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Future Of Banking: It Is Going To Be Crowded

The licensing of all kinds of new entities can complicate issues on the banking turf

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If the large banks of today are not as large five or 10 years from now, I think it is more likely to be because of bad lending, heavy regulation or market pressures to break up because the whole is valued less than the sum of the parts, than it will be because of disruption from fintech,” said Larry Summers, economist and former US Secretary of State, in May this year.

Summers might well have been speaking of the emerging banking topography in India. The dud-loan pile up will not resolve itself anytime soon. “Narrow banking” for weak state-run banks —so they don’t grow the asset side of the balance-sheet — is being spoken of in high decibels in some quarters; pressure on capital will force many banks to jettison their loss-making or unviable subsidiaries. In a nutshell, these are the concerns for our legacy banks.

And then there are the newbies — from payment banks, small finance banks to some that will operate as pureplay wholesale, retail, or infrastructure banks under a differentiated licensing regime (on the anvil). They have the potential to bite away large chunks of business from traditional banks, at least from the weaklings amongst them. While Summers spoke of the large banks being cut down to size not necessarily due to fintech but due to the whole being valued less than the sum of its parts, where does that leave the not-so-large or nimble in the local context?

In April this year, Mint Road also floated a discussion paper on ‘Wholesale & Long-Term Finance Banks’ — a good two decades after we thought the debate had been settled in favour of universal bank. ICICI, IDBI and IDFC opted to morph into the banks as we know them today for the very same reason; of course, you can always quibble over the fact that they were ‘term-lending institutions’ back in the day and not ‘banks’ as the discussion paper refers to the to-be reincarnated versions.

Is there really space for all these forms of life?
 
Some Will Be Choked
Four years ago, Mint Road released a discussion paper ‘Banking Structure in India - The Way Forward’ (27 August, 2013). The four-tier approach it highlighted comprised: a) home-grown banks that can go global and foreign banks b) state-run, private, subsidiaries of foreign banks incorporated in India, and specialised banks; c) old private banks, regional rural banks and multi-state urban co-op banks (UCB), and;  d) local area banks, single state UCBs, state co-op banks and district central co-op banks. Each of the denizens in these four tiers were to become either bigger or better through mergers or through conversion (as in the conversion of a few well-managed and financially-sound multi-state UCBs banks into commercial banks).

The moot point is just how many of these entities have a future at all. But it is politically incorrect to say it is so. Even at the best of times if you start out on a clean slate, you can quickly get into trouble down the line. Let’s go back a little. Ten private bank licences were issued in 1993; two more in 2003. Of the first lot, only five banks are still around — ICICI Bank, HDFC Bank, IDBI Bank, Axis Bank and IndusInd Bank. You also had an upgrade from an urban co-operative bank (to an scheduled commercial bank) — DCB Bank (the erstwhile Development Credit Bank). Others just could not keep up. Both from the second lot are still at the crease — Kotak Mahindra Bank and Yes Bank. In effect, a survival rate or success rate (depending on how you look at it) of 58.33 per cent.

A big advantage new entrants had in 1993 was that legacy, indeed, was a burden. State-run banks had a market share of 95 per cent market, but were not responsive to a fast-changing India Inc. Yet the newbies’ clean slates were soon filled with squiggles; they were manned by state-run bankers. It was not really fresh blood. Loans doled out on the double piled up as duds as the mid-1990s high interest-rate regime started to bite. The plot has changed now; there is talk of ‘continuous on-tap licensing’ of new banks, and an entirely different banking market. It’s debatable if the new method would have a success ratio of 58.33 per cent, if this happened two decades ago.

Presently, it’s not clear as to how the re-orientation of the banking structure will proceed from here on. Will the better among state-run banks agree to a marriage with the also-rans? Will it be fair — even if you say that all are majority-owned by the Centre (to the extent, the process will be a breeze) — to the rest of the shareholders?

The RBI committee on Comprehensive Financial Services for Small Businesses and Low-Income Households (chaired by Nachiket Mor, 2013) espoused the concept of differentiated banks to further the cause of financial inclusion, and deepening of strategies, using the functional building blocks of payments, deposits and credits. The case for payments banks was made saying their primary role would be to provide payment services and deposit products to small businesses and low-income households. Yet the effect of such a move on co-operative banks has not been studied. As on date, there is no detailed analysis in public domain on the financial health of co-operative banks. Just how well-prepared are they to take on payment banks, which can hit them on the liabilities front as well as on the asset side by cross-selling third-party offerings?

It’s one thing to put out a chart to ‘indicate’ how the story will unfold (or unravel); and it’s entirely another to give effect to these changes. It took almost two decades and more for the State Bank of India to finally merge its subsidiary banks with itself. We don’t have that kind of luxury anymore. If fresh new banking platforms continue to be licensed even as the laggards continue to float around, the pain will only increase.

It’s not to suggest that new entities are not needed. But the co-habitation of legacy banks, many with no real future at all, and the newbies will only worsen the plot. The point is, the future may or may not turn out to be perfect, but the present is tense for sure.


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