The complicated bailout of Citigroup by the US government will lead to a heated debate in America: Why should a Wall Street power be pulled out of trouble by taxpayers while a Main Street power such as General Motors is being asked to sink?
There is another debate that needs to begin in other corners of the world: Does this mark the beginning of the end for an ambitious business model that was pioneered by Citi and subsequently copied by banks in many countries, including India?
Citi has believed, at least since the days when John Reed ran it, that both retail and corporate customers could be served more efficiently and profitably by a bank that could serve all their needs. This is the assumption that lies behind the idea of a universal bank. The ability to sell all sorts of banking products to a customer would lead to lower costs and higher profits. Critics have for long pointed out that a universal bank could grow too large for its own good, and too unwieldy to manage risks.
That is what seems to have happened at Citi. Not that its current CEO, Vikram Pandit, will agree. He told a meeting of employees last week in New York that the universal banking model is the correct one for Citi and that the strategy would still be “to be the world’s truly global universal bank”. But one cannot ignore the fact that this model has not delivered superior returns to shareholders; in fact, there is growing pressure on the board of directors to dismember the bank and sell it off in pieces.
Many Indian banks have eagerly copied the Citi business model. No bank in India is in Citi-like dire straits. But we, too, have sprawling banks that are trying to do everything from derivatives trading and structured finance to farm loans and microfinance.
But the failure of what was, till recently, the world’s most admired universal bank or financial supermarket or financial conglomerate—call it what you will—raises several questions that bank managements and shareholders in India need to think about.
There is no need to gloat over Citi’s failures. The question is a sober one: Is this the end of the road for universal banks, especially if the financial deregulation that made them possible is rolled back?
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