BANKS SET TO BECOME LESS PROFITABLE; SOME NEED TO DIE
Two weeks ago when DCB announced it is planning to increase the number of branches by 50% to meet competition from small banks, the market beat down the stock price by 50%. But most other midcap banks were spared. I think the market is being myopic about the power of the new guys in the banking space.
Just take number of accounts. After the Jandhan movement opened 127 million accounts , the total number of bank accounts in the country is 210 MILLION.. The total number of telephone subscriber accounts is over 1 billion. Airtel, which now has a banking licence can actually cajole its 232 million subscribers to open accounts with it. That alone is more than the total bank accounts in the country. Airtel has already done the KYC. It has credit scores for these customer going by their record of clearing phone bills.
Likewise Idea has 163 million customers, that may be three times the number of bank accounts in SBI, the largest bank. Idea will have access to fertilizer- customers of Indo Gulf, small scale units that buy from Hindalco and Grasim and Ultratech. That's a massive data base of customers to whom it can package credit from AV Birla money.
On Friday governor Rajan said RBI is looking at credit for products bought on the net. Imagine the kind of service the phone guys can provide. Rel Jio which has tied up with SBI has a Reliance Fresh and Reliance Trends already in place. PayTm has already captured the urban payments market. It is a small walk to begin providing credit even without being a bank.
All these new players come with oodles of cash to burn at least during the early phases. Like Yes and Kotak, there is a possibility, these new players will pay slightly more than the legacy banks for the basic savings account. They already are big brands. Is it tough to expect many of their customers, especially their younger clients to open their first bank account with their phone company rather than the local Corporation Bank or Dena Bank or LVB or KVB or Karnataka Bank?
At the other end the small banks may not take that long to learn the basics of due diligence to create an asset book. Janalakshmi, Equitas, Ujjivan are all led by bankers. Equitas already has a book of about 2000 cr by way of loans to commercial vehicle owners. These small banks will also eat into the SME borrower segment of banks.
To be sure it wont be a cakewalk for the new entrants. The small banks are mostly yesterday's MFIs. Their cost structure required a lending rate of 20%-plus. But can they manage at lower lending rates remains to be seen. Also how will they woo new depositors in the face of competition from payment banks, remains unanswered.
To what extent the payment banks can tie up with loan providers, digital retailers and mutual funds and make money purely on the service they render also remains to be seen. They can burn cash for a year or two. Ultimately they have to show profit.
Meanwhile the payment scene itself is changing. National Payments Corporation of India (NPCI), the umbrella organization for all retail payment system in India, has taken up a new initiative called "Unified Payment Interface" . The new interface is designed to enable all account holders to send and receive money from their smartphones with a single identifier - Aadhaar number, mobile number, virtual payments address - without entering any bank account information. Will this stymie payment banks? Or will they find a way to compete and/or integrate with it with their superior service and relation with the customer. Also, it isn't clear how soon the UPI will be up and running. It is possible if it is late, the payment banks will have taken away the game.
The legacy banks are showing some fight in the face of the payment bank challenge.. HDFC Bank, ICICI and SBI all have mobile wallets and some of these have already tied up with digital retailers. If you buy goods this Diwali through the wallets of some of these banks, you may get it cheaper than if you buy from the vendor. Even midcap banks are fighting back. Federal Bank allows you to open an account called "selfie" in 4 minutes by taking a selfie and sending your KYC details like aadhaar over the phone.
There is one category of banks which hasn't shown any fight - the PSU banks. Other than SBI, which has launched a mobile wallet and also tied up with Rel Jio for the payment bank - the rest of the PSUs are in a state of stupor. Bank of Baroda didn't have a CEO for over a year. PNB didn't have one for a little less than a year. The new "private" managers of BoB have so far not shown any signs of warming up to the new banking dynamics. As for the Denas, the IOBs, the Allahabads, the Corporations, one has heard nothing at all by way of preparing for the coming competition.
It is clear the low fund cost advantage from current and savings account(CASA) will end for the legacy banks. The thinning of margins comes when the burden of non performing or bad loans is at its height. In any industry, increase in competition thins margins. In banking, the number of players is set to increase from 45 in 2014 to 66 by 2016. That's a 45% rise in the number of competitors. Some of the new guys come with cash and staying power and without a legacy of bad loans.
The market fears for DCB. I fear for all banks. The midcap PSU banks look set to die. And this death wont be a loss but a gain. Even the most ardent proponents of PSU banks have begun to admit that bank nationalisation is an unmitigated failure. The advent of payment and small banks may be an opportunity for the country to cleanse out at least some of these PSU banks that have become irreparable failures. PSU banks have been hotbeds of political patronage for a very long time . Which is why I worry if the government will have the political will to kill them or let them die. One hopes these entities are not kept alive at the cost of the taxpayers' money, as has been done with Air India.