India Ratings Chief: Indian Banks Need New Model to Succeed

December 30, 2013 Posted by India Briefing Reading Time: 3 minutes

Dec. 30 – The CEO of India’s leading rating agency, India Ratings & Research, has suggested that new banks in India will need to develop a fresh business model to profit in rural areas and mitigate risks associated with technology and cash management.

After a nearly decade-long hiatus in the processing of applications for new banking licenses, the Reserve Bank of India (RBI) is currently shortlisting applications from 25 entities including large conglomerates such as Anil Ambani-led Reliance Group, Aditya Birla Group, Bajaj, Larsen & Toubro and Religare. Other current applicants for banking licenses include India Post, LIC Housing, IDFC, Shriram Group, Indiabulls, JM Financial, India Infoline and Edelweiss.

India Ratings CEO Atul Joshi commented on the resumption of application processing by noting that “if we roll back to 2002-03, not many banks were into areas like housing loans, credit cards, personal loans and vehicle loans. Some people saw an opportunity and they rushed into it, followed by others. Some of them got it right and some of them got it terribly wrong. In some areas like personal loans and credit cards everybody got it wrong at that time, from foreign banks to private banks to PSUs.”

Joshi added that “the question that comes to mind is not if there was money to be made through financial inclusion, if money was to be made in rural banking within the existing framework, people would have rushed there — nobody lets go of any opportunity where money is to be made.”

Rural Focus

According to Joshi, new banks must formulate new strategies and banking frameworks that enable the inclusion of India’s primarily cash-based rural population.

“People have cash and they would go to [the] bank to deposit cash. Also, it is more like depositing cash and not much about borrowing cash. Do we have enough currency chests? Do we have [the] necessary back-end infrastructure to manage that kind of rural banking?

“There is also the governance issue and there are regulations like limits of INR 49,000 for cash transactions. Besides, banks can not disburse loans in cash. All these things would need a re-think… things like technology, cash limits, calculations of cash reserve ratio [and] cost of transaction.” he said.

India’s rural areas are well-known for having a strong cash-deposit base, yet with limited demand for borrowing, insurance, the purchase of mutual funds and other more complex financial products.

“There are issues like sales force, misspelling, financial education, awareness about technological devices and language issues. A lot of back end things would need to come into place, which would be good eventually, but that would require a complete transformation…what we need is a right model, which breaks into profit making in a few years. For the new banking licensees, I would want to see what kind of banking model develops over time,” Joshi said.

However, the India Ratings CEO also expressed some skepticism regarding whether banks were the ideal institutions to promote the development and financial inclusion of rural Indians.

“[This is the] right time for India to again do a little bit of introspection and start thinking whether we need specialized institutions to fund infrastructure. We had in the past specialized institutions like the ICICI, IDBI and IFCI, and similar structures can be created again for financing infrastructure. I think it would be much better if we have specialized institutions that would have specialized knowledge, and they would give specialized funding rather than having banks do these fundings.”

Risks

Atul Joshi also noted several risks banks would need to mitigate when attempting to reach out to India’s rural population.

“What we are looking into is a model that is more of technology-based, beyond the brick and mortar branches, or a fairly large access to technological devices and technological applications that would help take banking to the people. The problem that I see is that we do have the mechanisms to control, supervise, and govern that kind of banking models, with the existing knowledge of the bankers and at the regulatory levels. I think we need to develop a new set of skills at both the levels to provide and govern such kind of banking transactions,” Joshi noted.

“With the available internet security, with whatever we believe, we continue to see frauds, we continue to see these frauds happening even at some of the most technologically advanced banks.

But if we get into fairly intensively technology driven banking, then we need to think in terms of the entire control over technology. I don’t think we are there yet, despite whatever we claim. That is one of the biggest challenges,” he said.

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