Simply Put: Why are foreign banks quitting India?

If there’s one industry that is becoming the embodiment of the Atmanirbhar Bharat movement, it is banking and finance. Well, not intentionally, though.


Earlier last week, Axis Bank announced that it has acquired American giant Citibank’s credit card business, wealth franchise and a set of affluent customers for $1.6 billion. Interestingly, the announcement came on the same day last year when it recorded its highest quarterly profits yet. Even in India, it closed its balance sheet in FY20 to the tune of ₹7,227 crore. So, profitability doesn’t seem to be the reason behind Citi’s partial exit. According to Citigroup’s global Chief Executive Officer (CEO) Jane Fraser, the bank didn’t have the scale it needed to compete in India.


Meanwhile, companies left behind are trying to put on a brave face by pulling out of retail business and steering clear of expansion plans.


These subsequent exits underscore the frustrating battle that international banks face to get a small pie of the Indian market. While the reasons behind their exits are multifaceted, tough competition, high capital requirements, lack of scalable profits, COVID-19, infrastructural and social barriers have led to a total retreat.

As per a survey conducted by Stocktwits, a social media platform for market buffs, consumers are most bullish on Indian banks such HDFC, ICICI, Kotak and the State Bank of India.


The share of advances of foreign banks had slipped from 6.55% in 2005 to 4.15% in 2020, according to Reserve Bank of India figures. As a result, many foreign banks have been forced to shut shop or scale down business in the Indian market.

Apart from that, one major roadblock emerged in 2011 after the global recession: International banks were allowed to either operate through the Wholly Owned Subsidiaries (WOS) model or branch presence.

Unlike branches, locally incorporated subsidiaries are separate legal entities. They have their own capital base and board of directors. As they operate on an independent model from their parent country, they are less likely to be affected by global changes. In the case of branches, parent banks are, in principle, responsible for their liabilities.

Of the 45 foreign lenders, just Development Bank of Singapore (DBS) and State Bank of Mauritius operate as subsidiaries and these two foreign banks have been successfully expanding their presence in the country.

Another challenge imposed on foreign banks was related to priority sector lending. As per RBI 2011 rules, international banks were required to allocate at least 40% of the overall loans to the economically weaker sections. However, international banks set up their branches in metro and Tier I cities, so it was hard for them to follow this ruling.

And, on average, the RBI only issues about 14 branch permits to all foreign banks every year.

So, apart from DBS, which was able to set up its local subsidiary in 2017 and expand after its acquisition of Lakshmi Vilas Bank, other foreign retail banks continue to struggle in India.

Last but not the least, the global pandemic also worsened the bad loan crisis at Indian banks, especially during 2020-2021. Financial institutions were forced to set aside 'provisions' as many borrowers couldn't repay banks during the second wave, which ate into their profits. In July last year, Fitch Ratings said that India's struggling banks would need between $15 billion to $58 billion in infusion of fresh funds by 2022.

So, unless and until these foreign banks get some money to make more money, a lot of key executives may be packing their bags to fly out.

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