bank of India Act was announced in 1934, followed by the establishment of the Central Bank in 1969 the banking reforms were triggered in India on the basis of the recommendations by the Narasimhan Committee in 1991.
The licensing of the private sector initiated an era of change. On 28 February 2005, the RBI announced a blueprint for foreign banks in India with notable highlights on ownership and governance. Undoubtedly, the foreign banks started to flock to India either by increasing their stakes in the local banks or establishing their own operations.
RBI’s conservative stance on the banking sector and the global meltdown lead to another relevant event, namely the guidelines and whitepaper released by the Nair Committee Report on PSL in 2012. The committee strongly recommended that the Wholly Owned Subsidiary (WOS) of foreign banks be brought on par with domestic banks. The WOS system had its own added regulatory hurdles.
This guideline became a concrete challenge in 2013 for all the foreign bank including Citi. The RBI in due course of time started to limit and restrict the issuance of licenses for new branches for the foreign banks that did not opt for the WOS system.
Expectedly, the market share of foreign banks started to shrink drastically. According to RBI reports, the market share of foreign banks dropped from 8% in 2000 to 4% in 2020.
The story so far –
CitiBank started its India operations in 1902, the bank has over 2.9 million retail customers with a little over 1.2 million bank accounts. CitiBank is and will be India’s top five credit card issuers and has issued around 2.2 million credit cards that account for a 6% market share of retail credit card spending in the country.
As of March 2020, CitiBank aggregate total assets stood at approximately Rs. 299,250 CRS. The US-based lender also reported a net profit of Rs. 4,198 CRS. However, the major portion of its earnings was derived from commission, exchange and brokerage fees.
Why is Citi selling its retail banking business?
Evidently, CitiBank had been under a lot of pressure and stress to make money through its consumer banking business. Running a retail business be it banking or a corner shop requires intensive capital and infrastructure and the results may not be promising, like CitiBank.
Foreign banks have failed to understand the importance of glocalisation in India. The top management of these giants acknowledge the businesses with Tatas and Ambananis of India but have neglected the demands and use cases of small businesses and MSMEs based out of small and Tier 2 cities.
Additionally, in numbers, the loans extended by banks in India have tripled in the last decade however the same is also true for the non-performing assets or NPAs. The covid-19 pandemic coupled with the global financial crisis pushed the lender to restructure its operations in India and the Asia Pacific.
It is not only CitiBank but also other reputed foreign banks like the UK based Standard Chartered Bank and South Africa based FirstRand that have been cutting down their operations in India as a strategic move.
The latest downsizing by these global banking giants is a shred of evidence that the age-old regulations in India are not particularly parallel with the opportunities offered by the growth prospect in India.
The problems ahead-
Citi has played a pivotal role in developing financial services in India. The lenders focus on technology, innovation and digital transformation made it a remarkable player in the industry. With the announcement of its exit, there will be a huge gap, especially in the credit card business which will create initial chaos until the sale of the business goes through.
Other foreign banks like Citi have also failed to prove their worth in the Indian market and will sooner or later announce their restructure or exit strategy. Who is to be blamed for these draconian measures is yet to be decided conclusively.
Indian markets have radically changed with a focus on small businesses and a push for the make in India mission. Have the global banks failed to embrace this change or have the authorities at the Reserve Bank of India been conservative with their regulations is in the near future to give a thought about.
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Disclaimer – The above writeup is solely for the purpose of educating investors.