For last some years, we have been hearing a lot about the new banking licenses that RBI intends to issue. But corporate governance and ethical dilemma of giving licenses to big corporate houses were the reasons for which RBI was holding this decision for a long time. Finally when RBI opened up the application with strict guidelines, 26 new applications were received. On one hand, the top business house like Tata Sons, Aditya Birla, L&T Finance applied for the banking license while on the other hand there were surprise entries from government entities like IFCI Ltd & TFCO along with the very little known Smart Global Ventures. So, what could be the aspirations for banking licences in a country where very few banks are finding it difficult to manage and increase profitability? Does India really require more banks?
There has been a debate for a long time regarding issue of new banking licenses. Nearly 40% of the Indian population are unable to access the banking services. In addition to that, most banks that are accessible are government banks. To expand the process of inclusion, government is unable to allocate money or dilute their stake in government owned banks. In this hefty situation government has no option but to give more number of licenses to players with considerable capacity. But, who are these players who applied for the banking license?
- Aditya Birla Nuvo,a part of the Aditya Birla conglomerate.
- Bajaj Finance, part of the Bajaj Group.
- Bandhan Financial Services, a microfinance lender.
- Edelweiss Financial Services, a diversified financial & broking services company.
- IDFC, a finance company created especially for Infrastructure Development but lately been in Mutual Fund, Investment Banking and Private Equity.
- IFCI, a financial advisory company.
- Indiabulls Housing Finance Ltd, part of the Indiabulls group.
- India Post, part of the ministry.
- India Infoline, part of the IIFL group, which offers various financial services.
- INMACS Management Services Ltd, which provides management consultancy, corporate finance, audit, tax and legal advisory services.
- Janalakshmi Financial Services, a microfinance company.
- JM Financial, with Vikram Pandit as a prime investor.
- LIC Housing Finance, a unit of LIC, the country’s largest insurance company.
- L&T Finance Holdings, part of India’s largest engineering company, Larsen & Toubro.
- Magma Fincorp, a finance company that gives loans for vehicles, gold and small enterprises.
- Muthoot Finance, a gold loan specialist.
- Reliance Capital, a ADAG group company.
- Religare Enterprises, a financial services firm.
- Shriram Capital, part of the Shriram Group
- Smart Global Ventures.
- SREI Infrastructure Finance, an infrastructure projects finance company.
- Suryamani Financing Co Ltd, a financial services provider.
- Tata Sons Ltd.
- Tourism Finance Corp of India, financer of tourism-related activities.
- UAE Exchange India, a foreign exchange services firm.
- Value Industries, affiliated with Videocon Industries
These entries include many of the well known companies with some surprise entries. So, what could be the possible motives of these many players to be in banking business? It can be the greed to earn profits by leveraging on their success which they have achieved in past some years, cross selling of products through their existing network like LIC, IIFL, Indiabulls & Religare &/or to be a part of financial inclusion. It is to be noted that when RBI issued banking license to Kotak Mahindra bank, Mr Uday Kotak became the India’s first billionaire banker.
The RBI is likely to announce regarding approval of new banking licenses in the first quarter of 2014. In 1993, when RBI announced for private players in Banking Industry, it received 113 applications and of which 9 got the green signal. Looking at the current situation & psychographic conditions of the country, what factors will actually decide the future and success of the upcoming bank?
The Popularity of the Group which is backing the Bank: According to RBI guidelines, all the banks are compulsorily required to open 3 branches in rural area to get a single license to form bank in Cities or developed areas. Under such circumstances, the bank with lower brand face value will find it difficult to be trusted by people. LIC, which is one of the most popular brands in India, will find it easy in trustworthiness factor compare to INMACS management Services Ltd.
The Investment to setup new banks: India has seen a rapid growth in real estate sector. The banks which does not possess lands in different cities will have to take space on rental basis, the rates of which are also quite high these days. The companies which have enough offices in different places will find it easy to start banking business. Yet one time setup cost will be costlier due to advanced Technological changes, the expectation of consumers and the competition.
The core Business: The primary business of the newly formed business will also impact the performance of the bank. For example, Shriram Group is popularly known for its vehicle Financing. Can it lure more customers, except Vehicle finance? Will people feel better to see it as a Bank? That’s the question which time & branding will hope to answer.
Competition & Trends in the Banking Industry, will play an important role to make new banks either perform or perish. Existing banks have high levels of NPA, corporate restructuring of which are creating huge losses. The new banks will not be able to sustain such pressure from the beginning.
Situation of country: The condition of India is not exciting enough for foreign investments. In addition to that the IIP is also falling for quite some time. The Banks have reduced rates to boost industry but export centric business is not seeking funds. In this condition, how will they be able to sustain and generate profits? That’s the biggest strategic question that new banks will have to answer.
Rate of Interest: It’s all about interest rates in Banking Industry. New Banks will definitely have to adopt a strategy to pay higher interest rates on saving account deposits to lure customers. Apart from cross selling of the products, the banks will actually have to focus on its duties of landing and borrowing according to RBI norms.
Let us hope for the best for whosoever gets the banking license.
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