Middle-class bubble
The sudden influx of new players, though, raises a very pertinent question: is there room for all?

Historically, it has been observed that when an industry receives as much attention as retail finance is enjoying today, it invariably founders. At the very least, it witnesses a shake-out. Cement, automobiles, steel and plastics all corroborate the point. Hyped demand lures greedy entrepreneurs leading to a glut in the market.

Take the case of the mid-sized car segment. Four years ago when the industry was liberalised, there was a mad rush to set up car manufacturing capacity. Today, car capacities in the country are more than double the ‘middle class’ demand.

Retail banks too are taking refuge under the rapidly growing ‘middle class’ Indian consumer (see tables) segment. As YK Basu, head of retail branch banking, HDFC Bank notes: "People are talking about 125-150 million middle class. Even if you take about one fourth of that - 25-30 million - it is a huge market and is rapidly growing".

This might be of some relevance as far as low value consumer durables are concerned. But how much of it is to be discounted when one considers something like a car.

Given the existing pay packets, for an average salary earner (monthly salary of around Rs 10,000), it takes 25 months to purchase an entry level Maruti 800 and 55 months for a mid-sized car like Maruti Esteem. This excludes the interest cost of at least 15% per annum. Compare these figures with those in the US where an average salary earner ($2,500 per month) takes not more than nine months to buy a mid-sized car.

This is not to refute the fact that the bane of consumer financing in India has been non-availability of financiers. Those few that had entered the market in the past were active only in the metros and charged heavy interests. For example, till some time back, car loans were available at a hefty interest rate of 24 per cent. Some financial intermediaries still offer personal loans at such absurd interest rates.

Also, there was neither consumer awareness nor easy accessibility. Interest rates were heavily in favour of financiers. The situation today is much more consumer friendly. Housing loans are disbursed within 10 days and at competitive interest rates, without any premium charged for faster service.

While easy availability and declining interest rate regimes would surely boost consumer financing, the moot question is whether size will be enough to hold all the players.

Beginning of the struggle
What this increased activity means to retail banking players is pretty obvious. Intense competition and sleepless nights. The signs are already visible. The dynamics are changing fast.

Car finance is a classic case. Today, the highest interest rate around 18 per cent is probably offered only by a few uncompetitive NBFCs. Co-operative banks offer rates as low as 15 per cent.

The signs are even more clearly discernible in the housing finance sector. On the heels of SBI and ICICI aggressively entering the housing finance market, HDFC shifted gear by slashing rates to 13.5 per cent.

Price wars have entered the next phase with SBI cutting rates to 12.25 per cent. Corporation Bank too has joined the fray, pegging its rates at 12.5 per cent.

While the price wars rage, there is another fear (the worst perhaps!) that plagues the industry that of impending commoditisation of retail products.

Cloning of any finance product is a matter of minutes. Hence, any innovation is relevant till the time it is not duplicated by others.

"While there is a lot of advantage that you can get by being innovative, given that product life-cycles are getting shorter and cloning being a one hour job, innovation would only score that much. The cost of innovation, therefore, may or may not justify the product life-cycle or the advantage that you can have through innovation," says Muralidhara, business head, American Express Bank.

Take the case of Standard Chartered. It was the first bank to introduce global access to its domestic credit card holders. In any other industry, Standard Chartered would have been in a commanding position by virtue of this facility. However, within a few weeks, Citibank too introduced the option on its credit card, only to be followed by American Express.

The point is that as players increase, financial products will tend to look similar. The only difference would then remain in their pricing, which would trigger off price wars as currently witnessed in the housing finance segment. And the resultant economies will not permit this industry to be perceived as lucrative.

On-line banking: saviour or butcher?
Possibly the most potent factor hastening the disintermediation and commoditisation processes are the electronic channels.

It is already happening in the US and Europe.

Direct Line, a telephone-based insurer, grew from scratch to dominate the car insurance market in just a few years.

First Direct, a telephone bank, literally upturned the banking industry by serving customers much better than its brick and mortar counterparts.

Sharelink, a telephone broker, had a major impact on the broking industry, before it was taken over by Charles Schwab, an Internet discount broker who has become a nightmare for conventional brokers.

Virtual banks have sprung up overnight gobbling up conventional banks’clientele. Security First, a pioneering virtual bank, is a case in point. From a virtual start-up in October 1995, it mopped up deposits of over $14 million by 1997.

Electronic channels essentially demolish the entry barriers in an industry that has traditionally needed huge capital investments on account of branch networks. The ease with which players can enter the field makes these channels the most powerful force that can hasten disintermediation. India, though, hasn't seen much progress on this front, mainly due to security fears and lack of proper e-commerce regulations. But it is only a matter of time before virtual banks become a reality in India.

The process has already begun. The Mahindras have set up automartindia.com, a site that brings buyer and sellers of old vehicles together. While very few options are available at this moment (only two to be precise), the day is not far when the web site starts offering the browser a slew of options. Satyam Online's carstreet.com and cybersteering.com are sites that provide information on various car finance options. Rupeeesmith.com offers all personal finance products on the Net.

To stay ahead in the rapidly evolving on-line banking world, most banks and non-banks have set up their web sites offering information at the click of a button.

Although contents and features vary from site to site, most provide their pricing details. Those who do not will be eventually forced to submit the information as more and more people select the Net or the telephone over travelling to a brick and mortar branch.

Even today, a search, say on car loans, on any India specific search engine like khoj.com gives a long list of offerers. One such search for a three-year loan for buying a Santro gave some astonishing results. The equated monthly installment (EMI) (per lakh) was the lowest in case of ICICI (Rs 3,465) followed by HDFC Bank (Rs 3,515). Then came Kapoor Auto Finance, a Citibank dealer, at Rs 3,565 and lastly, Federal Bank (17.34 per cent) at Rs 3,582.

The customer is en route to becoming king.

What matters most: price or service?
There is another side to all this the bankers' side. Ask bankers and their unanimous opinion would be that price is certainly one of the most important factor in consumer behaviour; but not the only factor. They would also point out that the personal financial products market is more than just about selling a product. It is about relationships, about building them and maintaining them.

Relationships are more important and "once a customer is satisfied with the service offered, he has little incentive to shift to other banks," says Muralidhara.

Granted, the customer also looks at the service levels before selecting a financial intermediary. But how many people are truly that affluent to do relationship banking. To answer the question, only 6 per cent of the metro population. And this segment would anyway prefer to be served by foreign banks.

What about the vast middle and upper middle class? There is very little incentive for them to stick to one bank. Switching costs in Net banking, for example, is negligible. It has been observed in developed countries that because of low switching costs, customers are cherry picking among financial institutions.

What then stops them from hunting for a bargain? The only requirements are a PC and an Internet connection, both of which are fast becoming affordable to the common man; even in India, thanks to players like Worldtel who are pioneering the community Internet model. By setting up Internet kiosks at every telephone booth in the south, Worldtel aims to provide the same convenience as does a telephone to every single person.

Speed to succeed
The question now is that of retaining customers. It is no longer sufficient to just attract customers. In order to retain them, banks need to offer what they desire at the click of a button.

More importantly, products need to be competitive. Today, banks face competition from virtual banks (banks without any conventional branch), whose lower overhead costs mean higher deposit rates and lower loan and service rates. Competition would only stiffen further.

At the same time, the product profile of a bank is equally important. Retaining clients means offering more than what a traditional bank does. The customer looks for facilities like bill payment and presentiment, mutual fund, insurance, advisory services, broking services, et all. But as the market gets commoditised and same products of different banks are available at almost the same price, the next most crucial factor that would come into play is the speed of delivery.

This is where the NBFCs and co-ops fancy themselves. Being mostly regional players, they have close relationship with their clients. They are, also, in a better position in terms of customer service and quicker response to the evolving business environment.