Small start


New payment and small finance banks could pose a threat to public sector banks

After granting eleven licenses for payment banks, the Reserve Bank Of India also granted select license for small finance banks (SFBs) to ten entities, of which eight were already micro finance institutions (MFIs). This set the ball rolling on the new era of banking. With smaller bases and regulatory compliance, these would start the trend of increasing the base of small investors getting into banking.

The need of compliance was necessary after we saw multiple frauds break out in the unorganised chit fund and other such cooperative schemes, owing to which small investors lost their deposits. Within small investors, the ‘trust’ element is manifold, and the deposit base from small deposit had reached huge proportions. The recent Supreme Court judgement on the Sahara scam and the need for supervision by the Central bank saw regulators hurry up with the implementation and allotment of licenses for the same. The base would be small, but most allotted are prominent business houses with strong credibility.

What would be the impact on the existing private and public banks is the key thought running through business circles and banking analysts. For starters, it would not impact most private banks as they run as a ‘coterie’, and the size of the new banks would hardly be worrying as most have minimum deposits far in excess of any small depositor and would not be impacted by the same. Secondly, most of their net interest income is from fee-based activity with collateral and loans of different categories, which any way would not be in the reach of the small depositor. Thirdly, the low deposit base would mean economies of scale, as manpower and subsequent handling of accounts would be untenable for most private banks, for whom costs are crucial and the focus is on larger corporate houses with return on capital being the major driver.

The main threat would be on public sector banks, where minimum deposit guidelines are very flexible and small depositors are the core strength of obtaining large base effect. Their monopoly could be under threat, as small depositors can get better access to service and more bang for the buck from the new payment banks and SFBs, with both offering better initial returns through low net interest margins.

The new banks will also gain from innovation and better utilisation of employee strength, which, in turn, could lead to parting of more returns to the depositor initially to garner more market share. With fast growth in rural India and wages catching up, better quality of loan advances would see the new banks prosper as their key domain knowledge, coming on the back of industrial brand franchise and market share in each respective industry, would see brand loyalty flow their way by default.

In a nutshell, the implementation of the same could take time as breaking into thick generation banking may not be easy but the advent of alternates will open a variety of choices. Also, the supervision by the Central bank and tough regulatory coverage will make it a win-win situation, both for the retail small investor and the new incumbents.

Bhasin is executive vice president, markets and corporate affairs, at India Infoline Ltd.

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