Banking industry to brace itself for competition

The banking industry landscape is set for a salutary change. So far the industry has endured the public sector banks’ patchy performance interspersed with the recent breezy spell of private banks’ entry on a limited scale. The Reserve Bank of India is aiming to foster competition and innovation in order to promote efficient service delivery to end-users.

In June-July this year, the RBI gave licenses to IDFC Limited, a non-banking finance company (NBFC) and Bandhan Financial Services Pvt Ltd, an NBFC-cum-microfinance institution (MFI), to carry out banking services across the country. Subsequently, in August, licenses were granted to 11 payments banks which are ‘niche’ or ‘differentiated’ banks with the common objective of advancing financial inclusion. The RBI announced its ‘in-principle’ approval to 10 applicants for setting up Small Finance Banks (SFBs).

Both payments banks and SFBs have been recommended by the Committee on Financial Inclusion headed by Nachiket Mor. Their objective: tackling the thorny issue of delivery of meaningful products and services to new classes of clientele by leveraging new organisational structures and business paradigms. In fact, the creation of SFBs was earlier floated by the Committee on Financial Sector Reforms, chaired by the current RBI Governor Dr Raghuram G Rajan in 2009. 

Examining the relevance of small finance banks, the Rajan Committee argued that there was substantial change in the environment to call for experimentation with licensing of small banks. It is interesting to draw out the distinguishing features of payments and small finance banks because unlike payments banks, which can take deposits but not lend to the government, the small finance banks essentially undertake both deposit-taking and loan-making functions. In playing this dual role, they are the miniature versions of commercial banks. In essence, both payment banks as also SFBs, christened as ‘differentiated banks’, have a distinct remit to meet credit and remittance needs of small businesses, unorganised sectors, low-income households, farmers and migrant workers.

The 10 entities that qualified for the licenses to broach their banking operations as small finance banks are spread across the country, and are mostly drawn from the successful existing micro-finance institutions. In a well-spread and diverse network, these banking services can be accessed by the urban poor (Janalakshmi and Ujjivan) and the people in rural hinterland. They are spread from the South (ESAF Microfinance and Equitas, Chennai) to the east (Utkarsh, Varanasi), the North-East (RGVN Microfinance, Guwahati) to the West (Disha, Ahmedabad and Suryoday, Navi Mumbai) and to Punjab (Capital Local Area Bank, Jalandhar)and Rajasthan (Au Financiers, Jaipur).

Despite its conservative and cautious cast, the RBI Governor has unequivocally stated that “in order to get sustained growth we need more competition, especially from new entrants who are in a better position to reach hitherto excluded parts of our economy”. That is the reason why after a decade of no new entries, Rajan is confident that the country will see two new private banks this year as well as a large number of payment banks and SFBs next year with more licensing available “on tap” — that is if the applicants duly conform to the laid-down criteria.

Expansion of access to financing for the hitherto excluded and unbanked sections will definitely unlock the potential and value of the economy over the long haul. For SFBs, the challenges are no less formidable in this context since they bear the additional onus of deposit collection which is a costly affair in the inception stage. The commercial banks which are currently in this business have expertise and experience accumulated over the years. But the baby-steps that are needed to equip the banking sector to face the blast of competition have begun with the regulator RBI ready to hand-hold the new entrants. 

The author is a Delhi-based economic journalist