Rising non-performing assets have forced Citibank NA to reposition CitiFinancial, the biggest non-banking finance company (NBFC) in India. “Irrational lending, loose underwriting norms and ample liquidity” in the market led to problems for the NBFC that has been growing aggressively since its inception in 2000 following the bank’s global acquisition of Associates First Capital Corp. in the US.
In an exclusive interview with Mint, Citibank’s chief executive officer in India, Sanjay Nayar, and country business manger, global consumer group, P.S. Jayakumar, discuss the business strategy for Citi’s non-banking arm, which had an asset base of Rs11,000 crore and 2.3 million customers in March 2007, the latest data publicly available. Meanwhile, its net profit has fallen to Rs39 crore in the first half of this fiscal from Rs111 crore in the year-ago period. Edited excerpts:
You are closing branches of CitiFinancial, shrinking its business…
Nayar: First, let’s talk about the group. Citi India as a conglomerate is growing very robustly. The March-end results will come in soon. I can’t talk about the numbers, but you will get a sense of how we are doing from our advance tax payment (Citi has paid Rs1,267 crore, up from Rs600 crore in 2007).
We have a very solid double-digit growth in India both, for revenue and profits.
Will you be able to maintain last year’s 39% growth in net profit?
Nayar: We can tell you that only after March. I think all the strategies that we have built over time here to grow organically are absolutely on track. We have not only expanded our SME (small and medium enterprise) customer base to 5,500, but are also occupying a much larger share of their wallet now. The second big driver for us are the large corporations where we dominate through investment banking and capital market activities.
Have you brought in fresh capital this year?
Nayar: We just got $250 million (Rs1,012.50 crore). Capital is never an issue for us. Also, we have never remitted our earnings. Every year we retain $400-500 million and get fresh capital when we need it.
The third business that we launched early last year was the retail brokerage and private banking. We have got some very good client acquisition on the private banking side. Our retail brokerage branches will be 13 by the end of this year. The expansion is a little slower than what we had expected, but that is because of market conditions.
Going strong: Sanjay Nayar, CEO, South-East Asia, Citibank. (Abhijit Bhatlekar / Mint)
Unlike other European or American banks in India, we don’t cater to just one segment. We are catering to a lot of segments—from the emerging middle class to ultra high net worth or private bank clients. Yes, we have increased delinquencies in CitiFinancial, but then our NRI (non-resident Indian) business is booming.
You were one of the leaders in retail financing through CitiFinancial. What went wrong?
Nayar: CitiFinancial is meant for a particular customer segment that is different from the consumer bank’s clients. Our aim was to cater to the lower middle income segment or the “emerging middle class” who have an annual income up to Rs1 lakh. This was set up on the basis of a need for unsecured credit.
CitiFinancial’s profits have dipped and you are closing down branches...
Nayar: We are the biggest and we will remain the biggest.
About 15 months ago, we began to see the rising delinquencies for two or three reasons. First and foremost, we saw the entry of many new players. To have an NBFC was “in vogue”. These people came in with fresh equity and were highly charged up. They set up as many branches as they could and started lending money. That created over-indebtedness for our clients. The new players were focusing on the same 100 cities like everyone else.
Irrational lending, loose underwriting norms and ample liquidity led to the problem. Our client base is now more indebted and thus (started) defaulting.
What is the percentage of delinquencies?
Nayar: We cannot give numbers. But, it is much beyond our expectations.
Jayakumar: Delinquencies for CitiFinancial are not in double digits but (in) some segments (of business) they are in double digits.
Today, there is a credit bureau that gives us the credit history of the customer. Those customers who had started a relationship with us in 2003-2004 now have three to four credit cards. Everybody was pushing his way into the wallet of the same customer and the customer took on more than what he could repay. On the positive side, this happened in the industry at an early stage. Now, credit data is available and that part of the lacunae has been addressed. Performance of the (credit) bureau is key to the success of unsecured lending.
At a time when everyone was growing, there was little that could be done to prevent over-leveraging. That’s the heart of the issue.
So, you are shrinking the book?
Nayar: No. Our book has in fact grown bigger and we have more customers than our last published numbers show. Now we are focusing on getting the delinquencies under control. We are beefing up the collection infrastructure and using technology to do it. Collection infrastructure is a key remedy and we have already begun to get results.
You’re also closing down branches...
Nayar: We are repositioning the business. Broadly, we are looking at post-purchase customer behaviour and delinquencies, branch by branch. We are using this data to find out which branches are chronically bad. Those 50-60 branches can be relocated. You have heard about shutting down branches… Whether we shut them or relocate them, we still don’t know. We will not be in those areas where there is obvious duplication.
You are closing 100 branches...
Jayakumar: The number is 62. Our plan does not involve shutting them down altogether. We will go back to rebuild some of them in October. There are some geographical areas where the branches have underperformed.
So, your plan includes re-location, merger as well as closure?
Nayar: It’s not a big deal. If you look at our base of branches, if from 450 it comes down to 410, it is not a dramatic fall.
The second repositioning of the business is the product mix. We now offer a complete set of financial services products. We have introduced a whole range of insurance products and even in that there is an element of wealth management. We are also getting into the prime segment of customers in addition to the subprime or what we call the Rs1 lakh segment.
Jayakymar: Our earlier tag line was: “If you need money come to us”. Now we say: “Relationship for a lifetime”. Over the last 24 months our mortgage book has become 15% of our balance sheet. We are the largest distributor of insurance products.
But you are dropping consumer lending and auto finance?
Nayar: We were not doing too much of auto in the first place. As for unsecured lending, the book has increased, and is still growing. The lead product is, however, still unsecured lending in an efficient and fair manner.
You are also in the process of relocating automated teller machines (ATMs) of the bank?
Nayar: We get very limited branches and ATMs every 18 months. Why should we lose an opportunity there? Out of 460 ATMs, we are relocating a few to new areas.
Has the problem in the US impacted you?
Nayar: India has been a spectacular performer for a very long time and, therefore, has top recall for headquarters. We still lead market innovations and, probably, have the best and biggest organically growing business in the Citi world. We have no impact of the change of market conditions in terms of expenses, capital, resources.
But, where we are getting affected is through the revenue generation model because of the dampening of the capital markets. Deals are getting delayed but, we are still in business. Things have slimmed down on equity offerings, but that is of limited impact.
Is there any credit default by your customers when it comes to derivatives business?
Nayar: We are one of the biggest (player) in derivatives business in India. We were earlier dealing with 10 clients and now we deal with 150 clients. People have got aggressive. Both the bankers and the clients have started using derivatives for profit maximization rather than risk management only. It is identical to the NBFC story—people came in without the expertise of managing derivatives.
Three years ago, we took a clear stance that we are only going to sell derivatives if the client is doing it as a normal course of business. We have three levels of approval for such deals and that has paid off.
We lost a lot of business when new players came in three years back but, now, clients are coming back to us. Our sales people are advising clients on what to do with their current derivatives book and asking them not to do anything hasty, as a knee-jerk reaction to this turmoil.