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Set for a spectacular change - Views on News from Equitymaster
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  • Sep 23, 2000

    Set for a spectacular change

    The banking industry in India is undergoing a sea change of activities. Deregulation has brought in aggressive private participation. Global changes in consumer attitude and technological advancements are forcing banks to adopt to a new ‘ avatar’. And the demand from customers for better services is adding impetus to the change. Indian banks are rapidly moving towards offering newer channels to the consumers. These include the Internet, ATMs, tele-banking and mobile banking.

    With homes getting computer enabled and Internet access becoming cheaper, people will refuse to stay in line for their bill payments or to collect their bank statements. The desire to bank from home will surge in turn forcing the banks to deploy more transaction-enabled applications to the customers’ desktops. Banks will now have to think of customers differently. They will be forced to cross-sell their products through different channels. From product enhancement point of view one of the biggest challenge is to identify paperless money including electronic cash and smart card technologies.

    The digital divide
    Particulars CAGR of
    Operating Income Net Profit
    ICICI Bank 81.6% 44.8%
    HDFC Bank 68.0% 37.9%
    Global Trust Bank 27.3% 16.4%
    UTI Bank 37.5% 75.2%
    SBI 18.2% 5.0%
    Corporation Bank 25.0% 18.0%
    CAGR: Compounded Annual Growth

    Private sector banks in India have taken a lead in introducing new technologies. After online banking and ATMs, private banks have been quick to offer WAP (Wireless Application Protocol) enabled mobile banking services. The passage of Information Technology Bill will provide a boost to the online selling efforts of the banks by giving legal recognition to electronic contracts and signatures. They will continue to enjoy significant first mover advantage for a few more years due to the enormous technology gap. The value-added products offered by private sector banks have resulted in corporate clients migrating from the traditional banks to new generation banks. Thus private banks have virtually created an exit barrier by broadening their product range and effectively cross-selling them with the latest available technology.

    The public sector banks (PSBs) on the hand are also not lagging behind. SBI and Corporation Bank have made an investment in technology improvement and are planning to launch Net-banking products in the near future. However absence of dynamic and proactive management, lack of autonomy for restructuring operations, overstaffing and unwieldy branch network are dampening their growth prospects.

    Also in government banks prospects is hindered by capital adequacy ratio (CAR) constraints and high non-performing assets (NPAs). Most of the PSBs have a CAR of between 9-11 percent and need to raise capital over the next two or three years. The government regulations requires them to lend to sectors where there is low growth opportunity resulting in large NPAs. These hurdles make PSBs an unattractive investment. For them raising capital is very difficult. Thus capital constraints will not allow these banks to grow their assets in any significant way. The only advantage they have is access to large pool of low cost saving and current account deposits collected through their extensive branch network.

    Apart from technological enhancement, banks globally are focussing on the retail segment, which has emerged as a key area. Once again it is private sector banks that are ahead. They have everything the foreign banks could offer, full range of retail asset and liability products, a customer centric approach, reasonable service charges and a wide distribution network. Focus on retail banking will help banks in increasing their wafer thin spreads on lending to large corporates. It would also give them an opportunity to build a low cost deposit base. Historically commercial banks in India mostly focussed on corporate and business loans (besides mandatory priority sector lending). Retail lending presents a huge untapped potential as banks largely ignored the segment so far.

    Economic recovery during the last year boosted credit growth to a certain extent. While incremental deposits of the banks during financial year 2000 declined by 14 percent to Rs 1,155 billion. Advances witnessed an astounding 50 percent jump to Rs 448 billion. Also the year over year growth in the profits by 66 percent indicates a good sign for banking companies.

    A turnaround
    Particulars FY98 FY99 FY00
    Growth in operating income 11.3% 19.2% 15.5%
    Growth in net profit 42.5% -23.9% 65.8%
    % Change year over year
    Source: CMIE

    It is crystal clear from the above analysis that a handful of tiny new banks are out to change India’s banking landscape. It initiated the build up of a modern, efficient and customer friendly banking system. These banks are trying to consolidate their place in the financial sector and provide a one-stop financial service supermarket to their customers.

    Mergers and acquisitions amongst the banks have been found as an effective remedy for fragmentation. Mergers can prove to be very effective in strengthening the Indian financial sector. Technology is helping the banks to grab market share with superior product offering and most importantly in extending the distribution reach. While the trigger for investment in PSBs could come with improvement in productivity, reduction in NPA level, stabilising interest spreads, declining staff strength and good earnings growth. Private banks on the other hand will continue to enjoy higher valuations as long as they are able to change with the technology, maintain lower levels of NPAs, higher capital base and sparkling profit growth.



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