Taking different roads to the same destination

The diverse gathering at the launch of a book on HDFC Bank on a rainy weekday evening in Mumbai earlier this month presented a snapshot of the country’s present-day banking landscape.

Apart from the bank’s top management including its Managing Director and CEO Aditya Puri, the invitees were a mix of chiefs of private sector banks and public sector banks (PSBs), with State Bank of India Chairman Rajnish Kumar as the chief guest.

In recent years, with the economy showing an eagerness to grow, requiring in turn greater credit, the banking sector is seeing a plethora of new players, and existing players taking on a variety of roles.

Changes down the years

In the 50 years since banks were nationalised, the country’s banking infrastructure has undergone a sea change to meet the requirements of the people and the growing economy.

This started in the early 1990s, when guidelines were issued for licensing new private sector banks. In 2015, the Reserve Bank of India also started giving licences for small finance banks (SFBs) and payments banks, which were aimed at financial inclusion.

According to RBI data, there are nearly two dozen PSBs, 22 private sector banks, 10 small finance banks and seven payments banks, apart from foreign banks and a number of regional rural and cooperative banks.

“It would have been just impossible for public sector banks to meet the requirements of the population and set up branches across the country. Though public sector banks still have the major responsibility for financial inclusion, each kind of bank has had its own role to play in the economy,” said a former RBI official.

“It’s like comparing a cricket match to a football match. One can’t compare PSBs with private banks as profit is the main objective of private banks while public sector banks have more of a social responsibility,” said CH Venkatachalam, General Secretary, All India Bank Employees Association.

Today, almost every household in India has a bank account.

Banking for all

With the move towards digital payments and formalisation of savings, business correspondents and SFBs have come into prominence, providing last-mile access to customers and banks.

The RBI’s annual report shows that the combined deposits of all scheduled commercial banks in FY18 stood at ₹1.17-lakh crore. Balances under the Pradhan Mantri Jan Dhan Yojana have crossed ₹1-lakh crore, with 21.41 lakh beneficiaries.

Conscious of the huge potential in small businesses and low-cost transactions, many private banks, too, are rolling out initiatives for the MSME sector as they try to acquire more customers in the segment. Lenders such as ICICI Bank and YES Bank have launched many initiatives for such businesses and self-employed persons.

Similarly, private banks are also now keen keen to tap into tier 2, 3 and 4 cities as they try to get more retail customers on board. Mergers like that of Bharat Financial Inclusion Ltd (BFIL) with IndusInd Bank and Capital First with IDFC Bank (to form IDFC First Bank) will create economies of scale and be able to tap into a much wider retail base.

Next wave fo reforms

The next wave of reforms in the banking sector could possibly be triggered by the acquisition of a PSB by a private lender.

While the Centre has embarked on mergers and consolidation amongst PSBs, it has till now adhered to the plan to retain a 51 per cent stake each in the banks.

However, many large private banks are keen to acquire stakes in small PSBs, if offered. “Every private bank will be interested in buying up a PSB given they have the capital resources,” noted an executive with a private bank.

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