Indian Banking Sector: New Players,
New Plays
Introduction
Bank sector reform in India has been slow. The
domination of state-owned or Public Sector Banks
(“PSBs”), which began with the nationalization of banks in
1969, was loosened in the nineties to allow some private
players (most of whom enjoyed the patronage of larger
domestic institutional players) but under strict licensing
restrictions, making a ‘bank license’ a scarce and a
valuable resource.
More than a decade after the last two private entrants,
YES Bank and Kotak Bank, the sector is witnessing a
surge of 21 new entrants. These new entrants hold
promise to bring in vast proportions of the Indian
population who are currently outside the formal banking
sector. The key question that remains is if it can be done
in a commercially viable manner.
This paper take a brief look at some of these changes, all
of which represent a significant shift in the manner in
which banking players, incumbents and new entrants will
operate.
New Ways of Thinking
Raghuram Rajan, the central bank governor at the Reserve
Bank of India (“RBI”), recently completed two years in office. A
year’s head start over the new Bharatiya Janata Party (“BJP”)
government in Delhi has meant that he had a relatively free
hand in preparing the banking sector for its next wave of
change.
To Rajan’s credit, he has been single-minded in tackling the
core issue at hand; the financial exclusion of India’s masses.
Two new ‘full service’ bank licenses were issued last year and
Rajan has alluded to more in the next few years (rather than the
next decade). Even though there were more than 26 applicants
for the bank licenses, only two licenses were awarded. Both
license awardees, Infrastructure Development Finance
Company (“IDFC”) and micro-finance lender Bandhan, are
players with a proven record of building extensive reach in the
grassroots parts of India (or Bharat as many would say) that
banking incumbents have given up on for commercial reasons.
Furthermore, Rajan has conveyed that new banks licenses will
be issued more frequent, from the once-a-decade frequency
that has been the norm until recently.
The other significant shift is the RBI’s (led by Rajan) faith in the
rising use of telecommunications technology in banking which is
shared by another technophile in Delhi, Prime Minister Modi.
Both of them have consistently backed technology-driven
solutions, whether it be broadband or mobile technologies, for
efficient programme implementation and as tools of
empowerment for those outside the formal reach of the banking
system and the very poor. Last year, Prime Minister Modi overruled factions within his government to extend support for a
national biometric identification system AADHAAR as a part of
the basic “Know Your Customer” (“KYC”) requirement to open
new bank accounts. While many within his government saw
AADHAAR as a legacy of the previous congress-led government,
Prime Minister Modi saw the value of a ready and scalable
national identity system for India’s document-poor hinterland
where most of its poor reside. The foundational base of a
national identity system has since helped the RBI to develop its
policy interventions further as well as the Modi Government to
improve implementation of its welfare programmes.
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Strategic Communications |Indian Banking Sector: New Players, New Plays
Birth of ‘Differentiated Banks’ — Payment Banks
and Small Banks
In January 2014, the RBI-constituted Financial Inclusion
Committee (Committee on Comprehensive Financial Services
for Small Businesses and Low Income Households), headed by
Nachiket Mor, proposed a radical solution to the persistent
problem of financial exclusion: creation of new categories of
‘differentiated banks’ that would perform very specific functions
rather than provide ‘full-service banking.’ In August 2015, 11
new ‘payment banks’ licenses were awarded, to provide
payment-only services (i.e. without any deposit taking function).
Six of the 11 new payment banks are affiliated with telecom
service players which provide an entry for players like Vodafone,
Bharti Airtel, Reliance and Telenor to establish and expand their
mobile money businesses, blurring the lines between telecom
and banking services. This is linked to a realisation amongst
policy makers that mobile money strategies, which co-opt
telecom players into banking (as in parts of Africa) is an
appropriate financial inclusion strategy for India to emulate. The
earlier bank-led Banking Correspondent (“BC”) agent model,
favoured till recently, has proven ineffective1 and telco-driven
Payment Banks are being considered as a serious alternative.
One of the nine payment bank license holders, state-owned
India Post Department which is one of the nine payment banks,
poses a serious threat to banking incumbents and other
payment banks alike. A Post Bank of India (“PBI”) with its wide
network of 155,000 post offices (89% of which are in rural
areas) could replace state-owned State Bank of India (“SBI”) as
the biggest bank in India.
Another set of 10 ‘differentiated’ bank licenses for small banks
were announced in September 2015, most of the license
winners being micro-finance institutions (“MFI”) with strong local
networks, which is in line with the RBI’s emphasis on financial
inclusion. Small banks hope to improve credit facilities for small
business. This is put into context when one realises that close to
90% of small businesses in India have no links to any formal
financial institutions.
All put together, India has seen 21 new banking entities being
created in India (if one were to add up all the payment banks,
small banks and the two players who were granted ‘full-service’
licenses last year) in the last 18-months.
A New National Financial Inclusion Programme
The dynamism of the financial regulator RBI has been matched
by political action in Delhi. Within six months, the new Bharatiya
Janata Party Government launched the Government’s
Comprehensive Financial Inclusion Plan (”Pradhan Mantri Jan
Dhan Yojana“) which is a national financial inclusion
programme that made an entry into the Guinness Book of World
Records for the fastest enrollment of new bank accounts to
cover 99.74% of Indian households. Over 11.5 crore (115 mn)
new bank accounts were opened across the country in a span of
five months.2 While account opening drives are not new, this
programme was accompanied by a number of benefits for the
poor — a small over-draft facility to tide over financial
exigencies, bundled life insurance and promises of future
accident and health insurance as well. As the programme enters
its next phase, the Finance Ministry is busy drawing up plans to
ensure account holders actively use these accounts, a nuisance
of previous account opening schemes. The objective has been
to bring about 60% of India’s rural and urban population, which
currently does not have a functional bank account, within the
ambit of the formal banking sector.
The BJP Government has also been working on linking
Government-To-Person (“G2P”) welfare payments, termed Direct
Benefit Transfers (“DBTs"), to these newly opened bank
accounts and making the national biometric system, AADHAAR,
as the KYC filter to ensure such payments are transferred
electronically to real beneficiary accounts.3 All put together,
these central and state government transfers account for INR
4.2 trillion annually (approximately 70 billion, 4% of India’s
GDP),4 transferred annually from the National Exchequer to
individual beneficiaries. Such low-ticket, high-volume
transactions have been attracting the interest of the new
Payment Banks, some of whom are planning to build their
business models around such G2P transfers and remittances.
A New Indian Bankruptcy Law
Incumbent banks are struggling to change, scaling up their
‘mobile banking’ operations and cleaning up their own books,
weighed down as they are under their non-performing/stressed
loan assets. Years of liberal credit to Indian companies, many of
them reeling under slow growth of the last two years, has
bloated the bad debts on the books of many Indian banks with
little or no recourse to recovery.5 Here too, there seems cause
for regulatory cheer.
Media report in Economic Times
http://articles.economictimes.indiatimes.com/2015-0121/news/58305891_1_pmjdy-bank-accounts-jan-dhan-yojna.
3 Biometric authentication number created by UIDAI (Unique Identification
Authority of India).
4 Media report
http://www.livemint.com/Opinion/HoDuAuSYkuz1aMrl7C4FcN/Direct-BenefitsTransfer-An-idea-whose-time-has-come.html.
5 Media report excerpt http://www.reuters.com/article/2015/03/12/india-banksdebt-idUSL4N0WE3JR20150312.
2
1
RBI College for Agriculture Banking and the Consultative Group to Assist the Poor
(CGAP) survey in September 2013 declared 47% of the listed 2,358 agents
across 15 large states as untraceable.
2 • FTI Consulting, Inc.
Strategic Communications |Indian Banking Sector: New Players, New Plays
Last year, there were some landmark developments in terms of
banks restructuring bad loans and seeking legal recourse
against defaulters, with some of the borrowers being tagged as
‘willful defaulters’ and attracting more severe penalties. The
Finance Minister Arun Jaitley in his budget speech earlier this
year spoke about bringing in a new Bankruptcy Code, replacing
two inefficient pieces of regulations, to introduce a sound
bankruptcy framework, akin to the U.S. Chapter 11 bankruptcy
code. The Bankruptcy Law Reform Committee (“BLRC”) has
been instituted to frame this piece of legislation, which if
enacted would put an end to the abuse of the banking system
that has continued for years abetted by weak bankruptcy laws
and few effective options for recovery.
Conclusion
Both RBI and the Finance Ministry have played fairly dynamic
roles in the last 24-months in addressing some of the policy
asks of the sector. It is now for the newly created ‘banks’ and
incumbents to build out businesses that are relevant to the
needs of Indian customers and do so in a commercially
sustainable manner.
At one end of the spectrum, many incumbent ‘full-service’ bank
players need to re-capitalise and possibly consolidate. At the
other end, a new set of players are adopting local strategies to
overcome the challenge of financial exclusion and lack of
access to credit.
Overcoming both respective challenges requires significant
external investments, and in some cases divestment from the
government, a sharper focus on operations and
implementation, as well as an open mind towards innovation. By
embracing new technology, the regulator and the government
have shown maturity in pursuing the correct policy options. The
ball is clearly in the banking sector’s court — as it steps up and
creates the two million jobs it is expected to create over the next
decade, extending the reach of formal banking channels to
reach the deepest parts of the rural hinterland, which is also
where most of its poor reside.
The views expressed herein are those of the
author(s) and not necessarily the views of FTI
Consulting, Inc., its management, its subsidiaries,
its affiliates, or its other professionals
Amrit Singh Deo
Senior Director
+91 9167 428242
[email protected]
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