Since access to new technology will be critical to their success, PSU banks must be allowed to be part of NUEs
If we deprive our nationalised banks—funded by taxpayer money—of the opportunity to be part of a second NUE, it could set them back because this is not just about profits, it is about staying relevant in a fast-changing financial system.
Given the government’s stated objective of encouraging technological innovation locally, it is unfortunate that state-owned lenders have been disbarred from becoming shareholders in NUEs (New Umbrella Entities). The government is apparently stalling their participation on the grounds it would amount to a conflict of interest given most PSU banks are shareholders in NPCI. This reasoning defies logic. It is irrational to believe the stakeholders in NPCI, which has had a great run, would not continue to be supportive of its endeavours given UPI is, after all, an established platform. The objective of allowing more payments platforms is to foster competition and, thereby, innovation. Depriving the largest lenders—State Bank of India and Bank of Baroda—of an opportunity to gain market share in what is going to be the world’s biggest and fastest-growing digital retail payments market is patently unfair not just to the banks but also to the country.
If we deprive our nationalised banks—funded by taxpayer money—of the opportunity to be part of a second NUE, it could set them back because this is not just about profits, it is about staying relevant in a fast-changing financial system. It is about the learning to be gained by partnering with technology giants and private sector lenders. This sort of a learning opportunity must not be under-estimated.
PSU banks are already far behind their private sector peers in the digital arena, with the possible exception of State Bank of India. Frontline private sector banks are now seeing 40-50% of their business being digitally driven by their proprietary platforms and partnerships with fintechs. Even SBI cannot afford to remain complacent. Lenders today need to focus a lot more on technology if they want to grow their customer base, in much the same way the fintechs are doing. Payments is the first step to winning customers; while cash may still be popular, digital transactions are growing by leaps and bounds. Digital payments have grown ten-fold in the last five years to $450 billion and are tipped to hit $1 trillion very soon. Retail digital lending has grown at compounded 40% plus over the last seven years.
From vendors of vegetables to vehicles, everyone is embracing technology even as the population of smartphone users nudges 700 million. Fintechs have moved on from payments and are selling a range of financial products—mutual funds, insurance, etc—online and have already reached 150 million consumers. Some fintechs like Pine Labs and BillDesk are members of many consortia looking for a licence. While it is true that public sector banks today account for about 65% of bank deposits—a core ingredient for success in the financial system—this share could fall with increasing digitisation; if their value is not to be further eroded, state-owned banks must be part of the new retail payments networks. The fact that foreign tech giants like Facebook, Amazon, Google and card players Visa and Mastercard are all in the race, as are large corporations like those of the Ambanis, Tatas and Mittals, is an indication of how important a play this is. It would be unfortunate if the same banks that have been compelled to open millions of Jan Dhan accounts, which have compromised their profitability, are now not allowed to bid for an NUE licence.