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R Jagannathan
An interesting revolution has happened while we were all arguing about how quickly, or how slowly, we should be opening up our financial sector. The matter has now been taken out of our hands, thanks to the exponential growth of virtual banks on the Internet and the arrival of new technologies that serve as powerful tools of commerce and leap over regulatory hurdles.
It's no longer a question of whether (or when) we will open up; we already have, and we don't know it. Technology has prised open a side door which we cannot close anymore. We can either like it or lump it. This article is essentially about the financial sector, where the game has changed in both the credit and securities markets (aka banks and stockmarkets).
Consider the banking industry. For years the Reserve Bank and the government have been labouring under the belief that they own the keys to foreign entry. Actually, there is little they can do to prevent foreign banks (or any modern private bank, for that matter) from walking away withhuge chunks of domestic business if they want to. Reason: the new banking technology makes branch banking almost irrelevant. You cannot prevent the domestic growth of the Citibanks and BankAms purely by restricting the licensing of branches. Today, it is theoretically possible to cover the whole of Mumbai with just one branch and a 50-ATM network. On the liabilities side (retail deposits), this is more than clear. You only need to go to a bank to open or close your account. The rest of the business can be conducted over the phone, the Internet or ATMs. On the assets side, most foreign banks don't need a branch network to deliver loans or loan products. These days Citibank is sending vans vending retail consumer loans in some cities and most corporates worth lending to are being given room-service.
One foreign banker with big retail ambitions in India reckons that he can cover the whole country with just 15 branches. When pushed, he says that 50 branches would be the maximum he would ever want in a countryof India's size--even to do the kind of full-service universal banking business he sees himself doing. With less than a dozen branches between them, Citibank and BankAm raised deposits of over Rs 11,000 crore in 1997-98. State Bank, with a deposit base 10 times that size, has branches running into several thousands. When last heard of, Citibank was doing business (deposits plus loans) of over Rs 2,000 crore per branch and BankAm close to that. In 1997-98, State Bank was doing a miserable Rs 23 crore per branch. The future belongs to branchless banks, not SBI. The door to foreign entry is already wide open.
The examples can go on, but we will switch to the stockmarkets to give another perspective. Everybody agrees that there are far too many small stock exchanges and stockbrokers in India. Now what would you think if I were to tell you that not only brokers, but even stock exchanges may become irrelevant tomorrow? You would probably think I am nuts. Well, consider these points and tell me whether you stillthink so.
Today technology makes it possible for market trades to be executed in seconds. Settlements can be done the same day (if you want to), thanks to screen-based trading and demat. In this scenario, you don't need hordes of brokers to push paper into the system. Traditionally, brokers have been important as middlemen since they had to bring the buyer and seller together. However, people have wrongly assumed that you always need middlemen for the job. The truth is: the is important, not the middleman. Today, the computer behind the trading screen is doing the middleman's job that was once done by jobbers and brokers. Tomorrow, one could conceivably use the depository system to reduce the role of stock exchanges themselves. One can already put through private trades through DPs (depository participant) without using brokers or stockmarket trading systems. Tomorrow, if a DP can create an internal auction system for account holders to buy and sell stocks among themselves, who canstop him? The account holders don't need a stock exchange after that--except for price discovery. One day, DPs may be able to offer even that, and you can bet your last rupee that foreign brokers and DPs will be leading the change towards brokerless trading. For those who think that the financial sector will open up tomorrow, this will be a rude wakeup call. The sector was opened up yesterday. Copyright © 1999 Indian Express Newspapers (Bombay) Ltd.
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