New banks that would emerge from the 26 applicants for a new banking licence will need to focus on lending to the retail customer and the small corporates, in contrast to the big corporate-lender banks of the past.
Industry experts say new entrants will have to build a retail franchise simultaneously as they expand their corporate network in order to corner market share from the existing players.
In the 1993 licence rounds, most banks started off as corporate lenders before making inroads into the retail market. However, new banking entrants cannot emulate this as the current 26 public sector banks and 20 private banks are already vying for a share of the corporate loan book, which itself is growing at a near decade low.
You cannot do a YES Bank or a Kotak Bank model any more and start with the corporate side first. You will need to build the retail franchise simultaneously, says a banking consultant.
Industry experts say it is futile to fight for only the corporate loan pie as the intense competition could wipe out any benefits.
Non-banking finance companies would have an edge here as their retail franchise would already be in place. Even big companies could leverage their presence in the retail market to build a banking portfolio.
For instance, Shriram Capital can use the network of its group companies, Shriram Transport Finance and Shriram City Union, in small towns and rural areas and leverage on the existing vast network of centres.
On the other hand, large corporate applicants such as the Tata Group may have to invest heavily in setting up
brick and mortar branches to draw
in the retail customer. However,
their brand legacy could speed up
A FICCI survey shows that 88% of market participants feel that the condition of new banks opening 25% of their branches in unbanked areas in a year will expand banking reach to mid-tier cities and rural areas.
However, industry experts caution that growth of new banks business and size will be slow. Newer players cannot compete in size with existing banks; they will need an edge in innovation and efficiency, says Monish Shah, senior director at Deloitte.
Shah adds that margins of NBFCs may compress once they become banks, as they would have to pass on the benefits of low-cost funding to customers.
Most public sector banks margins are in the range of 3.5-4%, while private sector banks pocket a neat 4-4.50%. Business from lending to micro and small enterprises earn handsome margins as these are given above the banks base rate.
The healthy margins are largely from the retail segment where most loans are given at a spread above the base rate and deposits are taken at lower interest rates.
However, as the competition intensifies with the entry of new players, margins will invariably come down, feel experts.
Banks that were set up following the 1993 licence rounds forced public sector banks to ramp up their customer service models by adopting technology.
HDFC Bank, ICICI Bank and Kotak Bank have delivered banking at the doorstep of the customer. The customer interface of the bank at the branch end has been reduced through ATMs, phone banking and net banking as well.
New entrants may change this landscape further by bringing in efficiencies and delivering customer service at even lower costs, say experts.
For instance, the turnaround time in sanctioning and disbursing a retail loan could shrink further and charges for various services could reduce.
There is still a lot of scope for improvement in customer service, especially in the retail segment, says Shinjini Kumar, director at PricewaterhouseCoopers .
It is clear that the slowdown in the economy and credit growth will make it tough for new entrants to acquire business. The norms by the regulator will also have its costs. Nevertheless, new entrants will bring in much-needed reduction in costs to customers through more efficient business.