Will new banks serve any purpose? Financial Express: 12th August 2010

RBI’s Discussion Paper on new private banks needs to be commended for being wholesome. It takes one through the history of new private banks that came into existence after 1992 and highlights that only few have survived and grown. The report has opened the debate by clearly spelling out the pros and cons of the entry norms for enabling the reader to take an informed view. However, the broader question is, what are we trying to achieve by having more private banks?

Theoretically, more players enhance competition which delivers superior results. So, let us look at what could be the other motivations behind this move. The first argument is that we need to have more branches. But, India already has a network of 82,511 branches as of December 2009, which is one of the largest in the world. Besides if branches were the main issue, the existing banks would have opened more in case it made economic sense. In fact, today, 63% of bank branches are in the rural and semi-urban areas with 39% being in rural areas. Therefore, more branches in rural areas cannot be the overriding objective. Will we end up having more branches in the high business centres?

The second is that banking should be more inclusive and, therefore, more banks make sense. There are two aspects here. The first is that today 23% of deposits and 18% of credit are attributable to the rural and semi-urban areas, with rural regions having a share of around 9% and 8%, respectively. Clearly, they are under-banked and given the high share of branches, the business emanating is disproportionate. Will more banks channel efforts on deposits and credit to these regions? Today, the MFIs are trying to enable credit at levels that banks cannot reach. These are not just the unbanked people but also probably the un-bankable ones. New private banks starting off, would not find this ground too fertile to tread.

The second aspect of inclusiveness is the reach to small borrowers. RBI’s data on this is quite revealing. Of the 1,069 lakh accounts that are on the books of banks, 36%—less than Rs 25,000 —have a share of 1.9% of total credit, while another 53% (loans between Rs 25,000 and Rs 2,00,000) have a share of 11.8%. Curiously, 0.2% of the total loan accounts are over Rs 1 crore, account for 58% of total outstanding credit. These numbers illustrate that bank credit is skewed in favour of higher loan amounts, which in turn have a strong metro centre bias. Commercially speaking, these are the big ticket assets that earn good revenues and are easier to monitor than small loans. The question is whether the new banks will risk going for these small accounts?

The third outcome of having more banks could be getting in new products, as was the case in 1993-94 when new private banks were established. The answer here is that this would not be the case as the Indian banks today are at comparable global standards. We cannot think of more products being offered on account of these new banks.

The fourth angle that can be examined is whether the cost of banking will come down? One cannot be too sure here as the addition of a couple of new banks may not make a difference. In fact, banking today is not exactly customer friendly with banks charging for every service—including making use of the branch. In this situation, customers may not really gain. Therefore, more banks and branches will not really increase the comfort level of customers.

On the flip side, anecdotal experience shows that most of the new banks had either lost interest and sold out to others or worked on unsustainable models. Is there any guarantee that they would continue to be in business in the long run?

Is there room for more banks? Sure there is, as the ratio of bank business (defined as sum of credit and deposits) to GDP has increased sharply and continuously from 57% in FY05 to 124% in FY10. This is a good sign as we can see the market grow though it may not be more of the same.

Therefore, the idea of new banks, though laudable, should not be interpreted as a requirement beyond the contours of fostering competition. This would give an opportunity for various business houses to make new forays or financial services providers to convert to a bank—just like the development banks of yesteryear did. More banks will mean more branches and ATMs, though not in the unbanked areas. And maybe some more M&A activity at a later date.