Adviser, Strategy at Bandhan Bank Ltd, & Consulting Editor, Mint
About five weeks after Kolkata-based Bandhan Bank Ltd started its operations, IDFC Bank Ltd had a quiet launch in Mumbai this month. They had fought it out with two dozen contenders, including a few corporate heavyweights, to get the Reserve Bank of India’s in-principle approval one-and-a-half years ago. Barring the fact that the bosses of both the new banks—Chandra Shekhar Ghosh, managing director and chief executive of Bandhan Bank, and Rajiv Lall, vice-chairman and managing director of IDFC Bank—are non-bankers, they are as different as apples and oranges.
Lall, 58, an Oxford University graduate in politics, philosophy and economics, did his PhD from Columbia University. Before taking over as MD and CEO of the erstwhile Infrastructure Development Finance Corporate Ltd in 2005, he was heading the Asian economic research wing of Morgan Stanley Asia Ltd. In the past, he had worked with the World Bank, Warburg Pincus and Asian Development Bank, besides teaching at Florida Altantic University. Ghosh, 55, is the son of a small sweet shop owner in Agartala, Tripura. After getting an MA in statistics from Dhaka University, he worked with BRAC, a non-governmental development organization in Bangladesh, before setting up Bandhan in West Bengal in 2001. He started out by giving micro loans from his own life savings of Rs.2 lakh.
Bandhan started operations with 2,022 doorstep service centres, 501 branches and 25 ATMs across India. About one-third of the branches are in rural and unbanked pockets. In the past few weeks, it has ramped up its branch network and added substantially to its legacy customer base of 6.7 million. It will continue to serve the so-called bottom-of-the-pyramid segment and add small and medium entrepreneurs to its loan portfolio while collecting deposits from all, including high-net-worth individuals and corporations. It does not want to dabble in corporate loans, at least during the initial stage.
IDFC, in contrast, is positioning itself essentially as a smart corporate bank that will soon have a consumer banking wing. It started with 23 branches, of which eight are in Mumbai, New Delhi, Bengaluru, Kolkata, Chennai, Ahmedabad and Pune, offering corporate and wholesale banking products. The rest of the 15 branches are in Indore, Hoshangabad, Harda and Khandwa districts of Madhya Pradesh, serving the unserved. The focus is on the ease of doing transactions, using state-of-the-art technology.
In some sense, both are challenger banks and will force the high-street banks to redraw their strategies. Big private banks in India and a few state-owned banks too have taken note of Lall’s passion for technology and are on a spree to introduce tech-based new products for customers. Their objective is to take the wind out of IDFC’s sails. Similarly, some of the banks have started making serious inroads into rural India to try and check Bandhan’s expansion. Under Indian banking norms, a bank needs to have an exposure to the so-called priority sector consisting of farmers, small entrepreneurs and others to the extent of 40% of its loan book. If they cannot lend directly, they can give money to other intermediaries such as microfinance organizations to be on-lent to this segment. Many banks had been doing that but now a few of them have also started taking direct exposure to the small borrowers.
We are seeing a new wave of competition in Indian banking and this will intensify as the turf is being disrupted. Between 1994 and 2014, 12 new banks were born, but not all of them have survived. In the past seven weeks, two more have made an appearance, and in the next 18 months, we will see 21 more—10 payments banks and 11 small finance banks. Payments banks can collect deposits of up to Rs.1 lakh, provide payments and remittance services, and distribute third-party financial products. They won’t be able to give loans and issue credit cards but they can provide debit cards and Internet banking services. The small banks will be subject to all prudential norms like any other commercial bank and they would need to give 75% of their loans to the so-called priority sector, and 50% of the loan portfolio should constitute small loans of up to Rs.25 lakh. While payments banks will remain confined to their niche, successful small banks can graduate to universal banks after a few years.
The story does not end here. At least four foreign banks, including DBS of Singapore, have approached RBI for local incorporation. Once they are locally incorporated, they will enjoy the freedom to open more branches and can even buy out weak local banks. RBI may also allow some of the strong urban cooperative banks to convert themselves into commercial banks. Finally, banking licences—both for universal banks as well as specialized entities such as small banks and payments banks—are expected to be on tap.
So, be prepared to see huge disruptions in the Rs.90 trillion banking industry in Asia’s third largest economy. The payments banks are expected to eat into the fee income of regular banks by offering smart payments channels using mobile telephony, while small banks will fight pitched battles with big banks in different geographies for deposits. Bolstered by a bigger branch network, locally incorporated foreign banks too will lure depositors; they will also develop sophisticated corporate and personal banking products.
As the competition intensifies, Indian banks will be forced to innovate—not only for growth but also to stay relevant. We have already seen many incremental innovations in the past few months and the pace will gain momentum as newer banks appear. All this will benefit the customer. At the moment, banks are slow in paring their loan rates when RBI cuts the policy rate and even after they cut their base rate or minimum lending rate, they do not pass on the full benefit to their borrowers, citing different reasons.
A loan rate cut dents profitability, and the banks love their investors more than their customers—any day. This will change soon.
Cover Image: Chairman and Managing Director of Bandhan Bank, Chandra Shekhar Ghosh speaks at a press conference in Mumbai on June 17, 2015. Ghosh, founder of Bandhan Financial Services, beat India's financial titans to win a prized banking licence for his microfinance firm that lends to poor borrowers.
Tamal Bandyopadhyay, consulting editor at Mint, is advisor to Bandhan Bank. He is also the author of Sahara: The Untold Story and A Bank for the Buck.
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