Vikram Pandit’s plan to shrink Citigroup’s balance sheet has lessons for many Indian banks that have tried to model themselves on the archetypically aggressive global bank.
Pandit told investors and analysts last week that he would shed more than $400 billion of assets over the next three years as part of his broader strategy to pull Citigroup out of its current mess. Some of this may have a direct influence on the bank’s Indian operations. The New York Times reported last week after the Citigroup investor and analyst conference that the bank is looking at selling its outsourcing business in India— Indian media, too, has written about it. This follows plans to close several business units across the world.
Illustration by: Malay Karmakar / Mint
There is also a larger lesson from Citigroup’s spring cleaning. The sprawling bank has been the quintessential financial supermarket, offering all sorts of products and services —from loans to credit cards, investment banking to private equity and more. The underlying assumption of this business model is that it offers opportunities for “cross-selling”. A bank can use its existing capabilities to sell more to a client and maximize returns.
This arrangement should ideally lead to higher margins, as more business is pulled in using the same resources. It has not always worked this way, which is why financial supermarkets have often had lower profit margins than their slimmer counterparts. Critics of Citigroup have been demanding that it be broken up to generate higher shareholder returns.
The pros and cons of the Citigroup business model will continue to be a hotly debated issue. A variant of this business model has been adapted by many Indian banks—both in the private and public sectors—under the name of universal banking. They have as yet showed no signs of strain, partly thanks to the boom in the Indian economy. But, the issues that Citigroup is currently struggling with offer lessons for some of our best and brightest banks as well.
The travails at Citigroup and many other global banks are at one level the result of naïve over-optimism and poor risk management. But at another, deeper, level, they are also linked to problems with the universal banking model. The basic idea is a good one, but managing a sprawling bank is more difficult than many believe. This is a stark fact that the likes of ICICI Bank, HDFC Bank, Axis Bank and State Bank of India would do well to think about.
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