For the past three years now, the subject of new banking licences is engaging our minds. What are the possible business models we will like to see in the new approved application? Well, at the outset, there are huge expectations from new entrants from various stakeholders and the application ought to address these.
The government and regulator are driven by a few factors with varying degrees of emphasis. Inclusive growth and stability are the prime drivers. For fuelling economic growth, we want a much larger banking sector in size and, therefore, capital. For inclusion, we need the sector to reach out to the financial outsiders. The regulator will largely emphasise on inclusion, but with a keen eye on financial soundness and systemic issues.
The banking industry and deposit holders also have substantial expectations from the new entrants. The industry has not been able to establish or develop a viable business model for inclusion. Also, it is eagerly waiting for leadership in the area of efficiency monitoring and low-cost delivery. The industry will benefit, almost in keeping with the 1992 experience, if new ideas evolve around the correct mix of technology and efficient use of manpower, and network to conduct banking services for this new segment of the population.
The new banking application will have to take cognisance of the above factors. There is market reality that the Indian banking is about cash reserves, SLR mandatory investments and priority sector lending. This makes the order of cross-subsidarisation particularly very high. Then there is ALM and duration mismatch to worry about. Only serious players with deep pockets and with long-term commitment and vision will survive here. The regulator is well aware of this and will want to see this in the business models. There will be a clear effort to separate the men from the boys as the regulator will examine the models. Intentions and fiction, however well-drafted, will be separated from detailed work and a good understanding of the markets which are to be served. If the application will treat rural banking and inclusion lightly, it will not be appreciated.
The first key aspect in the business model would be the target customers and the geographies and markets in which they are present. A good understanding of the economic activity in the markets to be covered is essential. The products and the delivery mechanism will also depend on the markets and the customers chosen. Both the human and technology touch will be largely around an understanding of these markets.
The second key aspect will be cost of operations. The applications should address the way costs will be managed. Those who have a good experience in working in smaller markets will address this effectively. It is important that the application should attempt to design workable and practical mechanisms rather than subsidisation through other distribution structures. The bug term viability and scalability are critical in this regard.
The third critical aspect will be the aspect of products, which will be drawn around the customer segments and geographies chosen. Some of the applications will certainly look at creating larger payments and settlements capacity and capability, where technology and volumes will play a larger role. The banking sector, and even the existing participants, are going to invest in this part of banking to support the alternate channel initiatives to support mobile and Internet banking. From the present data on the number of transaction alerts which are put out through mobiles, the number of banking transactions which are conducted on Internet banking platforms and mobiles, it is evident that it is going to take longer for the alternate channels to establish a larger presence. Though the number of alerts put out by the banking sector on a daily basis is very large, the money transfer transactions on these platforms have to be growing to larger scales to establish a meaningful share in the delivery mechanism. An application may address some of this banking by more innovative means but there are limitations with regards to volumes and revenue generation.
Then again, the present banking is devoting substantial amount of resource and attention towards less cash transactions at the working level. It is unfortunate that the segments of geographies and the economy, which the new applications will address, have much smaller share in plastic use and we may not find any substantial game-changing approach to the cards business in banking (both debit and credit cards). Perhaps the new applications may look at the use of cards for customers who are covered under direct benefit transfer (DBT) programmes.
The fourth aspect in the business models would be to balance the portfolios across corporate retail and treasury. The larger presence in any one part of banking would create skewness and make the quality of balance sheet vulnerable to the economic cycles.
To conclude, all aspects of the application, namely the structure issues, business plan and governance framework, will be very critical. The overall application should assume a larger underlying principle that banking is more of a responsibility than a business opportunity.
Ashvin Parekh is partner and national leader, global financial services, Ernst & Young. The views are personal