Mid-October this year, Development Credit Bank (DCB) announced it would increase its branches by 50 percent over the next two years to prepare for competition from new small banks.
The market might have seemed myopic in penalising the stock on the back of a rising competition within the banking space, where the country will have two new private banks entering the fray of existing 25 public sector and 20 private banks.
Not just this, in a year’s time, 11 payment banks and eight small banks will add to the total count, taking it from 45 to 66. This, significantly, is a 45 percent increase in the number of banks in a mere period of 18 months.
Considering that the Reserve Bank of India (RBI) has licenced only nine new banks in the past 25 years, these fresh 21 licences granted within the past 25 months of the Reserve Bank Governor Raghuram Rajan’s regime spells a serious change in market dynamics.
Add to this, those payment banks coming with wealthy parentage — The AB Birla Group plus the Idea telephone network; the Reliance Group plus the Rel Jio network, the Airtel Group, the Mahindra Group and Vodafone come with serious capital and technology network.
Paytm comes with big private equity backing and youth-friendly technology so much so that it has become a must-have account for anyone hailing a taxi in Mumbai.
On the other hand, small bank licencees come with a terrific last mile to their customers and an ability to grab small and medium enterprises (SMEs) businesses.
Both sets come along with their own constraints. Payment banks can take deposits, and make remittances, but they can’t give loans; small banks have to ensure that 50 percent of their loans are of less than 25 lakh unit value.
Now the real question is: Will legacy banks be able to face this competition or will banks at least midcap banks face burn out from both ends: the payment banks taking away their deposits and small banks taking away their high return borrowers?
Speaking to CNBC-TV18, Shyam Srinivasan, MD & CEO of Federal Bank, admits it is not a worry as much as it is a great early warning for a full-swing preparation, where the biggest beneficiaries will be customers. “In the process, unless we improve our operational capabilities quite materially, there will be impact on overall profitability,” he says.
Without underestimating the power of regional banks, he explains how these brands’ importance is heightened for customers present in that geography.
On new microfinance institution (MFI) players, Sharad Sharma, MD & CEO of State Bank of Mysore, says: “They borrow from banks at 11-12 percent and do the lending at 25-27 percent, so the kind of margins which they are working and are successful at; there will be little bit of a challenge in replicating that when they need to work on a margin of 2 percent or 3 percent and similarly the cost structure.”
However, former chairman of State Bank of India AK Purwar has a contrarian view. He says even larger banks will start feeling the heat and pinch of this, not just midcap and small banks. In a neck and neck competition, he says: “It will become a question of survival of the fittest.” “The people who are able to get customers and track them, give them services of a good quality, at a decent price, I think that will make a big difference,” he justifies.
Below is the verbatim transcript of Shyam Srinivasan, Sharad Sharma and AK Purwar’s interview with Latha Venkatesh on CNBC-TV18.
Q: Would you worry more about payment banks or more about small banks?
Srinivasan: I mentioned couple of times, not so much as worry but we have to take it into stride and believe that they will change some part of the market dynamics and in some sense the banks, the incumbents are very significantly focusing on upgrading and up scaling and making ourselves extremely competitive.
I would say the challenge for the new players would be – how do they stay fresher and different from the incumbents who have already absorbed this as a big way of doing banking.
So the playing field from customer point of view will get very exciting, many choices will emerge, but at this stage I won’t say it is a worry as much as it is a great early warning and preparation is in full swing and you could argue that the beneficiary of all this is going to be customers. In the process unless we improve our operational capabilities quite materially, there will be impact on the overall profitability.
Q: Should you not be worried more about the small bank competition. Three small banks have got licences in the Bengaluru region. There is Janalakshmi or Janaagraha which is operating fairly good business in Bengaluru then there is Equitas, which is already giving about Rs 2,000 crore loans to commercial vehicle segment. Not a small competitor and then you have Ujjivan as well. So would you not worry that they will take away your high margin SME borrowers?
Sharma: I am not doubting them on that but their cost structure presently, as you said, eight of the ten people who have been licenced, are basically microfinance institutions (MFIs) players, who are use to working on margin.
They borrow from banks at 11-12 percent and do the lending at 25-27 percent, so the kind of margins which they are working at and they are successful at. There will be little bit of a challenge in replicating that when they need to work on a margin of 2 percent or 3 percent and similarly the cost structure.
If you look at the cost structure of Bandhan, before it was established into a bank and the cost structure which they will have in the next three years, when the Bandhan Bank is alive and fully kicking – that in itself is a challenge.
Q: Do you fear that first there is a danger to the asset side for the midcap banks?
Purwar: I would go a step further. The lincences to these large numbers of banks — market is definitely growing at a certain pace and there is a possibility for all kinds of banks to have this kind of business but in the short run and in the immediate medium-term brunt, there is going to be a huge competition in the market with these licences coming in. Why mid banks, why small banks even the larger banks will start feeling the heat, feeling the pinch.
It will become a question of survival of the fittest. The people who are able to get customers and track them, give them services of a good quality, at a decent price, I think that will make a big difference.
Q: In terms of brand recognition surely an Airtel or Idea or Rel Jio is better recognition. Why won’t I open that account rather than open a midcap account even shift because I have the telephone already. It is not even a much effort. If I already have an Lakshmi Vilas Bank account or Karur Vysya account or even a Federal account, I might just switch to an Idea or Airtel account?
Srinivasan: There are three points that we must keep in mind and I keep repeating, it is not like the challenge is not real, but first and foremost, while all these developments are happening, you are aware that there is an entire evolution happening through National Payments Corporation of India (NPCI) or unified payments interface (UPI) – I would then question the existence of Wallet and Paytm of the world because I can then do with mobile, instant to any bank. Why do I have to move money to Wallet and from Wallet to something else?
However, just as the development is happening on the emergence of a new banking category, the spaces are materially changing and banks are in the forefront of it. So I do not think we can ignore that reality.
The second, the same Idea , Vodafone and Airtel often nowadays, unfortunately when we call somebody on the mobile, we ask if they have landline to call.
And this is a reality. So there is a genuine problem. The same clients are not evoking the same response as it did a few years ago. So we cannot believe that it is going to be an automatic choice.
Third, we grossly underestimate the power of a regional brand. The names that you mentioned, for somebody sitting in Mumbai, seeing world differently, could mean very differently for somebody sitting in that local geography where the elegance is significantly higher to that brand.
So for these three reasons, there is a good case for these banks to upgrade the capability. So I would not believe that they will not come and walk away with the business. Yes, like Mr Purwar pointed out, there will be stiff competition, all that will come but it is not like winner takes all and there is only one winner, is the only point I would ask to what you are asking.
Q: How do you see the challenge on the current and savings account (CASA) front? Do you think that a substantial amount could go to the payment banks and therefore the entire industry will probably have to operate with much less CASA advantage?
Sharma: Yes and no. To give you an example, if you look at, by and large the banking sector is operating on a 4 percent savings bank interest rate. There are couple of private banks which were offering it in the 6-7 percent range. However, I have maintained my CASA percentage in the last three to five years at a fairly stable 33-35 percent.
Looking at that and the fact that the payment banks will be allowed to take maximum deposit of Rs 1 lakh, in a territory where there are other existing banking players available with amount of goodwill as Shyam Srinivasan was saying, yes so the goodwill factor which is there in those existing players, the pricing advantage especially in a rural and a semi-urban area or an urban area, the pool would not be to that extent that to will create a dent in my growth.
However, that is not to say that the challenge is not there. The advantage which these payment banks offer is the mobile Wallet and other things.
If you look at the existing banking players they are also moving very fast. Public sector banking space led by State Bank of India (SBI) and HDFC and the ICICI Bank all of them have launched their products and the terms at which they are getting scaled up by the time two years time or three years time, when these people will be alive in kicking. So liability side would also be a challenge for them to pick up.
Q: Just to oppose that point, Paytm has been claiming that they will start working as early as March. My sense is if they come in March I don’t think Idea Cellular and Bharti Airtel are going to take beyond September to come. So we are talking about a competition within one year and this is a time when they have money to burn; they are backed by private equity or by very large conglomerates. So, at least initially you cannot rule out a savings rates something akin to Kotak Mahindra Bank and Yes Bank. Now while it is tedious for me having probably an ICICI account to take a cab and go to Yes Bank and open an account there and take advantage of that 6 percent, if it is an on the Wallet, if it is on my mobile I might well do it. So, while you’re current players will not. Those who are 23-24-25, your bank costumer of the next generation of the next 10 years will prefer opening that account won’t they. So, incremental business will not fall for you especially because they are paying more money or are likely to pay more money on their savings deposits?
Sharma: You also have to accept the fact that the similar look-a-like product will be available with the existing banks also.
Q: In that case the entire industry’s margin will thin down at least by about 0.5 a percentage or one percentage point from today’s level?
Sharma: That of course is a process signs of time that is already happening. If you look at over the last two or three years, there has been more of competition and there has been an element of erosion. You are talking of the deep pockets which these promoters have.
The existing players also will be saving that thing and will be putting their best into retain that and if that was not the case why should Reliance team up with State Bank of India or why would the telecom companies team up with the private sector banks.
Q: Those who have not teamed up. Now what happens to Corporation Bank , what happens to Dena Bank ? Let me put that to a neutral party, seemingly neutral now, what happens to the midcap public sector banks? I mean the private sector banks Shyam Srinivasan enables us to open a Federal Bank account in six minutes or even four minutes. You can take a selfie and fill your aadhar through the net itself. I have not seen that many moves from the public sector banks. State Bank family is different but what about the rest will they survive?
Purwar: Let me look at it a little different way. The economy is growing today at around 6.5 to 7-5 percent. If present government has its way perhaps it will grow at 8-8.5 percent. The impact will be that the size of the economy will double in next five to six years time. Therefore what will happen that whatever we are seeing today all this will scale up very fast.
Reserve Bank of India (RBI) governor has issued these licences aiming that whatever extra growth is going to be in the market gets properly taped. Therefore in the short-run medium-term, yes there is going to be a huge stiff competition.
However, there are lots of inefficiencies in the mid banking segment. Those banks who have not upgraded their technology, those banks who have not trained their staff properly, those banks who have not brought products which are friendly to customers, those banks who do not have proper service to customers in place all these banks will face a lot of heat not only deposits side but also on asset side. I would say that next one-two and a half years we are going to witness huge amount of interesting development in the Indian banking space.
Q: How do you see life for yourself, what is the new normal, lower margins or more opportunities?
Srinivasan: Since you have ventured to look at this as sort of an inflection point and the industry dynamics will change, in two-three years there could be some churn but in the very long run — I am making a very courageous forward looking statement — you must remember they are also governed by their requirements to deliver quality and high sustainable profitability. On the same you will ask them, three years down, why quarterly numbers have not come up.
The flipkarts of the world today are required to start showing profitability. So I don’t think this is going to change. Yes, there may be a point in time some dip will be there like Mr Purwar pointed out there is a certain degree of inefficiencies that are to be corrected and it reminded me of that line I read recently, digital at the core and human at the fore that is where the banks like us will be able to qualify material.
Sharma: As Mr Purwar was saying, the size of the pie is definitely going to increase as we go up to a growth rate of 5-6 percent to 7.5-8 percent. So there would be a space for larger numbers and which is what RBI has in mind. Also the point that these Jandhan accounts have unleashed a lot of potential and those will need to be serviced so it is mainly the public sector banks which have maintained these accounts. They will have to give proper and timely service, decent products and in terms of the products as you said the mid-sized banks, public sector banks could be an issue. If you are looking at a three year space or whatever, maybe some element of consolidation may also happen in the public sector banking space. At that stage, yes, those who are there will have to definitely give a much better level of service and take products to meet the challenge. I am sure that would happen.
Q: Are we going to see a spate of mergers and acquisitions (M&As)? In the last 15 years that I have covered banking, I must have covered 5 M&As, recent was ING Vysya, Bank of Rajasthan, Centurion then Sangli and United Western but now will we see a lot of big fish eating small fish and not so big fish also eating others up?
Purwar: Consolidation in the banking industry is a normal process. Inefficient ones have to be eliminated and have to be absorbed by the more efficient ones. However, I take this opportunity to flag one issue — a very large sector of the Indian economy for example more than 50 percent Indian economy is contributed by services sector and the banking facility in those services sector are negligible. Perhaps these small banks which come up, I hope that some banks try to pressurise on these emerging growth areas.