Why did Citibank exit India?

Retail money is a big source of deposits for banks, especially in big countries like India. So why did Citibank decide to exit the retail/consumer side of the business in India?

Just by the way, the move was not India-specific. Citibank decided to exit the retail business in more than 10 countries across Asia and Europe. Other than India, countries like Australia, China, Malaysia and Russia were on the list. Now given this was more of a global move, the bank had some India-specific reasons too.

For foreign banks, retail has been a challenging game in this country for years. These banks have slowly been losing market share to local competitors in the retail business. All of the top Indian banks have been improving their balance sheets and profitability in recent years, and that generally comes with increasing market share.

It’s not just Citi. Most foreign banks have struggled to catch up with local competitors. After the 2008 financial crisis, RBI wanted to be on the safe side and they set some rules. The RBI decided that foreign banks should have wholly local-owned subsidiaries to get the same treatment as national banks. 

Basically, it was decided to allow foreign banks to operate in India either through branch presence or they could set up a wholly owned subsidiary (WOS) with “near national” treatment, which refers to equal treatment on regulation with local banks. The foreign banks had to choose one of the above two. But, there weren't many takers for the WoS model.

The RBI rules stated that if a foreign bank wants to incorporate locally and be treated like a local bank, they will have to give 40 per cent of the overall loans to economically weaker sections. This wasn't feasible for foreign banks, one, because their presence was primarily in metro cities, and two, because of their higher cost structure.

For those foreign banks which wanted to expand through a branch-only model, getting fresh permits from the central bank was tough. And because of that, foreign banks in India have way lesser branches in the country than local ones. Plus, with digitisation, all of India’s top banks have been getting faster at getting the work done. Also, many different types of institutions are now coming up in India, namely, small finance banks, payment banks and digital lenders. This makes an already biased game even more difficult to play for foreign banks.

But Citibank hasn’t left the country completely. They have continued with their institutional business, because that does not take up so much of the resources and the number of branches required is significantly less. Plus, the regulatory challenges are much less, and completely giving up a developing country with almost one-fifth of the world’s population would not make sense anyways.

So what’s your view on this, is it good that the RBI is focused on getting more business to domestic banks? Or does that outweigh the drawback of not exposing our banks to the full force of the fair market, which could mean that they don’t improve as much as they would with competition with the best?

Anyways, that’s it for this article. You can read more from me here. And do let me know if you want a specific topic covered! Subscribe for free to receive new posts and support my work.