Only 26 aspirants for new bank licences in a country of over 1.2 billion. That is no gold rush.
But excluding RRBs there are nearly 90 scheduled commercial banks. The number of aspirants represents 28 per cent to the existing flock. If all get in, the banking universe can explode.
The right number of banks for a country is always debatable. The US has thousands of banks/savings and loan associations (S&L) from community level to global.
The UK, on the other hand, is still dominated by a few banks and a large number of building societies with specialisation in mortgage. Both the models have their own challenges. Our context is financial deepening and inclusion.
What is new?
Most of the aspirants smell of finance. Large retail and successful telecom companies (telcos) bring to the table immense experience in supply chain management. Their competition-enhancing methods would help here.
Adopting their business and operating models would radically change the banking landscape for good. Those with a finance background would bring risk assessment and pricing to the table.
Mobile telcos have brought in a paisa tariff structure with huge customer convenience. It is a new paradigm. No industry till date can match this. They earned their spurs amidst scorching competition.
Mobile telcos have demonstrated their ability to roll out and sustain services. Joint ventures of banks, telcos and retail have a high potential to transform the banking landscape, particularly in reaching out to six lakh villages.
It can be a game-changer for banking, if not for bankers. Banks, being closely regulated, enjoy public trust.
Customer loyalty
Industries such as retail, hospitality and aviation have strong customer intimacy models.
These industries, besides telecom, know customer behaviour best. Hence, banks are miles behind in customer intimacy, their claims notwithstanding. Hugely successful banks forge strong partnerships with these industries. The Finance Minister has said on more than one occasion that he does not like clones and he would like banks to be different from each other.
What are the options for banks in terms of differentiated business models? New aspirants can make a choice and not ape the existing models.
Business models
One option is to position oneself as a product specialist.
Trying to be everything to everyone has not worked well. The financial supermarket model is passé. It is not just about niche, but being more focused on customers.
The second option is to be a world-class distributor. These models are dominated by partnerships.
Banks, particularly PSUs, come out with a large number of products but do not excel at distribution. The low number of products per customer is a symptom of this malaise.
Over 80 per cent of the products do not account for, individually, even 1 per cent of the total revenue. Most of the relationships start and end with the savings bank.
One more option is to be a dominant player in advisory and wealth management business. There is a huge opportunity in making money by offering advisory services to not so wealthy customers, particularly a burgeoning middle-class.
Another business model is to position oneself as a demand aggregator in mortgages and consumer business.
Business models built on net interest margin (NIM) are fragile. Deep knowledge of customer needs, some not known to customers themselves, cost-effective and efficient service delivery, and service value differentiation are mandatory components of any good business model.
In today’s age and world it is difficult to distinguish between business and operating models.
Retail player Amazon has a strong IT component. Banks too need to go digital, especially in the retail and payment sphere. Digital models are high-value and low-cost.
Experience elsewhere as here has shown that commercial banking is no substitute for development finance, particularly for financing infrastructure. Catch-all business models are elusive.
Leadership, management
It is not merely the right kind of leadership but also the right size at the start which is critical to deliver optimal execution. Banks need to maintain a balance between creativity and control of risk. The ability to use information and not just technology effectively is an imperative.
Banking is information business and as such good quality data is central to any business. Banks are still in love with their management information system, which is essentially backward looking.
They can gain immensely by deploying predictive analysis and not just stick to descriptive analysis.
Technology and information are two distinct disciplines. New aspects such as data mining can make a huge difference. No business model will succeed without customer focus.
Life-time value, number of products per customer and less customer churn are central to any sustainable business model. The retail industry has demonstrated this well.
New Expectations
Can the new banks wean away customer behaviour from gold investment and towards financial savings?
Is this not a function of real interest rates? Or do they gatecrash into savings of the incumbents’ pool? Can the new entrants improve declining financial savings? But given the finance background of most of the bank licence aspirants, would it be more of the same?
(The author is former CMD, Corporation Bank. Views are personal)