In the first part of this post, I summarised and linked to some of the recent changes to the Indian banking landscape and the move towards wider financial inclusion. Payment banks and small bank licences issued by the Reserve Bank of India.
While shifting the status quo, the central bank has relaxed some regulatory requirements. However, the new players still need to adhere to capital adequacy, priority targets and foreign ownership restrictions.
And having fulfilled their regulatory obligations, the new licensees need to deliver cost and service advantages and distribution, including the ‘last mile’. In addition to improving cost-income ratios and customer acquisition, many of the small banks will now need to recapitalize to dilute foreign ownership under the new guidelines.
Given that the majority of new small banks were once microfinance institutions (MFIs) with high foreign shareholding, the Indian domestic market will need to absorb listed and private equity offerings over the next 12-18 months. With the awareness created by the central bank and Government financial inclusion initiatives, I would expect domestic capital to be available at competitive levels. Shareholders, who, hopefully, insist on high governance standards and ensures that management and technology focus on responsible, profitable lending.
On the other side, a new payments bank has seen participation from the largest national incumbent, and while some of the other payments banks may not need capital, they are likely to enter into strategic partnerships to strengthen their positions.
While the payment banks are likely partners/collaborators with traditional banks and small banks, they will need to shore up their own cost and distribution advantages to attract high transaction volumes. Financial education, customer and merchant incentivization is a huge undertaking which drives up costs, and while business correspondents can extend reach, costs would also be driven up.
With the scramble to build distribution, create compelling consumer propositions and connect underserved India to the 21st century, the next 2 years will be an amazing period in Indian financial services. With so many opportunities and unmet needs, it’s possible that we will see much more collaboration than consolidation in the early days. A few hundred million reasons.