Why Foreign Firms Have Bit the Dust in the Financial Sector
Among the many arrogant quips and replies given by foreign banks immediately following the securities scam of 1992, was: “If you keep your front door unlocked, you are likely to be burgled.” This comment came from a cowboy banker from Citibank. He was justifying how foreign banks had hoodwinked Indian public sector banks (PSBs) in the opaque government securities market to make obscene profits. While their treasury operations were unknown outside the small, shadowy world of the Indian debt market, Citibank was a dominant retail financial services brand too in the early-1990s, setting the pace for retail finance from credit cards to consumer loans. ICICI Bank was still a development finance institution, Kotak Mahindra Bank and Axis Bank did not exist and HDFC Bank, set up in 1994, was headed by an ex-Citibanker. 
 
Some 30 years later, in March 2023, the same Citi sold its retail business to Axis Bank and exited the Indian retail banking business. It was not an isolated case. Over the years, the presence of foreign banks in India has been reduced to nothing. The largest foreign bank in India is Standard Chartered Bank which has only 100 branches in 42 cities. HSBC has just 26 branches. The 38-odd other foreign banks operating in India have an insignificant presence. HDFC Bank alone has more than 8,000 branches. The biggest global banks like JP Morgan Chase, Bank of America, Mitsubishi UFJ, and BNP Paribas are either not present in India or have nothing much on the ground. The top banks in India are: State Bank of India (SBI), Axis Bank, ICICI Bank, HDFC Bank and Kotak Mahindra Bank.
 
It is a similar story in mutual funds (MFs). Among the top-10 MFs, there are a few foreign joint venture partners, but they have little role. Most fund houses are entirely Indian-owned. The only foreign asset management company among the top-10 is Nippon India. The largest US MFs are not present in India. Morgan Stanley and Fidelity have walked out of India and Templeton is struggling to grow. 
 
The story is slightly different in insurance where many foreign companies are joint venture partners because the business is a bit technical. But these, too, are controlled by Indian management. Life Insurance Corporation of India (LIC), a government of India company, still rules the life cover business.  
 
All this is a far cry from the early-1990s, when circumspect Indian policy-makers attempted to strike a balance between domestic interests on the one hand, and the diplomatic push of US trade representatives on the other, to smoothen the entry of US foreign financial entities into India. 
 
Reams of media columns were written on how an aspirational middle class of India (estimated at 200 million at that time) prospering through economic liberalisation, would need retail loans, insurance, and – thanks to India’s high savings rate – investment products like mutual funds. And, who better to sell these to Indians than US companies which claimed to have the best products and investment expertise? 
 
Multiple rounds of discussion at the World Trade Organisation focused on opening emerging markets to services from developed nations (read: Wall Street); left-leaning politicians and academics howled about the possibility of neo-colonialism, brought about by neo-liberalism. What happened was exactly the opposite. 
 
In 1993-94, when six private mutual funds were licensed, many of them had foreign partners. Subsequently, more foreign mutual funds entered India, but hardly any of them survived in their original form. The string of early and later entrants, who have exited, include: Pioneer, Black Rock, Alliance Capital, Sun F&C, Morgan Stanley, Jardine Fleming, JP Morgan and Goldman Sachs. In contrast, the survival rate among Indian fund houses, some with passive foreign partners, is very high (JM Financial, DSP, Aditya Birla, and Shriram).
 
Millions of 'proud Indians' would see this trend as conclusive evidence of the greatness of Indian entrepreneurs and quickly extrapolate this into the future (‘India’s century’). While Indian entrepreneurs and managers have, indeed, shown tremendous talent and execution skills, the ‘Quit India’ policy for foreign financial companies has not happened by design, but by default. 
 
Quite frankly, all the assumptions made in the mid-1990s about the Indian middle class have turned out to be wrong. There was no smooth surge in middle-class prosperity for foreign businesses to tap into because the Indian economy continued to be mismanaged. Productivity remained poor, corruption and taxes stayed high, and crony capitalism undermined infrastructure growth in the mid-2000s, resulting in bad loans of Rs20 lakh crore in PSBs. 
 
A surge in prosperity in between 2005 and 2008 was purely due to a massive global boom across all geographies; it drove up the prices of many assets and created a short boom in financial services. But the global financial crisis (GFC) hit India in 2008 and we were again reduced to the same struggle for the next decade. Foreign firms, badly weakened by the GFC, got fed up, distracted and began to exit. Indian companies had no such option. They slogged it out, bided their time and steadily gained market share. 
 
Hence, when disruptive opportunities like the digital on-boarding of customers happened, domestic banks were better placed to scale up. Similarly, when the stock market took off post-Covid-19, domestic mutual funds and broking firms grew rapidly. 
 
While the financial sector threw up clear winners (Indians) and losers (foreigners), note the same has not happened in other sectors. For example, foreign companies in personal products have not quit. Their powerful presence continues. Indian companies have not made much headway in winning market shares from multinational companies like Colgate and Hindustan Lever. 
Similarly, older manufacturing companies that have stuck out like Siemens and ABB or car and bike companies like Suzuki and Honda are making hay. The reason foreigners have lost out in the financial services business is because they have been impatient and had a short-term view—perhaps those traits come from the nature of the financial services business itself.
 
(This article first appeared in Business Standard newspaper)
 
 
Comments
kuuladi
1 month ago
Regulators played a very important part in this.
1. The logic of having compulsory rural branches for new branches in urban areas definitely curtailed the branch expansion strategies of foreign banks. Added to this, even ATMs needed RBI license. This was a big disadvantage because prior to 2008 the foreign banks were flush with lot of capital and were not having restrictions in hiring people or branch expansion. Once the Indian banks became big enough in size and the technology became cheaper, RBI removed these barriers.
2. Accusing the foreigners of being impatient is unfair as the likes of HDFC bank, ICICI bank or Axis bank are majority owned by foreigners. They have been holding on to their stakes for decades.
3. As an ex-banker in both domestic and foreign banks, I can say that the fear of regulator and regulations is more in foreign banks.
4. Many foreign banks and financial institutes developed products suited for India. For example, the concept of SIP was brought by Franklin Templeton and were willing to take as little as 500 rupees and they invested heavily in distributor education when none of the Indian companies did.
5. The logic of Indian regulators seems to be fairly simple, give your capital and have no say in the management and then we will allow you to make money.
6. Apart from the ESOPs, the Indian banks did very little for the employees. Compared to foreign banks, the salaries were lesser while the targets were same or higher. The aggressiveness of every Indian retail bank in pushing insurance products that generate higher commissions is much higher than any foreign bank. Thus a lot of mis selling happens in Indian banks. While one case of HSBC got highlighted, 100s of such cases exist in Indian banks. SBI sells their mutual fund products to people like fixed deposits. 95% of their MF commissions come from only one asset management company, so much for diversification and the regulator talking about investor friendly measures. In fact barring, HDFC and Kotak, most of the Indian banks sell their own mutual fund company products over 70% of the times.
7. If the regulator wants fair treatment for investors, they should cap the % of sales by banks in their own subsidiary mutual funds. Since this means loss to big banks, it never gets addressed.
8. Indian employees in foreign banks have reached the highest echelons of management globally. If they could do well in different countries across the world, they could do well in India too provided there is a level playing field. With a loaded dice, it is better to be silent partners and enjoy the returns of equity rather than doing the actual business.

This can go on and on. The fact is that many countries in the world do not want to give control of the financial sector to foreign companies and so did India.
tgeorge572
Replied to kuuladi comment 1 month ago
Would you then say that the primary goal of the regulator is the health of the banks even if it is at the expense of consumer protection?
saran2sai
Replied to kuuladi comment 1 month ago
This is true and acceptable. "The fact is that many countries in the world do not want to give control of the financial sector to foreign companies and so did India". With so many controls from RBI and SEBI, yet there were many fianancial scams and unexpected insolvencies in the past.
shantanu.ambedkar
Replied to kuuladi comment 1 month ago
Agree with this assessment. Well said
Kamal Garg
1 month ago
I think it is due to many reasons :
1. Foreign financial intermediaries were inpatient, did not wait for long term story.
2. They lacked competence to understand Indian complexity and vastness of the country. India is an extremely complex and diverse country. Often they tried to bring and impose their developed country model onto Indian scene.
3. They must understand that our one State is often larger than their entire country and therefore the complexity and vastness completely differs.
4. Now this leaves a unique dilemma : Jio Financial Services having partnership with Blackrock - which earlier failed in their partnership with DSP group in India. So how this partnership pans out is to be seen and would be interesting.
balaji.kasal
1 month ago
These institutions might struggled to understand the culture here. Their HQs might be too pushy to show up Q2Q or Y2Y results. As they were here to grow and add to profits. The finance is a long-term and leveraged business.
On other hand, it might be good here. As it would avoid any jerk movement of these companies.
S.SuchindranathAiyer
1 month ago
The replacement of traditional high street banking with Americanisms such as MBA (in lieu of apprenticeship and the AIB and CAIIB), and Quarterly performance bonus greed have not done well. Many foreign companies follow reckless human resources paradigms at top and senior management levels. I remember Digital that raised corruption and incompetence to veneration under the benign oversight of entirely naive and unwitting Managers based in the US.
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