Jun 13, 2013|
What will new banks mean for the banking sector?
More than 100 aspirants have lined up to seek bank licenses from the Reserve Bank of India (RBI). This is evidence of the fact that the Rs 75 trillion Indian banking industry is poised to witness some sea changes in coming days. Various industrial houses, non-banking financial companies (NBFCs) and even government entities (like India Post etc) are vying for banking licenses. While July 1st 2013 stands as the final deadline for the new bank aspirants to submit their applications, the entire process encompassing from the approval stage to the listing stage is expected to culminate in a three-year time frame..
This is, however, not the first time the RBI is issuing new bank licenses. Let us take a glimpse of the past. 10 such licenses were granted way back in 1993-94; another 2 a decade back in 2003-04 when Kotak and Yes Bank were formed. While the number each time looked small despite the plethora of applications, RBI has always spelled out word of caution and rightly so. The RBI is pretty candid about granting licenses contingent upon the sound credentials, integrity and strong financial track record for over a decade of the promoter group. Therefore, Caution is the key.
However, establishing a full-fledged deposit taking franchise under the RBI's current guidelines, calls for gathering adequate ammunition. Formation of the new but complex holding structure, merging the existing operations to suit the new banking structure, revamping the employee base, asset allocation across portfolios and in turn synergizing with the pure banking activities are some of the many challenges.. In addition, the fairly complex regulatory requirement is the biggest entry barrier for the incumbents. New banks will have to comply with the reserve requirements in terms of Cash Reserve Ratio (CRR) and Statutory Reserve ratio (SLR) which implies substantial capital requirement. This has been the major factor that kept away many entities from pursuing banking activities in the past. Thus, regulatory hurdles stand overwhelming.
Now capital is not the only hurdle. The RBI has also mandated 25% of total branches to be located in unbanked areas and lending to priority sector .. Thus it is very likely that the sector, would witness pick up in M&A activity as well. Few small size lenders may prove strong takeover potentials for the new entrants as the latter can benefit from the readymade branch network and employee bandwidth to enhance growth prospects. So consolidation is on cards.
New entrants to banking sector would also encounter challenges on the manpower front. With many PSU chiefs set to retire over next few years, many top positions (9 posts of CEOs as per media sources) are soon to lie vacant. While the need for quality manpower already worrying the existing players, the new bank entrants may experience scarcity of executive talent. So, pooling human capital remains an anxiety.
That said, one such interesting outcome would be the increased competitive intensity in the already existing dynamic banking environment. While the end customers would largely benefit from the better service quality and improved accessibility, the price war amidst the players would only gather fervor. The fight for market share in terms of deposits and advances would become the order of the day. Not to forget, while 80% of the funding for Indian banks comes from deposits, there lies sufficient opportunities for the banks to co-exists and grow their deposit base. Most new entrants would take advantage of the de-regularization of interest rates on savings account deposits. While the lenders may succeed in garnering market share and woo customers, tinkering with interest rates on deposits would prove as a dampener to the net interest margins of the banks. Rather, effective pricing, improvisation on quality and technology and establishment of a scalable franchise would provide a competitive edge both to the existing and the new players. But Competition is imminent.
However, amidst all the noise, it remains to be seen whether the RBI's primary objective of financial inclusion leads to fruition. In the 1.2 billion populated nation, 70% constitutes of rural folk who stands devoid of basic banking services such as deposit accounts. Both RBI and the government are keen on financial inclusion, and aspire to bring large number of under-banked areas into the banking fold. Whether this regulatory objective is met or the competitive forces gain attention, remains to be seen.
For investors, the choice of banks to invest in would widen as and when the new players get listed. However, the decision to do so has be a very careful one and profitability and good asset quality is something that is restricted to just a handful of players in the sector.
||Shweta Daptardar-Mane, has an MBA (Finance) degree and over five years of equity research experience. She passionately tracks the Banking and Finance industry and follows the macro developments in the economy, particularly the central bank monetary policy. She is deeply inspired by not only Buffett's investment acumen, but also by his infectiously charismatic, down-to-earth persona. Shweta is the contributor to our large cap franchise, StockSelect.
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