With over 20 new players set to enter the banking space, in varied formats — universal, small finance and payments banks — the market can be assured of plenty of action in the coming years. Customers who were till now served by traditional banks will be spoilt for choice, having the freedom to transact with a host of new players, who are likely to offer more convenience and a wider reach. But these players have a long way to go before they start competing aggressively with existing banks on lending and deposits.
Lending opportunity Two players — IDFC and Bandhan — have bagged universal bank licences, which allow them to lend and take deposits just like existing banks. While these players will compete with traditional banks on all grounds, they are unlikely to offer any meaningful competition immediately.
“Each of these players will take three to five years to evolve their business models. Competition will take time to build,” says Rajiv Anand, Group Executive & Head - Retail Banking, Axis Bank.
Moreover, many players concur that there will be ample lending opportunities for everyone, once the economy revives. Currently, banks have diversified into various segments, depending on their competencies and target segments. Most private banks have focussed on the retail segment, spanning housing, commercial vehicles, auto and gold loans. Lending to small and medium enterprises is another space that many banks are active in. Public sector banks, on the other hand, have been at the forefront of providing funding to the core sectors, such as infrastructure.
“Our domestic market is very huge. So the entry of a set of new players is not a concern for existing players. There is enough opportunity for all, and existing banks only have to decide for themselves as to how to make use of this opportunity,” says Ravi Narayanan, Senior Executive Vice-President, Branch Banking Head (West), HDFC Bank.
While new banks will compete in their own niche areas, existing banks will be able to leverage their core strengths and entrenched presence, according to B Sriram, Managing Director and Group Executive for National Banking, SBI.
“We have about 16,500 branches and 55,000 ATMs. Fifty five per cent of SBI’s domestic lending is retail — including agri and SME. We have seen healthy growth in the retail and small business segments, and we should be able to continue this growth,” says B Sriram.
He adds that new universal banks will provide different types of banking — one is based on the financial inclusion model (Bandhan) and the other is known to be a large infra lender (IDFC).
“As far as HDFC Bank is concerned, over the last couple of years we have positioned ourselves as a large universal bank with a wide physical footprint and varied range of products — be it cash management, retail loans, trade and forex, wealth and credit cards. So, we have created a strong footprint to serve our customers better,” says HDFC Bank’s Narayanan.
Micro lending As for competing with small finance banks in the micro-lending space, some banks have already stepped up their efforts to cater to this segment. “HDFC Bank is the largest player in the organised small-finance segment. Over the last few years, we have brought around four million families above the poverty line. We have created market linkages for these families through joint liability groups. Moreover, this is not an outsourced business. Our bank’s executives have reached out to remote areas in villages and tribal areas. It is done in a manner that is profitable not only to the bank and shareholders but also to borrowers. We are already a small-finance bank,” says Narayanan.
While there may be ample opportunities for lending, raising low-cost retail deposits will be a challenge for new players. For existing players too, maintaining their current market share in current account and savings account (CASA) will get tougher over the next couple of years.
Aside from the two new universal banks, small finance and payments banks too will compete for such deposits. Payments banks can accept deposits of up to ₹1 lakh.
“Both formats — small banks and payments bank — might see some impact on existing banks’ business, especially in areas like CASA mobilisation and micro lending. However, we believe that the advent of these banks will go a long way in deepening the overall market, reduce cash and bring more customers into the banking fold, thereby providing increased opportunities for all players,” says Axis Bank’s Rajiv Anand.
But new players will find it difficult to scale up their deposit base, at least in the near term. Aggressive branch expansion to widen the deposit base will mean higher costs and lower profitability. Kotak Bank and YES Bank, which were awarded licences over a decade ago, have taken this long to ramp up their CASA deposits. YES Bank has a CASA ratio of 23 per cent while Kotak Bank (after its merger with ING Vysya) has 34 per cent. Leading private banks, such as HDFC Bank and ICICI Bank, have CASA ratio of 44-45 per cent.
Moreover, existing players believe that the level of engagement with the customer will determine the ability of a bank to garner a larger share of deposits. “HDFC Bank’s wide product range and superior turnaround time will enhance its ability to raise deposits,” says Narayanan.
Axis Bank’s Rajiv Anand believes that given the wide range of product offerings by banks, payments banks will have to come up with something disruptive to be able to compete with existing banks.
The key is to build a long-lasting relationship with the customer, according to SBI’s Sriram. “Funding will depend on how well you are geared to serve the customer. If you have more products linked to a traditional deposit product — a home loan, demat account, or cross-selling insurance/MF — then the relationship becomes stickier,” he adds.