Five years after an aggressive entry into the Indian market, the business isbeing wound up. What went wrong?
Mumbai: The lone Mumbai branch of Barclays Bank Plc is located on the sixth floor of Ceejay House in Worli. There’s a small metal sign on the door but not much else. The British bank’s India corporate headquarters is on the eighth floor of the same building, a prestigious business address in central Mumbai.
The branch, one of nine across India, was located some blocks away on Dr Annie Besant Road until 30 June. A few years ago, advertisements on lamp posts clearly marked out the way to the Mumbai branch of the UK’s fifth largest bank by market capitalization.
Barclays is no longer as keen on public attention because it’s winding down the retail business, focusing instead on corporate and investment banking, along with wealth management in India.
When Barclays started commercial banking operations in India in 2006, billboards across Mumbai trumpeted its arrival. It entered retail banking in Asia’s third largest economy the following year, sensing enormous opportunity from a rising middle class with disposable incomes looking to buy homes and cars. The bank first ventured into India in 1990 through Barclays Capital, its investment banking arm.
The Indian economy was growing at a pace of 9.5% at the time. A big-bang credit card launch followed with an aggressive push for customer acquisition; credit limits were much higher than at other banks.
In hindsight, the timing couldn’t have been worse. As Barclays’ India retail push hit its peak, the global financial crisis slammed markets and economies.
“They were very bullish on India and that reflected in the pace of their investments. They had a great team but then the crisis happened," said an employee who joined the bank in 2008 and left in 2010.
The credit card business was sold to Standard Chartered Plc and Kotak Mahindra Bank Ltd in December 2011. The mortgage, personal loan and commercial banking assets may also be sold, although officials at the bank haven’t confirmed that.
Six years ago, the country was seeing a boom in the credit card and personal loan business. Local lender ICICI Bank Ltd was signing up customers in droves. Citibank NA was aggressively expanding its non-banking arm CitiFinancial, looking for a bigger slice of the pie. Deutsche Bank AG had even re-entered retail banking in 2005 after having wound up its initial venture into the field in 2000.
India’s per capita income almost doubled from $530 (around 29,550 today) in 2003 to $1,030 (around 56,650 today) in 2008 and banks wanted to take advantage of the rising appetite for personal loans, credit cards and automobile finance.
The party didn’t last beyond 2009. CitiFinancial piled up bad assets and had to shrink its business. ICICI Bank saw surging defaults and sharply curtailed its retail business, riding out the troubles thanks to its substantial commercial banking business.
By 2009, Barclays had half-a-million credit card customers, having piggybacked on its sponsorship of the English Premier League. Its aggression was evident from the rapid rise in employees. Between 2006-07 and 2007-08, headcount increased eight times to 2,078 from 265; profit per employee dropped to 50 lakh from 36.28 crore and return on assets dropped to 0.10% from 4.45%. Barclays got caught in the middle, having been too aggressive with credit cards and personal loans being given to customers with whom it didn’t have any other relationships.
There was a reluctance at the UK headquarters to make hard decisions, said another former executive, who didn’t want to be named citing contractual obligations.
“Barclays was very indecisive despite advice from India that it is not wise to continue giving loans to individuals. They had just announced a big-bang business plan in India, Africa and Middle East and opened a lot of branches in 2007. In 2008, after the crisis broke out they were reluctant to close any branches, fearing uncomfortable questions from shareholders," the executive said.
While other foreign banks and local lenders acted quickly to contain losses, Barclays waited until late 2009 to curtail its retail operations.
According to Reserve Bank of India (RBI) data, the UK bank’s non-performing assets (NPAs) swelled to 1,235 crore in 2008-09, or 4.59% of net advances, from 61 crore, or 0.42% of net advances, in 2007-08.
In 2009-10, this rose further to 1,422 crore or 5.15% of net advances. At the time, Barclays had seven branches and 7,565 crore of advances. Hongkong and Shanghai Banking Corp. Ltd (HSBC), which led on NPAs among foreign banks at 1,683 crore in 2009-10, had 50 branches and 23,475 crore of advances.
The period also coincided with an upheaval in the Barclays boardroom. The international retail and commercial banking business was handled by Frits Seegers, who was bullish on the Indian market. Seegers quit in November 2009 after a board room shake-up that saw him being divested of some of his responsibilities.
Bob Diamond, then president and later chief executive, was put in charge of commercial banking, while retail was taken over by Antony Jenkins, then chief executive of Barclaycard, the credit card business. (Diamond quit in July over allegations that Barclays had participated in rigging the benchmark London inter-bank offered rate or Libor. Jenkins is among those tipped to replace him.)
“Seegers’ exit and the large losses from India forced headquarters to change the strategy and the bank finally started to unwind retail loans," said the executive cited above.
The new management, led by Diamond and Jenkins, was more inclined towards investment banking and wealth management. These, along with corporate banking, became the new focus outside the UK.
“In March 2010, Barclays announced changes to the group structure to improve the alignment of our products and services to our customers across the markets in which we operate," said a Hong Kong-based Barclays spokeswoman in an email. “We took a decision then to sharpen our focus in India on corporate and investment banking and wealth management and to reduce over time our retail banking presence to a core network of branches serving the high net worth individuals segment."
The loan defaults in India had arisen from job losses in sectors such as information technology and business process outsourcing (BPO). Workers in these sectors had been the main beneficiaries of personal loans and credit cards.
Banks were also hit by RBI’s guidelines on loan recovery from individuals after allegations of excesses in recovering money in 2008. Banks could no longer track down defaulters to their homes and offices. They could only use recovery agents who had undergone 100 hours of training at the Indian Institute of Banking and Finance (IIBF). All this slowed the loan recovery process.
The 2008-09 jump in bad loans in the retail segment showed that lending to individuals has hidden costs in distribution and credit margins, said Robin Roy, associate director, financial services, at audit and consultancy firm PricewaterhouseCoopers (PWC).
“Without a large branch network, retail banking doesn’t work," Roy said. “Foreign banks have also realized that they may have the best of banking models but unless they have credit information data, those models won’t work in India."
Building a branch network in India can be slow and painful for a foreign bank. In 160 years, HSBC has got 50 branches in India.
“It takes seven to 10 years along with diligence to show results," he said. “Banks like HSBC, Standard Chartered and Citibank have been successful because they have stayed the course. Barclays, on the other hand, was aggressive when it entered but couldn’t recover from the headwinds it faced post the financial crisis."
Barclays has, however, been a consistent performer in investment banking. So far this year, the bank is second with 54% market share and a total deal size of $15.36 billion, just behind Morgan Stanley’s $15.48 billion in mergers and acquisitions in India, according to the Bloomberg league table. In 2011, it was No. 3, behind Morgan Stanley and Goldman Sachs with a 25% market share and $17.02 billion in deal size.
While banks like Barclays can’t ignore India, they need to look beyond the big cities, said PWC’s Roy.
“They have to look beyond the cities into the hinterland where there is a huge untapped opportunity," he said. “But for that they will have to grind harder and shed dependence on off-balance sheet revenues and fee income. Retail banking requires commitment. Banks need to fight out one or two credit cycles and stay put for 15 to 18 years to see results."
To be sure, Barclays did look beyond the big cities. It had wanted to tap the market beyond tier I cities by opening branches in Kanchipuram, Nelamangala, Junagadh, Ahmednagar and Rajahmundry (its other branches are in Pune, Hyderabad and Delhi, besides Mumbai). But it gave up on the plan because of the rising bad loans. With the focus shifting, the minimum balance for savings accounts has been raised to 1 lakh from 10,000 while loans to individuals have been stopped. Customers are being advised to close accounts if they can’t service the minimum balance requirement.
“There are very few customer attendants in our branches now and we have no ATMs. We would advise you to keep these things in mind before opening an account with our bank," said an executive at its Worli branch.