There is good and bad regulations and good and bad deregulation in the financial services industry. Bad regulation (and good deregulation) involves (and removes) rules that benefit banks at the expense of consumers by limiting competition in the banking industry. There is a global trend toward removing these protections in favor of more competitive banks. In the US this was about making it easier to combine state banks to create national banks. In regions like ASEAN we can expect increased ability to standardize and integrate business processes–key to growing strong regional banks with the ability to complete with the global banks.
A current example is that the Reserve Bank of India (RBI), after a gap of 10 years (4), is granting new banking licenses. Niche banks are being considered as opposed to only universal banks as in the past. India’s banking industry is progressively being opened up to competition from foreign banks (3)
Two licenses were granted in the first round on April 2:
- Infrastructure lender IDFC
- Microfinance company Bandhan Financial Services.
These two entities will need to begin operations within 18 months (2).
Large corporate houses will be considered based upon objectives, credentials, track record and how funds will be deployed (1).
So far not approved by the Election Commission (EC): Aditya Birla Nuvo, L&T Finance Holdings, and Reliance Capital. Janalakshmi, another microfinance company, had also applied for a banking license.
Other applicants under consideration include:
New licenses will be granted on an “on tap” basis (as opposed to in tranches) and as part of a “differential licensing system” (to create differentiated banks as opposed to universal banks). A differential licensing system might create segments such as affordable housing, low-income groups and economically weaker sections. One intent is to avoid creating clones of existing banks.
Entities that fail to secure a license may acquire a stake in an existing bank. For example, there were media reports that L&T Finance, which had failed to secure a license in the first round, “was eyeing a stake in YES Bank”.
Less than 60% of Indians have access to banking services (over 40 per cent of India’s 1.2 billion people continue to remain financially excluded). Increasing inclusion is one aim behind deregulation. (6)
There is an effort to improve the asset quality of Indian banks by reducing the high incidence of non-performing loans.
Banks will also need to find innovative ways to raise capital as there is a general need for more capital as they migrate to Basel III framework (2).
A previous “in principle” banking license granted in 1996 was unsuccessful with the bank going defunct and the well-connected promoter fleeing the country (4).
New banks (and existing banks preparing for new competition) create opportunities for tech firms, such as IT outsourcing and best-in-class technology for digital banking (5). A senior official of a global IT and consulting company was quoted as saying “The technologies used by the financial services company have seen massive changes in last few years. Since the new banks do not have any legacy platform or software, it gives the service providers like us an opportunity to create digital banks of the future.” “Even as it is difficult to asses the size and shape of the new banks at this point, a rough calculation by experts shows that the opportunities for technology companies could be anywhere between Rs 100-600 crore a bank.” (5) I think this equates to about $17-100M USD per new bank.
The overall opportunity size would depend upon the number of new banking licenses–2 for sure, good odds on a third (India Post), and possibly more–but with only 2 of 25 applicants being granted licenses in this round it didn’t seem likely under the previous government. However, the new government says they want more and are writing new guidelines to be ready within 4-5 months (9). There were legitimate concerns behind not granting “industry houses” (large conglomerates) licenses. Granting corporations who are active in real estate a banking license could endanger the economy. Industrial houses, if allowed to enter the business of banking, can play mischief by using public money for their own benefit and denying money to the competition (8).
Software needs for a bank are vast. “Core banking solution: Indian banks typically prefer Infosys’ Finacle, TCS’ BaNCS and Oracle’s Flexcube.” Other software includes: “Data warehousing, CRM, applications for business functions such as finance, HR and ERP; solutions for internet banking, phone banking.” Also required: “Back-office support, application support and maintenance, software upgrade” (5).
Experts name “TCS, Infosys, Wipro, HCL Technologies, IBM, Accenture and HP” as those that would be in the race for getting business from the new banks. Some experts and bankers said that “in line with model adopted by the recently launched Bharatiya Mahila Bank, these new banks may look to outsource heavily and depend on consultants as system integrators to manage their IT infrastructure efficiently. This, they says, is a preferred option these days, as it reduces complexities relating to technology allowing bankers to focus on their core job” (5).
IT vendors stand to benefit on an ongoing basis from these new banks, as a tier-I banks spends 3.5-4.5 per cent of its revenue on technology, said Arup Roy, research director at Gartner. “Time-to-market is a big factor today, and thus it is very important to use technologies like cloud to get support on that front,” Roy said, “RBI has also mandated banks to have branches in rural areas, which will also lead to increased dependence on technology. Given the fact that these are going to be new entities, their annual spending on IT would be heavy and could be around 3-4 per cent of their revenues” (5).
But how can you build out all of the IT for a new bank in 18 months? One idea would be to build it out in the cloud. This has been a successful approach for banks seeking to increasing inclusion in Africa.
- Business Monitor: Q3 2014 India Commercial Banking Report
- http://www.business-standard.com/article/finance/the-challenge-a-bank-account-for-everyone-114041900903_1.html, http://www.business-standard.com/content/general_pdf/042014_02.pdf.