The intense competition developing in the Indian corporate sector to acquire bank licences is proving very salutary. As Reliance Industries? announcement of a joint venture with global private equity and hedge-fund DE Shaw shows, companies are exploring new models to make their applications pass the expected RBI scrutiny. Chances are the new joint venture will also pitch for an NBFC status initially. Other industrial houses like the Tatas and the Aditya Birla group, and NBFCs like Shriram Finance, IL&FS, IFCI and L&T Finance are already in the field. The race to stand out from a me-too syndrome is intense. This is good, as it means the new licence holders will push for financial innovation that the Indian banking space sorely needs. While some things will not change, like the competition to mobilise CASA for a cheaper source of funds, the new private banks will have to innovate on differentiated business models that profitably bring the unreached banking area into the fold. There is enough room for positive innovation, like the telecom-based banking correspondent model. In the urbanscape, a similar example is that of life insurance companies piggybacking on mall visitors (mallassurance), apparently in a cost-effective manner. The need for differentiated models has been spelt out in the Survey, which has proposed two types of licences?one for basic banking and another for full-fledged banking.
There are concerns about possible concentration of capital, but as RBI spells out norms for corporate governance and group and individual borrowing limits, the competition can be expected to do the rest. It will hinge on the outreach created by the new banks. The opportunities include tapping opportunities in credit cards, consumer finance and wealth management on the retail side and fee-based income and investment banking on the wholesale side. These will require new skill sets in sales and marketing, credit and operations. As banks no longer enjoy the windfall treasury gains that the decade-long secular decline in interest rates provided, they will have to cater to the needs of consumers who are demanding enhanced institutional capabilities and services. PSBs have been stymied by their highly similar pattern of operations that has left little room for local banking. With total banking credit being less than even 50% of the GDP, there is a lot of space for new banks to develop robust models.