The granting of banking licences to IDFC and Bandhan Financial Services is interesting when looked at from the point of view of the character of the institutions that have been chosen by RBI. One is an MFI while the other is an infrastructure-finance company. If an NBFC was awarded this privilege, then the transition would have been relatively seamless. But once we have an infra-finance company and an MFI in the frame, the future paths become eventful. Quite evidently, both the institutions must have chalked out their plan that convinced RBI and hence there is a lot of thought that has gone into it. But it would still be compelling to conjecture on the issues on the table. Let us look at the MFI. It has a good spread across the country, and given its predilection to operate in unbanked territories and lend to the underprivileged, the priority-lending task can be met with consummate ease. Creating branches is not an issue if the circumference will be where it is. But once it decides to get into mainstream banking, then scaling would be a priority where they move from rural to urban and metro areas. When we talk of SLR, the bank has to bring in treasury and risk experts to manage the funds and meet the regulatory compliances. ALM becomes complex, unlike its MFI activity where funds received are parked for short-term across the portfolio. Therefore, to begin with, the physical space covering branches and ATMs along with human resources would be the main areas to look at. A low-cost model followed so far would not require highly-qualified staff as microfinance is more a relationship-based banking, involving gelling with the customer. While garnering deposits from the existing clientele would be easy, spreading to other regions will require banking skills, which have to be developed. Therefore, there is a huge scope for institutions like the Indian Institute of Banking and Finance (IIBF) to pitch in here. In fact, the nuances of commercial banking need to be learned and imbibed by the staff so that they are equipped to do business under the regulatory environment. As long as MFIs stick to their clients, the model works fine. Once they start transitioning to deposit-picking, their pricing model will change. First, the existing customers who pay 20-22% currently will coexist with the new ones who are financed through higher CASA deposits, which will go at a lower rate of interest. This will, however, be temporary, for once the old loans are repaid, then there would be a level-playing field for all borrowers. But again, the MFI bank will have to walk the rope on whether or not to continue with microfinance, which is less collateral based; or move fully to regular banking, which is based on collateral. There will be a dual interest rate structure and it is a matter of conjecture as to which of these business lines will be preferred by the MFI bank based on cost of funds, returns, cost of administration and, ultimately, quality of assets. They also have to touch the 18% farm loans sub-target, and while the present set of loans may largely qualify as priority-sector lending, attaining other sub-targets would require a different array of skills. The same will hold for corporate-lending as well. The IDFC case is unique because unlike the earlier DFIs that changed to universal banks, there is no case of two institutions in the same group that are merging, which was the case with ICICI and IDBI. The present structure of an infra-finance company would find the asset side easy to manage as it will be an extension of skill-set it already has. One of the two areas of difference will be on the liabilities side, where the institution has to turn to retail unless the preference is to be like foreign banks, which are more corporate. But, at some stage, the retail focus has to come in when it looks at household deposits. While creating structures would be important, given that it is starting from the beginning, it could also experiment. Novel models of transaction banking, say, an internet bank, can be established where everything happens on the net and physical brick and mortar branches are minimal. The other area that needs work would be, of course, priority-sector lending, as 25% of branches would have to be located in unbanked areas. This could be done in a scaled manner where the ratio is maintained as the plans are built. But there has to be a major scaling-up of branches and staff and this would take time. Farm-lending and SME-lending require different kinds of mindsets relative to plain vanilla corporate banking. In a way, these two entrants would quite obliquely come under an amorphous differentiated licensing system, though it has not been overtly stated. The MFI route is more a niche banking player, which has to mature and grow ‘upwards’ from this state, while an infra-finance company would be one starting off roughly as a wholesale bank and then dilute this strain and grow ‘downwards’. Both these models hold a lot of promise and are novel, unlike an NBFC that already has most of these structures and the way forward is mainly restructuring the balance sheet. There would be a lot of employment opportunities opening up at all levels as both the banks would require different skills going ahead. Two questions arise—first, whether these models will succeed, and if there is little reason to believe that they won’t, what is the future of long-term and infra-finance? One may recollect that IFCI, which remains a financial institution today, also would like to get converted into a bank. IDFC was specially set up with a purpose, but if its model is changing, we would be left with probably just IIFCL to look at the infra space. It is expected that once converted into a bank, IDFC’s roadmap may change just as it did for the two other banks, even though it could still borrow and lend for infra projects. The same holds for the MFI, if it chooses this route over a period of time as a scaled-up MFI may like to move away from risky lending towards the confines of conventional banking. The second question is while the licences will be on tap, if the other 20-odd applicants did not qualify, will there be other players in the race? While the unsuccessful applicants could reapply, one assumes that RBI would give them reasons for their falling short. Or else, the concept of licence-on-tap may only be on paper. Banking is surely poised for exciting times, and while one assumes that these two are just the beginning and there will be more to follow, competition will increase. The models adopted by them will set templates for the others to follow so that the system as such moves to a different level of sophistication.
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