The Hindu Business Line : E-trading: A strategic imperative for banks

The country’s leading public sector bank said the other day that its own broking arm SBICAP Securities would be offering an electronic trading platform in listed stocks for its customers. This would supplement an arrangement it already has with a private stock broking firm. Other banks such as Punjab National Bank, Union Bank, Bank of India etc., too have announced tie-ups with broking outfits to offer such a facility. It is just as well that a number of public secto r banks are taking to offering an online trading platform in listed stocks for their customers.

The concept of a bank cross-selling its third-party financial products to supplement its core business of accepting deposits and on-lending it to borrowers at a profit has come to be well recognised within the industry as a key component of a successful business strategy. It seeks to leverage a bank’s core strength of a customer network to generate higher profits than may be inherent in the banking relationship that it may have with its customers.

Global trend

Indian banking industry too has fallen in line with the global trend and has made a beginning with small forays into such areas as selling mutual fund units or insurance policies. Viewed thus, the decision to branch out into the business of offering an electronic trading platform in stocks of listed companies for a fee is but a logical extension of its desire to deepen the relationship with its customers.

Moreover, the fabric of customer loyalty is beginning to get frayed at the edges in a world of increasing customer choice and changing cultural ethos that looks down upon permanent relationships. So the more facets that a bank evolves to the relationship that it has with the customer greater are the prospects of such a relationship enduring and possibly even flourish in the future.

Market volume

Just how big is the brokerage market? One can only hazard a guess. The National Stock Exchange data show that trades done by brokers on behalf of clients who are neither FIIs nor domestic financial institutions such as mutual funds, banks and insurance companies (principally retail clients) is in the region of about Rs 10,000 crore per day on an average. The figures for BSE add up to an additional sum of Rs 5,000 crore per day.

Historically, delivery volumes are typically a fifth of the total turnover. That should give us a daily average delivery based volume of Rs 3,000 crore covering both the exchanges. Brokerage charges on non-delivery based transactions are in the region of one rupee for every Rs 10,000 (.01 per cent) of turnover while on delivery based trades it could be five times (as much Rs 5 for every thousand rupees).

For the retail trade figures shown above, the broking industry gets a fee income of roughly Rs 4,050 assuming that stock exchanges function for roughly 250 days in a year.

Of course, how the banks and broking houses that will provide the trading platform split the commission is a matter of discussion between the two. But this much can be said.

The pie is fairly large and, moreover, can only get bigger as stock ownership begin to catch the fancy of more retail customers of banks and internet penetration becomes deeper.

Huge potential

Consider it from another angle. There are currently 1.1 crore demat account holders under the two depositories functioning in the country. In contrast, there are 30 crore customers with the banking industry. There is a huge opportunity that is waiting to be tapped.

The data on household savings too point to a situation where investors are beginning to shed their earlier outlook of conservatism that favoured bank deposits and small savings schemes of the Government and take to stock ownership. The portion of household savings that went into stock market investments went up by more than two-third having accounted for Rs 48,228 crore in fiscal 2006-07 from Rs 29,712 crore in the previous year. In contrast, bank deposits could grow by only 53 per cent having moved up from Rs 2,74,693 crore in 2005-06 to Rs 4,22,039 crore in 2006-07.

Funds diversion

No doubt, bank deposits still enjoy a dominant position in the share of incremental savings of the household sector. But what is interesting is that every time the stock market was on a bull run, the general public has favoured the diversion of slightly larger share of household savings into the stock market than had been the case earlier. We saw that happen in 1999-00 when the Y2K led boom in IT stocks took the market to record highs.

Quite naturally, the general public invested Rs 16,308 crore in the stock market, which meant that they put nearly 20 per cent as much money as they put in bank deposits. In contrast, when market went into a prolonged slump in late 2000, the evidence of diversion of money away from the stock market in favour of bank deposits was no less striking.

Money in stocks

In 2004-05 for instance, stock market attracted just a little over five per cent of the money that went into bank deposits. As the market turned for the better in 2005-06 and continued its good run in 2006-07, the results were clearly evident in the proportion of household savings that the stock market managed to attract. In absolute terms, it rose nearly four fold (3.66 times) up from Rs 8,113 crore in 2004-05 to Rs 29,712 crore in 2005-06 and then again to Rs 48,228 crore in 2006-07.

With experts pointing out to the possibility of India enjoying a long period of corporate boom in the years ahead, there is every possibility of the public fascination with the stock market not only being sustained but even grow further. The banking industry may not be able to stave off flight of savings into the stock market. But opening up of a stock trading platform to its customers tries to at least capture some of the opportunity lost in such funds diversion.

Late entry

The public sector banks, which are late starters into this ‘stock trading’ game, the delay has proved particularly costly. They have seen the two newly licensed private sector banks, namely, HDFC Bank and ICICI Bank which offered depository accounts and e-trading facilities, ramp up deposit growth far more dramatically than their counterparts in the public sector.

Consider the case of Corporation Bank. It had as on March 2003 Rs 21,725 crore in deposits. That is just marginally short of the figure of Rs 22,376 crore for HDFC Bank. Yet in the four years that followed, the latter’s deposits grew three-fold while Corporation Bank had to settle for a growth that is just two-fold! This was also the period when electronic ownership of shares took off and internet based trading became a reality. Was the HDFC Bank’s growth then due entirely to superior customer service or partially at least a byproduct of newer offerings to customers?

That is the question that PSU banks may have to ponder over.

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