Citigroup Global has decided to withdraw from the consumer banking business in India. First Rand Bank has decided to change from the existing branch structure to a representative office structure. Although these are two banks of different sizes and scales, it does remind people of the reasons that led to the exit of these banks.
While both banks have issued formal statements on the reasons for their exit, they do reflect the inherent challenges of the Indian financial system, which is that the risk tolerance of these organizations no longer exists. It is incorrect to believe that all these challenges caused the two proposed banks to make a reassessment decision, their status in India may have played a role.
It is worth mentioning that for some time, many Australian banks have also withdrawn from the Indian market, except for ANZ Bank, which is located in India, although only focusing on corporate and institutional banking.
Differential Treatment Of Indian Banks And Foreign Banks
The level of compliance expectations between Indian banks and foreign banks, especially with regard to priority sector loans and taxation, has always been a thorny issue. Although the proposal of a wholly-owned subsidiary was made to resolve this discrepancy, there were not many payees because the rupee was still not fully convertible.
Poor Asset Quality Problems Caused By The Structural Imbalance In The Financial System
The IL&FS crisis caused a series of events, leading to a comprehensive liquidity crisis, which affected the loan service capabilities of some NBFCs and enterprises. Although the company’s credit quality rating was very high when issuing loans, it still resulted in the write-off of foreign banks’ exposure. In a challenging environment, the relationship between this and global banks is not optimistic, because global banks find it wiser to reduce risk exposure in a market with a lot of potential financial instability.
Surplus Liquidity And Ultra-Low Interest Rates
Due to this pandemic, the government’s fiscal policy and the central bank’s monetary policy will become looser in the foreseeable future. This will lead to surplus liquidity and ultra-low interest rates. Most banks are interested in the retail business mainly because they have obtained low-cost funds and inherent liquidity.
Retail banking business is not a high-profit business, but a large-volume business. This is a fact that banks have always known, but they are involved in this business due to the low cost of capital. Since it is no longer attractive, it makes sense to rationalize the capital allocation for companies with higher profit margins.
Retail Banking No Longer A Hedge Against Poor Corporate Banking Performance
Generally, whenever the company’s account books are emphasized, the retail account books provide good risk diversification. However, due to the pandemic and lockdown as well as corporate balance sheet issues that have not been fully resolved, the risks of corporate loan books and retail loan books are no longer asymmetrical. Considering this asymmetry, it makes sense to exit the low-margin consumer banking business.
Increased Competition From Domestic Companies
Domestic financial service providers have indeed improved their technology and ability to respond to changing market demands. Although the managers of foreign banks are Indians, many decisions are still being made on a global scale, which slows the pace of foreign banks’ response to changes in the Indian market. The local management of foreign banks already knows what needs to be done, but overseas decision-making bureaucracies shut it out. Being agile in today’s time and nimble-footed is very important.
Lastly, the purpose of emphasizing this view is not only to talk about the challenges that caused these exits but also to see how to keep the market interesting and relevant to these participants and players. Each of these banks is critical to our country’s trade channels, so it is important to see what measures can be taken to reverse this seeming trend.
Supervisors should first consider eliminating the differences between foreign banks and domestic banks. The harmonization exercise and coordinating activities are important to maintain a market conducive to foreign banks staying in India. The same statements have been made for some time in the past, and it is important to prioritize them now, which is a good place for regulators to start from now on.
Besides This, Sending Money From India To Overseas Has Never Been Easier
We’ve heard this before: Coronavirus has accelerated the adoption of digital payments in India as consumers and organizations seek more convenient ways to conduct daily transactions. Despite the obvious digital changes, many people still think it is difficult to send money overseas from India. Although this may have been true in the past, India’s digital remittance space has also undergone major changes in recent years making it easier than ever to send money abroad.
Digital remittance platforms have developed by leaps and bounds, and international remittances are now faster and more convenient than ever. So, what is driving this change? What are our expectations for the future?
The Role Of Digital Remittances In India
Digital remittances have played a key role in India for decades. Given India’s diaspora, this is not surprising. In fact, in the fiscal year 2020 alone, Indian remittances overseas reached a record high of 18.75 billion U.S. dollars, an increase of 36% from the 13.78 billion U.S. dollars in 2019. The main driver of this demand is the increase in immigration and overseas education.
In fact, one of the main reasons for sending money out of India is to support relatives studying abroad. Internal data provided by Instarem shows that between 2020 and 2021, 75% of digital transactions from India to major immigration destinations were carried out to support overseas education. These include remittances to Germany, Australia, Canada, the United Kingdom, and the United States. There is no doubt that this shows that India’s demand for advanced digital remittance solutions is increasing, especially in the coming months as we prepare to reopen our international borders. So how does India support this shift to advanced digital remittance options?
Liberalized Remittance Scheme Of India
In the past five years alone, the digital remittance industry in India has undergone greater changes than in the past 50 years. The main driving force behind this change is that the Reserve Bank of India (RBI) launched the LRS (Liberalised Remittance Scheme) in 2015, which allows Indian residents to remit unpaid remittances during each permitted fiscal year (April to March) which is more than $250,000 in payments or capital account transactions, or a combination of the two.
Reserve Bank of India (RBI) revised the guidelines under the LRS to allow Indian residents to send money to the country’s IFSC (International Financial Services Center). The purpose of this is to help Indian residents use more remittances for investment purposes, to help them diversify their investment portfolios, and to deepen the financial market of India’s IFSC. In this way, LRS encourages more fintech companies to enter the digital remittance market and at the same time forces banks to enhance their digital products to cope with increasing competition.
The Role of Fintechs In Shaping Indian Remittances
With government initiatives such as LRS attracting more fintech participants to India’s financial ecosystem, we are now seeing partnerships between banks and fintech companies. Such partnerships are essential to meet the growing digital payment needs of residents (through a faster, easier, and more cost-effective experience). In the past five years, several fintech partnerships established with banks have demonstrated successful experiences around the world we have seen almost the same trend in India.
As more fintech companies cooperate with local banks, we see an enhanced digital payment experience that can cover more customers across the country. For example, we are now seeing Indian banks integrating bill payment, e-commerce links, and UPI (Unified Payment Interface-India’s real-time payment system) into mobile banking applications so that customers can use a single interface.
It is estimated that the number of smartphone users in India will reach 829 million by 2022, and we can also expect similar growth in digital payments through mobile applications and Internet banking. In fact, it is estimated that by 2030, India’s digital payments will exceed US$1 trillion, which highlights how India and China are leading the digitalization of Southeast Asia’s finance.
So, What Does This Mean For Consumers?
As a result, Indians now have more choices than ever before and can choose to send money overseas. Nowadays, with the help of various digital solutions provided by banks and fintech companies, Indian customers can now send money faster and cheaper than ever before. Moreover, as more and more fintech platforms work with licensed bank partners to strengthen their capabilities in India, the process of sending money abroad will only become smoother. There is enough evidence to show that the cooperation between fintech companies and banks is shaping the future of payments and making everyday customers’ lives easier.
In Short, This Will Mean:
- Improved outbound services, which means consumers find it easier to send money overseas.
- A longer list of destinations you can remit from India.
- Better delivery time for transfers.
- Access easy-to-use money management tools, mobile check deposits, online banking features, and applications.
The Way Forward
As we find our foothold in the post-COVID world, these enhancements to digital remittance services in India have never been more important. Now, digital remittance has become a necessity, and only in the post-COVID era is it expected to increase its demand. Therefore, as we move towards the new normal, choosing digital payment providers that provide integrated solutions and seamless cross-border payments will bring huge benefits to organizations and individuals. Although we are only the beginning of India’s digital transformation, there is no doubt that we are heading in the right direction.