Setting up a new bank? Pause and proceed

Reserve Bank of India has finally issued the much awaited guidelines for new bank licences and set in motion the process of accepting applications from eligible promoters aspiring to set up the next generation of banks.

The ‘feel good’ in business circles, especially considering that the RBI has allowed applications from quarters that were speculated to be possibly excluded, is clearly visible and understandable. The fact that the RBI has indicated a meaningful timeline and evaluation process is equally welcome.

While there is already a well-known list of so-called high-probability licence hopefuls, one should expect a lot more applicants to throw in their hat — may be some of them just trying their luck at getting a ‘coveted’ bank licence, though the RBI guidelines envisage somewhat pristine track records for a decade.

The following discussion intends to present to licence-hopefuls some vital pointers based on generic principles and issues.

Different situation

The first and the most important reality that every wannabe needs to factor in is that the business and the competitive context now is completely different from that obtained in early 1990s when the HDFCs and the ICICIs of the world entered Indian banking.

This in no way means that those were easier times to succeed but that the challenges were very different.

The entrants now have to factor a very different set of incumbent players, their level of maturity, customer segments served, product and business processes and customer satisfaction drivers.

So if you are the promoter putting your Rs 500 crore on the table, then you better require your A-team of the bank project to present to you clearly the defined business opportunity in this overall context.

Second, and a related aspect is, if not already done, every promoter should invest energies in taking into account the lessons from the paths traversed by the new generation banks of 1990s — those that are hugely successful, those who became also-rans and those who left the track midway.

Source of differentiation

Third is the need to convincingly define for oneself the source of differentiation. The RBI guidelines say every new bank from day one is on core banking solution. In reality, this is nothing of a regulatory issue but merely the reflection of what is the bare minimum infrastructure to start running a bank today.

In fact, the banks of 1990s also started as fully computerised operations, but at that time the investments they so made constituted a significant source of competitive advantage and started paying off from day one.

But today, whether core banking solutions or modern delivery channels — simply put you on par with rest of the players.

By themselves they do not afford any opportunity for super-normal gains, while, on the other hand, existing players on sunk investments have attained certain scales and ROI is already flowing.

Fourth pointer is in a way a consequence of what has been discussed — the need for a licence differentiated business model and strategy.

To understand this, let us consider some possible examples. Everyone knows that MSMEs (micro, small and medium enterprises) as a segment still present an opportunity and a new bank can possibly have this segment as one of its focus areas and, accordingly, strategise.

Geographic strengths, leveraging sector expertise, product group excellence, and so on, can enable a bank to have specific business models and plans, going beyond generalities such as ‘innovative products for customer delight’.

Conviction about model

Finally, looking at the macro numbers, there is undoubtedly a large opportunity in the business of banking in India and a decade from now, we will, in all likelihood, look back at winners of this phase of transformation.

At the same time, ask any banker, and he will say the competition is severe. An applicant who demonstrates an honest appreciation of this paradox and an equally honest conviction over the relevance of his proposed business model should get the licence.

And from the RBI’s point of view of granting licences, while the ‘fit and proper’ aspects would be non-negotiable and rightly so, it would be equally vital to require the aspirants to convince on very sound business models, strategies and plans. Let us get some players who can really take the competition to the next level.

New licences, even if they are in batches of small numbers, for those whose business propositions are understood with confidence — both by the promoters and the RBI — will do a lot good to the system. Therefore, pause and proceed.

(The author is a management consultant. The views expressed are personal.)

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