X

Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.


Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
What will new banks mean for the banking sector? - Views on News from Equitymaster
 
 
  • PRINT
  • E-MAIL
  • FEEDBACK
  • A  A  A
  • 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.

     

     

    Equitymaster requests your view! Post a comment on "What will new banks mean for the banking sector?". Click here!

    3 Responses to "What will new banks mean for the banking sector?"

    UDAY

    Nov 28, 2014

    Hearty Congratulations for a vital issue raised.

    So also open the matter of RAMPANT CORRUPTION PREVAILING IN THE BANKS, which eat out all PUBLIC MONEY by the people who got Money.

    It is in all levels, bottom to the TOP.

    Once again Congratulations

    Regds,

    Like (1)

    Aman Sharma

    Oct 12, 2013

    "70% constitutes of rural folk who stands devoid of basic banking services "

    Can you back this statement with some proof?

    Like (1)

    Satish S Dabholkar

    Jun 14, 2013

    The article is very interesting. As I recently retired from leading nationalized Bank,anything pertaining changes in banking sector, raises my interest in the article.I always think how my bank, from which I retired ,is going to face the challenge.

    Like (1)
      
    Equitymaster requests your view! Post a comment on "What will new banks mean for the banking sector?". Click here!
     

    More Views on News

    IDFC Bank: Strong Trading Income Shields Credit Slowdown (Quarterly Results Update - Detailed)

    Aug 10, 2017

    IDFC Bank is taking steps to address contracting NIMs and successfully transition in to a retail bank.

    ICICI Bank: Loan Slippages Trending Downwards (Quarterly Results Update - Detailed)

    Aug 10, 2017

    Asset quality will be the key thing to watch out for going forward.

    Axis Bank: Outside Watchlist Slippages a Big Worry (Quarterly Results Update - Detailed)

    Jul 31, 2017

    Almost 74% of the watchlist as provided by the bank of Rs 226 billion in FY16 has turned into non-performing assets.

    Should You Take SBI Chief's Advice and Load up on SBI Shares? (The 5 Minute Wrapup)

    Jul 6, 2017

    Does the stock score on the value versus price equation?

    AU Small Finance Bank Ltd. (IPO)

    Jun 27, 2017

    Should one subscribe to the IPO of AU Small Finance Bank Ltd?

    More Views on News

    Most Popular

    Demonetisation Barely Made Any Difference to Tax Collections(Vivek Kaul's Diary)

    Aug 7, 2017

    The data tells us quite a different story from the one the government is trying to project.

    A 'Backdoor' to Multibaggers: It's Like Investing in Asian Paints Ten Years Ago(The 5 Minute Wrapup)

    Aug 10, 2017

    Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.

    Should You Invest In Bharat-22 ETF? Know Here...(Outside View)

    Aug 8, 2017

    Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...

    Signs of Life in the India VIX(Daily Profit Hunter)

    Aug 12, 2017

    The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

    7 Financial Gifts For Your Sister This Raksha Bandhan(Outside View)

    Aug 7, 2017

    Raksha Bandhan signifies the brother-sister bond. Here are 7 thoughtful financial gifts for sisters...

    More
    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407
     

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms

    S&P BSE BANKEX


    Aug 18, 2017 (Close)

    S&P BSE BANKEX 5-YR ANALYSIS

    COMPARE COMPANY

    MARKET STATS