Can you bank on them? - The Honest Truth By Ajit Dayal
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Investing in India - Honest Truth by Ajit Dayal
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13 NOVEMBER 2013


Over the past 20 years, the RBI has issued 12 banking licenses. Some of the entities that received the banking license are: HDFC Bank, ICICI Bank, Kotak Bank, and Yes Bank.

The Reserve Bank of India is in the process of granting a license to some of the 26 hopefuls who have applied for the privilege of taking your money as deposits and the opportunity to lend your money out to different borrowers at different rates of interest.

After all, that is what banks are supposed to do:

  1. Take your money at a certain rate of interest - and effectively guarantee that you will get it back on maturity; and

  2. Lend it to various borrowers for various periods of time at different rates of interest.

The difference between the money they receive as interest from the borrower and the money they pay you as a depositor is called the "spread". From this they need to deduct all their costs of operations, salaries, rents, any money that they will not recover (due to a default or a bad loan), and then arrive at their profit. The key to success of a bank was to correctly assess the ability of the borrower to repay the money - and to work out the lending rate to reflect the risk being taken in giving that loan.
Those risk assessment teams were pretty important people.

That was the traditional banking model.
The new-age banks have become wealth managers and they have this insatiable need to always sell you something: mutual funds, PMS accounts, insurance products, PE Funds, structured products...anything that earns them a fee.

In theory, the wealth management teams at banks are supposed to look after your interest.
In practice, they tend to look after their fee income which ends up as their salary and bonus for doing well.

But you don't have to be a client of their wealth management teams.

You can say no and, sensibly, walk away from their trap.

And nor do you have to be a depositor with them.
You can ignore their pleas for more deposits - they tempt you by offering higher interest rates - and place your money in a "safer" bank even though you may be earning lower rate of interest.

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The RBI's rationale for issuing new banking licenses is to make banking available to more people across India.
I am not sure if that has actually worked in the past: I would imagine that most banks will open up branches in bigger cities and fight for existing people with bank accounts, rather than heading out to rural India to convince a villager why he needs a bank account. And can you imagine the frustration of wealth managers as they try to mis-sell some of their laundry list of products to villagers with negligible net worth? So far, the wealth managers have been swatting their wealthy customers in urban India. In a village, they will have to swat the flies.

But that is another story and will be the topic of another Honest Truth.

So, here is the list of the 26 entities that have applied for a banking license.
Which of these groups would you deposit your savings with?
Pick any 5. Or more if you wish.
We will compile the feedback and send it to SEBI and RBI who have set up committees to scrutinise the applicants.

And no, M/s Chidambaram, Sibal, Jaitley (and all the other opportunist protectors of the sacred Constitution) this is not an opinion poll; this is a fundamental left to a freedom of expression, so the results cannot be banned! ☺

Table 1: Will I trust you with my money as a deposit?
S. No. Name of Applicant (alphabetical order) Name of Group Would you place your savings as a deposit with them? Yes or No Should they get a banking license? Yes or No?
1 Aditya Birla Nuvo Ltd Aditya Birla Group    
2 Bajaj Finserv Ltd. Rahul Bajaj Group    
3 Bandhan Financial Services Pvt. Ltd      
4 Department of Posts Government of India    
5 Edelweiss Financial Services Limited      
6 IDFC Limited      
7 IFCI Limited Government of India    
8 Indiabulls Housing Finance Limited      
9 India Infoline Ltd      
10 INMACS Management Services Limited      
11 Janalakshmi Financial Services Pvt. Ltd      
12 J M Financial Limited Nimesh Kampani Group    
13 LIC Housing Finance Ltd LIC of India    
14 L & T Finance Holdings Limited Larsen & Toubro    
15 Magma Fincorp Limited      
16 Muthoot Finance Limited      
17 Reliance Capital Limited Anil Ambani Group    
18 Religare Enterprises Limited      
19 Shriram Capital Limited      
20 Smart Global Ventures Pvt. Ltd.      
21 SREI Infrastructure Finance Limited      
22 Suryamani Financing Company Limited      
23 TATA Sons Limited Tata Group    
24 Tourism Finance Corporation of India Limited Government of India    
25 UAE Exchange & Financial Services Ltd      
26 Value Industries Limited Videocon Group    

Send in your email with 5 names or complete table to: HonestTruth@Equitymaster.com

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Disclaimer: Past performance may or may not be sustained in the future. Mutual Fund investments are subject to market risks, fluctuation in NAV's and uncertainty of dividend distributions. Please read offer documents of the relevant schemes carefully before making any investments. Click here for the detailed risk factors and statutory information"


Disclaimer: The Honest Truth is authored by Ajit Dayal. Ajit is a Director at Quantum Advisors Pvt. Ltd and Quantum Asset Management Company Pvt. Ltd. The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and has not been authenticated by any statutory authority. The author, Equitymaster, Quantum AMC and Quantum Advisors do not claim it to be accurate nor accept any responsibility for the same. Please read the detailed Terms of Use of the web site. To write to Ajit, please click here.


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10 Responses to "Can you bank on them?"

Arun Palkar

Nov 15, 2013

None of the Industrial Houses should be granted Banking License. Among the 26 names only the following should be given licenses:
IDFC, IFCI, L&T Finance, India Posts, LIC Housing
The last two for the reason that they have established branch network especially rural reach which can be effectively exploited for the benefit of rural india. They should however tie up (JV) with reputed Banking companies (Indian or Foreign) to set up world class infrastructure and banking services.

Like 

naveen

Nov 15, 2013

Primary reason for giving licensing should be reach. I agree. Their need to be both private and central/state govt institution, if found fit to be awarded licenses.

Two facts are critical in awarding licenses: Authenticity- experience, Trust- people using the service to feel secure to bank with - very important factor (Outside-In) especially in rural India.

These are the companies/govt institutions to be awarded licences:

Bajaj Financial Services: Found to be doing good profitable business in financial services in both rural and urban areas. and would give 5 rating out of 10 in terms of reach. Need to get commitment for continued business support in rural areas atleast for 5-8 years. Banking will be a complete different ballgame.


Department of Posts: Advantage: Pure reach as they are spread all over indian sub continent. Would give 7 out of 10. Caveat: Govt may need to look at their hiring and other training plans for their employees if they be awarded licences.

LIC: Reach, trust with individuals (CRM database), resourse skills etc..

And this company needs to be scrutinized (management, experience and reach it has etc..) before awarding:

UAE Exchange & Financial Services: As there are many expats and others working outside india and are from villages, in different white and blue collar jobs and other professions who are expecting ease of managing and transferring money back home etcc... OR
any other business which boasts and has performed with such a profile.

Above all there need to be satisfactory survey or such parameters like trial periods, incentives in terms of tax breaks etc for the first 1-3 years considering that government truly wants people in rural and urban areas to have reach for their financial and banking needs.

Other companies are just getting in this race with one angle plain and simple - profits. There is no second angle of real service.

Another option is set a competitive stage: Govt need to award new licences for their own state or central run institutions and forbid awarding licences to private organisations. However, incentivize existing Private banks to setup their operations in rural areas with commitment for minimum service operations (CMSO). Incentives can be tax break on business generated etc..
So, this would be govt Vs private.

Concern: Labour..especially skilled labour

(Anology: Google using US post to deliver their products to customers during this festive seseon and beyond- joint operations, a simple model - Fulfill reach, magnitude of business, and speed)

Like 

Anon

Nov 14, 2013

If you have followed Ajit for long, you can hear SBI and HDFC :)
As per him anyone giving more interest then SBI is giving you a risk premium.

Like 

param

Nov 14, 2013

i can't pick 5 to bank upon, but i can certainly pick 5 to 'not touch with a barge pole':
a. reliance
b. religare
c. muthoot
d. indiabulls
e. india infoline

Like 

Sarit

Nov 14, 2013

1. Tata Sons
2. Shriram Capital
3. IDFC
4. Department of Posts
5. Bajaj Finserv

Like 

kesavan nair

Nov 14, 2013

Post office
Larsen Toubro
Muthoot Finance Ltd
Tata sons

Like 

Srikanth

Nov 14, 2013

1. Department of Post
2. LIC Housing Finance Ltd
3. L & T Finance Holdings Limited
4. No more :-)

Like 

Satish Choudhary

Nov 14, 2013

TATA Sons Limited
Aditya Birla Nuvo Ltd
LIC Housing Finance Ltd
L & T Finance Holdings Limited
Bajaj Finserv Ltd.

Like (1)

mohan iyer

Nov 14, 2013

1.Tata sons
2.LIC
3.Aditya Birla Nuvo
4. Larsen Toubro
5.Bajaj Fin services

Like (1)

Ajay

Nov 13, 2013

You have mentioned in your post "place your money in a "safer" bank even though you may be earning lower rate of interest" - which bank in your opinion is safest?

Like (1)
  
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