By Amit Singh
In last three months, the steps taken by Reserve Bank of India (RBI) is nothing short of a revolution in the banking and financial sector. RBI is one such institution in independent India apart from the Supreme Court and the Election Commission, which every Indian can be proud of. Its legitimacy can be derived from its dependence of market demand as opposed to bowing down to the ill acclaimed “babu culture” of Indian democracy.
Reforms by the RBI
RBI has taken a holistic view of the economy and floated a series of innovative reforms which were unthinkable a few years ago. Let me first mention the chronological order of the steps taken by RBI in the past few months, whose repercussions are expected to be visible soon.
· April, 2015 – New private universal banking licences to IDFC, Bandhan Financial Services.
· August, 2015 – The niche banking licences in terms of 11 Payment Banks.
· September, 2015 – 10 Small Financial Banks licences.
I cannot stop myself from feeling nostalgic about the economic reforms of 1991 which prompted the RBI to adopt the RBI reforms in 1993. Under this, it opened up the banking and financial sector, kick starting the economic revolution which is now termed as the ‘Indian Story’. I feel that a similar ‘Indian story V.2.0’ is about to be unravelled.
New Universal private bank Licences
Based in Kolkata, Bandhan is the largest micro-lender in India in terms of assets. As of 31 March 2014, Bandhan had a loan book of Rs.6,200 crore and a total of 5.4 million borrowers. The company has 13,000 employees and 2,016 branches operating in 22 states. Bandhan has a capital base of Rs.1,100 crores¹ and International Finance Corporation, the World Bank’s arm, has a stake of 10.93%.
IDFC, on the other hand, is an infrastructure finance company with a loan book of Rs.54,552 crore. It had a net worth of Rs.15,250 crore as of 31 December. The government owns 17.24% of IDFC, followed by a unit of the Malaysian sovereign fund and Sipadan Investments (Mauritius) Ltd, which have a 9.97% stake. Apart from that, several financial institutions hold minority stakes in it1.
RBI’s February guidelines require new banks to hold a minimum capital of Rs.500 crore. RBI has made it mandatory for new banks to open at least 25% of branches in rural centres.
They will also have to comply with the so-called priority sector lending norms under which 40% of the money loaned by banks has to go to segments such as agriculture, small businesses, retail traders, professionals and self-employed individuals.
The Reserve Bank of India (RBI) has chosen just 11 out of 41 applicants to set up payments banks in the country. Payments banks are institutions that will offer most of the banking services except loans and credit card products to retail customers. Customers can deposit up to Rs 1 lakh in these banks and transfer money, make payments, or buy financial products such as insurance and mutual funds.
The 11 names include India’s postal department, two telecom players (Airtel and Vodafone), three large corporate houses (Reliance Industries Ltd (RIL), Aditya Birla Nuvo and Tech Mahindra), two financial services firms (Fino Paytech and Cholamandalam), two individual entrepreneurs (Dilip Sahnghvi and Vijay Sharma) and National Securities Depository Ltd².
The biggest push to financial inclusion is the inclusion of the Indian Postal Department in this list. The postal department, which failed to get into the list of full service banks when the RBI gave permits to IDFC and Bandhan in April 2014, has been longing to get into the banking business. The department has begun to set up ATMs and connect its offices through core banking solution (CBS) network. The post expects to connect about 25,000 branches under CBS in next one year. The India Post has already been active in the deposit-taking activity through its various savings schemes. As of 31 March 2014, the outstanding balances under the post office savings scheme stood at Rs 6.05 lakh crore, which is nearly equivalent to half the deposits of the government-owned State Bank of India, which is the country’s largest commercial bank, and double that of the largest private lender, ICICI Bank Ltd. The department has a network of about 1,55,000 branches across the country, of which about 1,39,040 are in rural areas³.
It give me goose bumps when I think of the Postal Department as a ‘bank’, working to provide access to banking services to the poorest of poor. Post Bank can offer stiff competition to the State Bank of India and other public sector banks in the deposit market. Given the fact that India Post is present in many far-flung areas of the country, even where nationalised banks do not have branches, a Post Bank can change the way people save money in these parts of the country. Post is a trusted brand name in India’s households and hence, would find it relatively easy to convince customers to keep their savings with its new entity.
It will be the biggest contribution of the RBI in this decade.
Small Financial Banks
The Reserve Bank of India (RBI) on 16 September 2015, granted in-principle approval to 10 applicants to set up small finance banks. The 10 banks were chosen from the 72 applications received by the RBI.
The applicants selected for setting up small finance banks include Au Financiers Ltd, Capital Local Area Bank, Disha Microfin, Equitas Holdings, Ujjivan Financial Services, Utkarsh Micro Finance, ESAF Microfinance and Investments, Janalakshmi Financial Services, RGVN Microfinance and Suryoday Micro Finance2.
The small finance bank will primarily undertake basic banking activities of accepting deposits and lending to unserved and underserved sections, including small business units, small and marginal farmers, micro and small industries, and the unorganised sector entities.
They can take small deposits and disburse loans. They have to lend 75% of their total adjusted net bank credit to priority sector, and distribute mutual funds, insurance products and other simple third-party financial products. At least 50% of loans should be up to 25 lakhs
However, they cannot lend to big corporates and groups; nor can they be a business correspondent of any bank. We can see that while focus of giving licences for payment banks is to reach unbanked individuals, here, the aim is to cover small and marginal business units and marginal farmers.
Seen holistically, through this trinity of decisions (the universal bank licenses, the payment bank to small financial bank), the RBI has tried to cover all possible segments of the society with a focus on financial inclusion.
Effects on the existing Banking Sector
There is no denying the fact that the already operational universal banks will come under stress from all directions. They will not only have to guard against the mushrooming start-ups by young Indians, experimenting with all kinds innovative solutions, but also against the new breed of banking players, who have become significant since the past one year. The rules of the game has changed. The overall landscape of banking sector in India has been hit by a silent tsunami. In coming 2-3 years, we will start seeing its impact. The impact could be good or bad for the present banks, depending on how they respond to threats. Whatever may be the response, one thing that seems certain is that the country will be benefited and the consumers will be the real winners.
The existing banks have to quickly adapt to the changing landscape or else some of them will vanish; similar to the fate of Kodak from photography and Nokia from the mobile segment!
However, the existing public and private sector banks have one thing to cheer about. Despite the novel products that the emerging small and deceptive players have to offer, the existing banks have a comparative advantage. They already possess the products and capabilities. The only thing which is holding them back is their FOCUS. If they can focus on the product suite of new entrants and build on their existing capabilities, they can still survive and succeed. India is a huge market. Every kind of players can still exist and can be a winner.
Success strategies for the existing banks include:
· Innovation- on existing products and new products
· Focus- Internal as well external environment
· Agility- in taking decisions and implementing them
· Productivity- of systems and of human capital
· Partnership- Engage with new entities and young Indians
· Leveraging- Leverage your existing relationships to enter new business like ecommerce, smart cities, green business etc where new entities have little to offer
India has 27 state-run banks and 22 private sector banks, according to the RBI data, but its ratio of branches to adults is only about one-fourth of Brazil’s, leaving about half of the households in India outside the banking system1.
RBI is one such institution, that has always moved faster than government policies and busted the myth that government institutions cannot produce excellence. They have not been in any instance of corruption, which adds to the credibility.
Moreover, Dr. Raghuram Rajan should be applauded for the steps he has taken in his tenure. He would be remembered as we now remember the duo-Manmohan Singh and Narshima Rao- for economic liberalization V 1.0.
With the changing banking landscape, the existing players have to adopt to this change. And, this is exactly what RBI is working towards. The efforts explained above are reflective of its goals of financial inclusion and efficient utilisation of cash flows.
Now, the government is mulling over raising FDI limit in private banks to 100% from present 74%. And changing the bank licences from window system to ‘on-tap system’ is going to be an exciting journey ahead.
Amit Singh is presently an Assistant Vice President in Yes Bank. He is an IIM Ahmedabad and IIT Roorkee graduate. He has over 9 years of work experience in diverse fields. His area of interest includes Banking, World Finance, Politics, International relationships, and Start-up ecosystem in India.