industry

View: Banking sector may meet telcos' fate. Here's how to avert it


By Gaurav Gupta

With the opening up of the Indian economy in the 1990s, free markets catapulted Indian GDP growth rates. Take telecom. The entry of multiple players drove tariffs down, increasing telecom penetration, making India today, with over one billion subscribers, second only to China. India has also been at the forefront of the mobile evolution, with the consumer being the biggest winner.

However, even in telecom, with three players remaining and with a potential risk of being down to two, the consequences of diminishing competition are telling. Call tariffs have gone up 20-50%, and more hikes are imminent with monopolistic tendencies firming up. The consumer will be the biggest loser.

The telecom story can be a precursor to other sectors, especially banking and financial services. A possible telecom-like story seems to be unfolding there. In the last two decades, the total assets of public sector banks (PSBs) have declined from 78% to 61%, and the share of deposits has dropped from 76% to 66%. With PSBs now being consolidated to 12, these banks are now more focused on integration issues.

Non-banking financial companies (NBFCs) came into existence to meet business requirements that banks weren’t able to fulfil. Wholesale NBFCs provided financing against land, equity and customised amortisation to meet specific business needs. Retail NBFCs provided last-mile financing to the unbanked segment.

These NBFCs adopted technology, built alternate credit evaluation techniques, and played a key role in meeting the credit needs of a segment that didn’t have access to formal finance.

Today, NBFCs enjoy only 20% share of total assets, but their penetration in the small and micro segment is higher. There are more NBFCs (with assets under management (AUMs) over Rs 10,000 crore) than private banks and some of them are older.

The private banks, however, have been the biggest beneficiaries. With no legacy issues and a favourable licensing regime, their share of total assets and deposits has increased in the last two decades from 10.5% to 32%, and 11% to 27% respectively. In fact, they gobbled up 60% incremental deposits in 2018-19. Moreover, the market cap of the most valuable private bank is bigger than the market cap of all PSBs put together.

However, in the last 15 months, a few failures in the NBFC sector have put the entire sector in a bad light. Liquidity has been choked, and benefits of transmission of lower interest is not seen to percolate to most NBFCs.

Thus, despite private banks growing exponentially, consumption has been severely impacted, as banks are unable to fill the gaps left by the NBFCs. The result: GDP has slowed to less than 5%. To achieve the goals of financial inclusion, India needs to adopt ‘free market’ principles that will encourage competition.

First, NBFCs need to be positioned in a positive light. A few failures shouldn’t come to impact the entire sector. In every segment, be it auto, cement or steel, there will be some winners and some losers. This is a free market principle. In fact, there have been more failures and larger write-offs in banks than in NBFCs. Alevel-playing field needs to be provided to them.

NBFCs today are primarily dependent on banks, which, at one level, are also looking to compete with these NBFCs. Banks have been reluctant to lend and pass on lower interest rates to NBFCs (they have actually increased lending rates to NBFCs), which then pushes NBFCs to charge a higher rate to end customers.

This dependence needs to be reduced. But a framework needs to be put in place that doesn’t put at risk the entire business model. The way banks have access to liquidity window, perhaps a similar facility could be put in place for NBFCs.

In lieu of this, if a tighter framework needs to be put in place, with greater supervision and more rigorous reporting, then it should be done. We need to create an environment of trust for all stakeholders so that terms like ‘shadow banks’ are done away with.

Second, PSBs need reskilling and retooling to compete with the private sector. Merging NBFCs with PSBs would be an ideal way of doing this. PSBs bring a sound liability franchise, and NBFCs provide new-age technology for credit underwriting and collection capabilities.

Third, we need more banks. There are over 6,000 banks in the US, and over 4,000 in China. This will drive efficiencies, technological innovation and further help meet GoI’s financial inclusion targets.

In the absence of the above, we could soon have a telecom-like situation with fewer players, reduced competitive intensity, and losing consumers.

The writer is CEO, Adani Finserve





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