Thursday, January 16, 2014

Will the Banking Industry in India Be Revolutionized in 2014?


There has been news running around that the Reserve Bank of India (RBI) has agreed to grant new Licenses to private players who want to start Banking Operations in our country. Am sure you would've read it in papers and this is something the market is excited about. The stock market is volatile as ever but Banking Stocks have become interesting again. The idea behind this article is to understand more details reg. this new development and what to expect from the Banking Industry in 2014...

The Current State of the Banking Industry in India

In India we have many Scheduled Commercial Banks and hundreds of Cooperative Banks. These are banks that received their "Banking Licences" from RBI many years ago and have been successfully functioning across the country. There was an article titled List of Registered Banks in India where I had listed down the list of banks in our country. You can Click Here to read it.

Coming back to the point, even though we have numerous banks, the truth is that every 1 in 3 Adults in our country has no access to Banking Services. So, the Banking Industry still has a lot of room for growth in our country. Imagine - so many crores of people in the country without Banking Services means - there is so much untapped Business in the Market. If I were someone who owned a Bank in our country, I would be licking my chops after reading this previous setence...

Is this new Licensing Initiative by RBI Good?

Of Course it is good.

From an Economy Perspective - If Banks can penetrate areas where we are missing them, this would add a lot of 0's to India's Economical figures. Even today a lot of people in our Villages store their cash physically in Vaults and Lockers. Imagine how much it would help boost the economy if all that money came into the market as investments or as liquid cash in circulation...

From a Customer Perspective - Any Industry where there is competition, the Customer Wins. Up until a decade ago, Public Sector Banks were dominating our banking industry and developed the kind of Arrogance that isnt good for the customer. It even shows in the behavior of their staff. Even today most of the people who work in Public Sector Banks are arrogant and dont really care about the customer. With the arrival of Private Banks into the market, these guys are slowly changing their behavior. Private players like ICICI and HDFC have revolutionized the banking industry in the country and brought in more of a customer centric service which was the much needed wake up call for our government owned banks. With the arrival of more private players into the market, the competition is going to get tougher and banks will need to improve their services in order to retain their customers.

How Many People Applied for New Banking Licenses?

Given the fact that we have many Conglomerates with sizeable financial backing coupled with the fact that Banking in India is a lucratice business and there is tremendous potential for growth, we would have expected numerous applicants for these new licenses.

Unfortunately, the truth is that only 26 people are in the running for these new licenses. Even the largest business houses in India - the TATA's and Mahindra's have gone out of the race.

Is it Easy to Get a New License?

The Banking Regulations of our country are very tight and the rules that the RBI has set forth are very strict. The moment you learnt that the TATA's and Mahindra's are no longer interested it tells us how easy or difficult the actual working space is when it comes to Banking. Some of these rules are:

1. The company that is applying for the license has to have a minimum paid up capital of Rs. 500 Crores
2. The company that is applying for the license must have a successful track record of at least 10 years with sound credentials
3. The company that is applying for the license must have a business model that is aligned with Banking
4. The New Bank must be set up through a wholly-owned non-operative financial holding company (NOFHC)
5. Statutory Regulatory Requirements like - Cash Reserve Ratio (CRR), Statutory Liquidity Ratio (SLR) etc have to be maintaind from Day One
6. 25% of the New Banks branches must be set up in rural centers of the country that do not have any Banking Facilities available
7. The New Banks are also expected to meet the 40% priority lending guidelines as well.

The list is pretty long but I have just listed down the key or most important rules. As you can see, the first 4 points should be much easier than 5, 6 and 7. If you ask me 6 and 7 will be the most difficult because - Setting up Branches in rural centers means banks would have to compromise on their margins and incur additional expenses until the branch becomes profitable. Priority Lending in rural areas usually means lending to farmers and other people who have no access to loans which could potentially be a risk from a Purely Business Stand point.

Some Last Words:

The New Banking licenses are expected to be announced by the end the current financial year (FY14). The related costs and investments towards setting up branch networks and rural financing will be the key challenge that companies will face. Given the stringent guidelines - it will be even more challenging to set up new banks. But a realistic impact on financial performance of the currently established banking companies is only expected to come a few years down the road. Until that happens, we cannot expect any sort of Revolution.

This year is going to be difficult and the performance of the Banking Stocks will be in-line with the performance of the Economy. Good Companies are always a great choice from an investment perspective. Even if the stock price gets beaten down in the short term (1-3 months) in the long run, they are always profitable investments. So, choose good banks with strong fundamentals and profit making ability and stay invested for a couple of years. You will definitely make a good profit.

At the end of the day, I believe that in the long run, this will revolutionize the Indian Banking Industry. If not 2014, 2015 may be the year the industry gets revolutionized!!!

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