Bank Li­cences On Tap But Hardly Any­one To Tap

The Economic Times - - Money & Banking -

When the RBI opened the bank li­cense win­dow in 2014 af­ter a decade, there was a scramble for uni­ver­sal bank li­cences. So was it for pay­ments & small fi­nance banks too. Changing in­dus­try dy­nam­ics may see very few seek­ing new li­cences leav­ing one to won­der how many were se­ri­ous about run­ning a bank, write

ally com­pet­i­tive? Whether it is Win­dows or Star­bucks, it’s all Amer­i­can. Ex­cept for Yoga, there isn’t a sin­gle In­dian prod­uct ac­cept­able world­wide. Be­cause our cor­po­rates are not in­no­va­tive enough, that is why they are at a loss. ”

In the US, with a pop­u­la­tion of 400 mil­lion, there are more than 20,000 banks, many of which are com­mu­nity and lo­cal banks. In­dia with a pop­u­la­tion of 1.3 bil­lion peo­ple has only 40 sched­uled com­mer­cial banks and 1,574 ur­ban co-op­er­a­tive banks with many of them be­ing dys­func­tional.

Tough con­di­tions like high cap­i­tal re­quire­ment of Rs 500 crore and large in­dus­trial houses with such re­sources be­ing barred from bid­ding for li­cences them­selves could be de­ter­rents.

“The rea­son that there are no ap­pli­cants is that it is a dif­fi­cult mar­ket to get in for peo­ple which are not in­dus­trial houses,” says TT Ram Mo­han, pro­fes­sor, IIM Ahmedabad. “The only ones who can en­ter this mar­ket are peo­ple with deep pock­ets and the RBI doesn’t seem very re­cep­tive to them.”

But the luke­warm re­sponse is not nec­es­sar­ily a re­flec­tion on the po­ten­tial for mak­ing money in fi­nan­cial ser­vices where many mod­els ex­ist. One of them is non-bank­ing fi­nance com­pany which is a bet­ter model for prof­its, es­pe­cially when in­ter­est rates are headed lower.

“Peo­ple take time to un­der­stand that bank­ing makes money only over a long pe­riod of time, so you have to be will­ing to take that call,” said Deepak Gupta, joint man­ag­ing di­rec­tor, Ko­tak Mahin­dra Bank. “For the first five years, bank­ing is an in­fe­rior model than an NBFC and banks have a prob­lem of bu­reau­cratic costs like com­pli­ance, and risk which is sig­nif­i­cantly higher than an NBFC, plus branches and ATMs.” Gupta, whose bank was an NBFC be­fore con­vert­ing into a bank, says that while typ­i­cal op­er­at­ing cost of a bank was any­where be­tween 2% and 2.5% of its to­tal as­sets, for an NBFC it is less than 1%.

The dy­nam­ics of the in­dus­try are fast changing and the mush­room­ing of fi­nan­cial tech­nol­ogy com­pa­nies are threat­en­ing even es­tab­lished banks’ bread and butter busi­ness.

“Li­cences on on-tap ba­sis doesn’t put pres­sure on any­one to ap­ply for a bank li­cence in a lim­ited time pe­riod, but only af­ter do­ing de­tailed vi­a­bil­ity anal­y­sis,” said PN Va­sude­van, MD, Equitas. “No ap­pli­cant for a li­cence shows that peo­ple do not want to just rush in which is a good sign.” When mo­bile wal­let com­pa­nies are chal­leng­ing the likes of the State Bank of In­dia and HDFC Bank, the new en­trants are not sure about what they are get­ting into. “There is a huge ques­tion mark on pay­ments bank vi­a­bil­ity once you move to the UPI in­ter­face,” says Mo­han of IIM-Ahmedabad. “There is no rea­son for you to go to a pay­ments bank when your ex­ist­ing bank can give you all the fa­cil­i­ties. The small fi­nance banks look promis­ing be­cause they are get­ting into ar­eas which are not of great in­ter­est to the uni­ver­sal banks.” Big banks wh i c h h av e been hob­bled by reg­u­la­tions fear that they might end up be­ing a spe­cialised bank for cor­po­rates as in­no­va­tions can take away their re­tail cus­tomers who are look­ing more for con­ve­nience than com­pli­cated prod­ucts that big banks bring to them. “One doesn’t know how dig­i­tal shapes up,” says Gupta. “For ex­am­ple, for an uni­ver­sal bank, re­tail tends to be one-third of to­tal busi­ness. Will that re­tail move straight to the pay­ments bank? Who knows? So the cor­po­rate piece may re­main but the re­tail piece may just go away.” Mo­bik­wik, a fin­tech firm which was one of the 72 ap­pli­cants for pay­ments bank li­cence, be­lieves that reg­u­la­tions are lag­ging be­hind the re­al­ity. “I am look­ing for be­ing an in­ter net-only bank,” said Mri­nal Sinha, chief op­er­at­ing of­fi­cer of Mo­bik­wik. “If I am able to ser­vice the cus­tomer, I should have the right to choose the busi­ness model. This is world 2.0. Our pol­icy mak­ing needs to evolve to say that there is a huge seg­ment of In­dia which doesn’t want any­thing to do with branches.” Non-bank­ing fi­nance com­pa­nies which are quasi banks may look to gain by con­vert­ing into a full-fledged bank as they could ac­cess lower cost cur­rent and sav­ings ac­count de­posits, but many with­out vi­brant fi­nan­cial ser­vices who looked to flip li­cence for a profit may strug­gle. There are ex­am­ples in the in­sur­ance in­dus­try like Bharti and the Fu­ture group which are strug­gling to make a mark and it won’t be any­thing different with bank­ing which is even tougher due to higher costs of com­pli­ance. “If these as­pi­rants want to do bank­ing, the way it’s been done then there isn’t much to do be­cause it will be an­other me too kind of bank,” said Subra­ma­nian. “A lot of cor­po­rates in In­dia have made money ei­ther by their prox­im­ity to the gov­ern­ment or by re­verse engi­neer­ing global prod­ucts. If this has to work we can’t be only talk­ing about ‘ju­gaad’ in­no­va­tion any­more.”

Those who want to ap­ply haven’t fig­ured out how to make money, they need more cre­ativ­ity. Tra­di­tion­ally, bank­ing in In­dia has made money just from low com­pe­ti­tion, says Kr­ish­na­murthy Subra­ma­nian, as­sis­tant pro­fes­sor of fi­nance, ISB

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