Why do foreign banks find it difficult to crack India's retail banking

Foreign banks are withdrawing from India’s retail banking sector.

And the latest; and most visible; example is Deutsche Bank.

Deutsche has decided to exit retail banking in India. As the sale process got underway in August 2025, clients and assets began moving out. Deutsche’s wealth management AUM reportedly fell from about $4 billion to around $1 billion within months, dragging down valuations.

Today, the business includes roughly ₹12,000 crore in loans, ₹20,000 crore in deposits, and just 17 branches, with bankers estimating a sale value of ₹3,000–5,000 crore. This pattern isn’t unique to Deutsche. Over the past few years, foreign banks have steadily exited or scaled back retail operations in India. While they still hold about 6% of banking assets; down from 8.5% in FY18; the economics of retail banking have steadily turned unfavourable.

Deutsche invited bids for its ₹25,038 crore retail book (₹2,455 crore FY25 revenue) in 2025, eyed by Kotak and Federal; Citi's 2022 exit sold ₹22,000 crore assets to Axis for ₹11,603 crore; Standard Chartered sold ₹4,100 crore loans to Kotak in 2023.

Source: Business Today, ETBFSI

Why the exodus?

Higher costs weigh on profitability

On paper, foreign banks in India earn healthy margins. In FY25, Deutsche Bank reported NIMs of 4.9%, while Standard Chartered posted 4.6%.

But these margins don’t translate into sustainable profits because operating and regulatory costs remain high. Deutsche’s operating expenses touched ₹3,100 crore in FY25, consuming nearly 79% of its income and keeping return on assets (ROA) below 2%.

Provisioning and compliance further weigh on profitability. System-wide gross NPAs stood at 2.1% in Q2 FY26, pushing up provisioning needs and regulatory capital requirements. For foreign banks, these costs are largely fixed and unavoidable, squeezing profitability even when margins look healthy.

By contrast, domestic private banks consistently report ROA above 2%, reflecting stronger cost efficiency and better operating leverage. ICICI Bank’s ROA improved to about 2.2% in FY25 even with a cost‑to‑income ratio of roughly 39%, indicating strong operating leverage and disciplined expense management.

Lack of scale

Retail banking in India is built on scale; and foreign banks simply don’t have it. Most foreign banks operate with 10–40 branches in India.

By comparison:

• HDFC Bank has ~9,000 branches
• SBI has over 22,000 branches
• ICICI Bank operates ~6,400 branches

Scale shows up in customers and balances. Foreign banks together account for:

• <5% of retail loans
• ~6–7% of deposits
• ~6% of total banking assets (down from ~8.5% in FY18)

Domestic private banks, in contrast, control 55–60% of retail loans and over 40% of total system credit.

Digital banking has not solved this problem. India’s digital model rewards banks that can convert payments into primary accounts, deposits, and cross-sell. Without large deposit bases, foreign banks struggle to monetise digital users, even if their apps and platforms work well.

In short, foreign banks lack the volume needed to spread costs, acquire customers cheaply, and make retail banking profitable at scale.

Stringent regulatory requirements

Regulation is another hurdle foreign banks can’t easily dodge.

India’s priority sector lending (PSL) rules require banks to lend a fixed share of their credit to sectors like agriculture and MSMEs. For domestic banks, that target is 40% of adjusted net bank credit. For foreign banks, the requirement is phased based on branch presence, ranging from 10% to 40%.

The problem? Many foreign banks don’t have large retail loan books to meet these targets organically. So they end up buying Priority Sector Lending Certificates (PSLCs) instead; an added cost that eats into margins.

Expansion isn’t cheap either. Under RBI’s subsidiarisation norms, foreign banks looking to scale retail operations must commit a minimum of ₹3,000 crore in capital. That capital stays locked in, even if returns remain weak.

On top of that, foreign banks face dual oversight; complying with both Indian regulations and global home-country rules.

Source: India Times, Loansjagat

How are domestic banks capitalising?

Acquiring premium books

Domestic banks are purchasing quality rather than merely expanding naturally.

Private Indian banks have acted swiftly to obtain their superior customer books when foreign banks leave retail. An excellent example is Axis Bank's integration of Citi's retail portfolio, which increased its retail book by about 25% and attracted wealthy clients with solid credit histories. In a similar vein, Kotak and Federal Bank's offers for Deutsche Bank's HNI portfolio enable them to directly connect with high-end customers, increasing fee revenue through cross-selling lending, wealth products, and cards.

Market share reflects the outcome. Domestic private banks held 55–60% of retail loans and 41.2% of all credit by March 2025, a significant increase from ten years prior. They are scaling by absorbing pre made, high-quality books rather than starting from scratch.

Scaling through networks and technology

In banking, size is still important, but it's now both digital and physical.

With more than 30,000 branches, banks like HDFC and SBI have an unparalleled ability to mobilise deposits, with a combined total of around ₹67 lakh crore. But this is no longer traditional banking. Now, more than 70% of new clients are onboarded digitally, with data-driven credit evaluation, apps, and UPI handling the majority of the work.

Growth is being propelled by this mixed scale. ICICI and Kotak reported loan growth of 18–20% in Q2 FY26, demonstrating how technology enables huge balance sheets to grow more quickly without corresponding cost increases.

Cross-sell and efficiency gains

Retail is the point of entrance rather than the final product.

Wealth management, insurance, credit cards, and even investment banking are all supported by a strong retail base. Because of this, the assets under control of domestic private banks increased by about 18%, whereas global banks experienced a decrease as they moved away from retail. Banks make more money per customer at a lower incremental cost once they are part of the ecosystem.

Profitability is also increasing as a result of repricing and improved risk management.

Domestic private banks are expected to have net interest margins of about 4.2% in FY26 thanks to lower deposit costs, improved cross-selling, and operating leverage.

What are the implications for stakeholders?

As foreign banks step back from retail, the effects are clear. Customers benefit from cheaper loans at local lenders, with SBI and HDFC offering rates of 8–9%, better apps, and stronger cross sell. Global banks haven’t exited entirely; they’ve shifted upmarket, focusing on premium wealth and UHNI clients.

For investors, the winners are obvious. Domestic private banks are pulling ahead, backed by scale and profitability. ICICI Bank’s ₹37,500 crore annualised NII in Q2 FY26 underlines this. Foreign banks are pivoting toward investment banking, lifting fee income but limiting retail upside.

Regulators gain too. Fewer foreign retail players mean simpler oversight, deeper co-lending and bank acquisitions, and stronger domestic resilience; especially with ~15 billion UPI transactions every month.

For global banks, the move is strategic. Corporate banking remains steady at ~6% market share, freeing capital to be redeployed toward faster-growing Asian hubs.

The market-share numbers back this up. As of March 2025, PSBs hold 53.8% of total credit, domestic privates 41.2%, and foreign banks just 6%. In retail loans, domestic privates dominate with 55–60%, PSBs sit near ~35%, and foreign banks are below 5%. On deposits, PSBs lead with 58.1%,domestic privates hold 35%+, and foreign banks account for 6–7%.

In summary

In the face of cost wars and capital traps, domestic privates write scale-driven supremacy while foreign banks' retail withdrawal writes a domestic victory. The issue remains as Deutsche's bids close and wealth AUM rises: will the corporate pivot of multinational corporations continue, or will local moats transform India's $273 billion retail market by FY32? In a market where kings are crowned with billions in CASA and branches, this defection is a strategic recalibration rather than a failure.