The receipt of 26 applications for a banking licence is interesting as it evidently shows the high level of interest on both sides—corporates who see scope for business and RBI who would like to have more banks to meet the capital requirements for future expansion.
The background of the applicants is also quite disparate. There are four public sector or semi-public sector entities that have put in their claim where the attraction is to have access to CASA deposits which constitute around 33% of total deposits. These are cheap funds that lower costs for them. Then there are three corporate bodies that are looking out for diversification which would probably also involve their financial outfits. The 14 NBFCs are evidently on the lookout for a change of image as their current line of business which includes gold loans has turned nasty. Converting to a bank will be easy for them and relatively seamless as they also have branches across the country that can be remodelled as bank offices. There are three other entities that do work in the finance field and would be relative new entrants that can add variety, while the idea of the P&T department to become a bank has turned serious now. This is unique as it is a government department that wants to turn into a bank with a strong infrastructure, though questionable mindset. And finally an MFI which could be better placed at the starting line to meet the RBI norms on business model.
The enthusiasm is palpable in this area which is one of the better regulated fields that has shown fairly smooth progression in the last five years that have been tumultuous in the West. New entrants without a baggage of NPAs would start on a clean slate but will have to create structures to keep the business ticking. Besides CASA deposits, there is access to the inter-day call market for banks as well as the repo market for shoring up funds. The risks in plain vanilla lending are lower than in other financial businesses and hence are enticing. Therefore, banking is a good area to explore. The fact that there are several safety valves installed by RBI to ensure governance of the highest order addresses any apprehension on this side.
RBI has put certain clauses like priority sector lending and having branches in unbanked areas which deserve some discussion. While priority sector lending cannot be avoided given that all banks have this commitment as per the national priorities, the insistence on branches is interesting. The quarterly data released by RBI has a story to narrate. The top 100 centres account for around 2/3 of deposits in the country and 77% of total credit. Further, the top 200 centres account for 73% and 81% of deposits and credit respectively. Also, while there were 101,567 offices in December 2012, 31% of them covered these business lines. In fact, around 50% of total offices have deposits of less than R20 crore and 75% of them have credit of less than R20 crore.
Quite clearly there is concentration of business in the major centres and the offices which generate it are a disproportionate number.
Given these facts, the new players would have to contend with opening branches in centres that are unbanked which raises an obvious question. Why have others shied away from them? In fact, banks have been allowed to close down non-viable branches in rural areas. If this is the case, then will the new centres really be financially viable? Also the fact that MFIs have made a mark in the un-bankable segment is because they cater to a section that banks would typically not lend to on account of the risk and absence of collateral. From this counterintuitive logic it appears that there will be a major challenge for the new players who will have to design these structures in a manner that meets regulatory requirements but may not really be able to generate business.
The other interesting issue relates to growth in business. When the first set of new banks came in, they did change the face of banking through technology. Is there anything new that the fresh set would be bringing to the table? Today banks are competing for a slice of the cake which though expanding at around 15-18% per annum has its own set of issues during a downturn in the form of NPAs, restructured debt, and slow growth in deposits. In such a situation would more banks mean more business or a division or substitution of the same?
In fact, curiously, in the two decades before reforms and the advent of new private banks, overall growth in credit averaged 17% per annum which has increased to around 19% in the subsequent two decades. In terms of deposits, it has come down from 19% to 17%. But broadly speaking, the business growth rates have been stable, with of course a major quantitative shift in the contours of banking in terms of quality, efficiency and experience. While new banks will mean more numbers that will help in providing for future growth, can the same be done with the existing banks by going in for recapitalisation? There is evidently no clear answer here.
While one is not sure of how many would finally qualify though there could be a strong case for at least a dozen of them, such a move will mean more banking facilities, expenditure on technology, more jobs, and hopefully more products. Given that there are companies with different backgrounds that are seeking to get into commercial banking, the questions which will seek answers are what happens to specialised segments such as say truck and gold finance, term lending, infra finance, home finance, etc, when such specialised institutions turn into banks and encourage others in their filed to contemplate such a switch at a later date. The advent of universal banking has not quite found suitable replacement structures for term finance given ALM issues and the absence of a vibrant debt market. Maybe commercial banking would have to reinvent itself to also address these demands in a proactive manner.
The background of the applicants is also quite disparate. There are four public sector or semi-public sector entities that have put in their claim where the attraction is to have access to CASA deposits which constitute around 33% of total deposits. These are cheap funds that lower costs for them. Then there are three corporate bodies that are looking out for diversification which would probably also involve their financial outfits. The 14 NBFCs are evidently on the lookout for a change of image as their current line of business which includes gold loans has turned nasty. Converting to a bank will be easy for them and relatively seamless as they also have branches across the country that can be remodelled as bank offices. There are three other entities that do work in the finance field and would be relative new entrants that can add variety, while the idea of the P&T department to become a bank has turned serious now. This is unique as it is a government department that wants to turn into a bank with a strong infrastructure, though questionable mindset. And finally an MFI which could be better placed at the starting line to meet the RBI norms on business model.
The enthusiasm is palpable in this area which is one of the better regulated fields that has shown fairly smooth progression in the last five years that have been tumultuous in the West. New entrants without a baggage of NPAs would start on a clean slate but will have to create structures to keep the business ticking. Besides CASA deposits, there is access to the inter-day call market for banks as well as the repo market for shoring up funds. The risks in plain vanilla lending are lower than in other financial businesses and hence are enticing. Therefore, banking is a good area to explore. The fact that there are several safety valves installed by RBI to ensure governance of the highest order addresses any apprehension on this side.
RBI has put certain clauses like priority sector lending and having branches in unbanked areas which deserve some discussion. While priority sector lending cannot be avoided given that all banks have this commitment as per the national priorities, the insistence on branches is interesting. The quarterly data released by RBI has a story to narrate. The top 100 centres account for around 2/3 of deposits in the country and 77% of total credit. Further, the top 200 centres account for 73% and 81% of deposits and credit respectively. Also, while there were 101,567 offices in December 2012, 31% of them covered these business lines. In fact, around 50% of total offices have deposits of less than R20 crore and 75% of them have credit of less than R20 crore.
Quite clearly there is concentration of business in the major centres and the offices which generate it are a disproportionate number.
Given these facts, the new players would have to contend with opening branches in centres that are unbanked which raises an obvious question. Why have others shied away from them? In fact, banks have been allowed to close down non-viable branches in rural areas. If this is the case, then will the new centres really be financially viable? Also the fact that MFIs have made a mark in the un-bankable segment is because they cater to a section that banks would typically not lend to on account of the risk and absence of collateral. From this counterintuitive logic it appears that there will be a major challenge for the new players who will have to design these structures in a manner that meets regulatory requirements but may not really be able to generate business.
The other interesting issue relates to growth in business. When the first set of new banks came in, they did change the face of banking through technology. Is there anything new that the fresh set would be bringing to the table? Today banks are competing for a slice of the cake which though expanding at around 15-18% per annum has its own set of issues during a downturn in the form of NPAs, restructured debt, and slow growth in deposits. In such a situation would more banks mean more business or a division or substitution of the same?
In fact, curiously, in the two decades before reforms and the advent of new private banks, overall growth in credit averaged 17% per annum which has increased to around 19% in the subsequent two decades. In terms of deposits, it has come down from 19% to 17%. But broadly speaking, the business growth rates have been stable, with of course a major quantitative shift in the contours of banking in terms of quality, efficiency and experience. While new banks will mean more numbers that will help in providing for future growth, can the same be done with the existing banks by going in for recapitalisation? There is evidently no clear answer here.
While one is not sure of how many would finally qualify though there could be a strong case for at least a dozen of them, such a move will mean more banking facilities, expenditure on technology, more jobs, and hopefully more products. Given that there are companies with different backgrounds that are seeking to get into commercial banking, the questions which will seek answers are what happens to specialised segments such as say truck and gold finance, term lending, infra finance, home finance, etc, when such specialised institutions turn into banks and encourage others in their filed to contemplate such a switch at a later date. The advent of universal banking has not quite found suitable replacement structures for term finance given ALM issues and the absence of a vibrant debt market. Maybe commercial banking would have to reinvent itself to also address these demands in a proactive manner.
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