Daily wage labourers, small traders and self-employed individuals should now have access to formal banking services, courtesy the government’s grand financial inclusion drive. The drive has resulted in 26 companies, including Tata Sons, Aditya Birla Nuvo, Reliance Capital, Bajaj Finserv, L&T Financial Holdings, IFCI and India Post, applying for banking licences. If approved, the new players should be able to help several thousand Indians open bank accounts, while many more small and micro enterprises, entrepreneurs and traders should gain access to capital. That’s because the Reserve Bank of India has mandated that all the new players must open one branch in rural areas for every four they set in urban areas.
The requirement couldn’t be more timely. The majority of India’s 6,50,000 villages do not have even one bank branch, and just 3.5 of every 10 Indians have access to formal banking services in the country, according to a 2011 World Bank survey. Only 37,471 branches were operational in rural India, as of March 2012, while the total banking outlets in villages (including branches, business correspondents and other modes) number just 1,81,753. While the existing banks also function as per the same mandate (one rural branch out of every four branches), the entry of new players should augment the overall rural presence.
The new banks will come up only 18 months after March 31, 2014, when a high-level committee (comprising top RBI officials and heads of public sector banks) approves the applications. The RBI is expected to be very stringent with the applications and could also look into the books of those who have applied for the bank licences. This is to prevent any siphoning of deposits or funds by the new banks into the applicants’ primary or other businesses.
Meanwhile, most of the established players seem to be gung-ho about the new developments. The increased pace of competition bodes well for customers while the established players foresee overall growth in the sector, they say. “Rising per capita income, growth in the earning population is expected to boost the banking industry, while higher disposal income is likely to increase retail credit,” says BA Prabhakar, CMD, Andhra Bank.
“As I look back at the time when we became a bank, I see our private sector peers had a major takeoff in the period post 2003. I hope the potential entry of new banks is a tipping point for our next round of growth,” says Uday Kotak, chief, Kotak Mahindra Bank. According to him, the entry of new players will increase the pace of competition. “They will increase the pace of competition for talent and customers,” he says. “The entry of new players will put attention on customer service to sustain and grow in the present competitive environment,” adds M Anjaneya Prasad, executive director, Syndicate Bank.
The going doesn’t promise to be easy, though, for the new entrants. The RBI’s objective to address financial inclusion places a heavy demand on the banks’ profitability and capital. In addition to the mandated number of rural branches, the RBI requires the new banks to fulfil statutory reserve requirements like placing 4 per cent of deposits with the central bank and holding 23 per cent in government bonds from day one. They also have to lend 40 per cent to the priority sector (agriculture, MSME, education, housing and export credit) at par with the existing players. As a result, their initial profitability is likely to be limited. “We believe some entities will find the 40 per cent priority-sector lending target tough, even though they have around three years’ time to meet them,” says global rating agency Fitch.
“The 10-year gap since the last round of new banking licences means that existing operators are well entrenched, especially in the urban markets. The new entrants may bring some much-needed innovation to sectors where only around 50 per cent of households have access to banking services,” explains Fitch Ratings.
According to Kotak, the key change ripping through the financial sector relates to customer, values and ethics. “Appropriate products and right advice are the cornerstones of the future. The battle in financial services will be won or lost around customer orientation, technology and risk management, combined with a strong people culture,” he says.
Currently, the sector is consolidated with the top 10 players accounting for approximately 60 per cent of the industry. Public sector banks dominate, with the State Bank of India, Punjab National Bank and Bank of Baroda having the first, second and third largest credit portfolios, respectively.
According to RBI’s quarterly statistics on deposits and credit of scheduled commercial banks in March 2012, nationalized banks accounted for 53 per cent for the aggregate deposits, while SBI and its associates accounted for 21.8 per cent. New private sector banks had aggregate deposits of 13 per cent, old private sector banks for 4.8 per cent, foreign banks for 4.4 per cent and regional rural banks for 3 per cent Forex reserves stood at $293.37 billion for the week ended March 22, 2013.
“The million-dollar question is how are the new banks going to accomplish the desired branch expansion and inclusive growth when the performance of the existing private sector banks is far from satisfactory,” says NSN Reddy, chief manager, Andhra Bank.
Experts say the prudent banking practices adopted by public sector banks and the moderate protective measures initiated by the regulator have insulated Indian banks from the global financial crisis. To help them cope with the crisis, many central banks across the world are moving to provide government support to the failed/tainted private sector banks for survival and to face the emerging challenges.
Recalling the genesis of the global financial crisis, Kotak says the key causes were excessive leverage or lack of prudence, complex creative products or lack of simplicity and bankers’ lack of humility. As Indian banking—particularly the private sector—gains share and becomes a larger player in the Indian economy, banks need to keep these points in mind at all times and not repeat the mistakes of history, he says.
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