I recently read an interview where the person interviewed said we don’t need more banks. He argued that we instead need more efficient banks which are better capitalised, we need consolidation amongst banks and five more banks won’t help inclusion.
While I can’t disagree with these objections, I strongly believe that we need more banks … mainly for one big reason – INCREASED COMPETITION. My University of Chicago brainwashing still remains!
Twenty years back Indian banking was dominated by the public sector banks. The foreign banks were highly efficient and profitable, but they remained on the fringes. The first wave of banking brought in a host of banks. Some ended up as disasters or don’t exist today – Global Trust Bank ended up within Oriental Bank of Commerce and HDFC Bank over the years gobbled up Times Bank, Centurion Bank and Bank of Punjab. But the remaining banks have grown and done very well. HDFC Bank, ICICI Bank and Axis Bank have all become neighbourhood banks and have forced public sector banks to become more efficient.
Twenty years back none of us thought that these new banks would be so powerful. So while all the banks were not great successes, the ones that survived did brilliantly and permanently changed the banking landscape of the country.
This year I have travelled to remote parts of our country. In January I was in Nagaland and Manipur visiting remote private-sector schools. And I was very happy to see branches of HDFC Bank all over the place (and proudly sent back pictures of these branches). Recently my wife, kids and I spent four weeks in Ladakh where we mainly set up libraries (with an NGO called 17000 Ft Foundation) in remote government schools. We were all excited to see HDFC Bank branches and ATMs at many places on our trip. And I was asked to talk to HDFC Bank to set up branches in many more places. This highlights the role that these ‘new’ private banks have played in promoting financial sector inclusion. What the past 20-odd years have also taught me is that we can’t make change overnight in all sectors. Some of these processes take years and investors, entrepreneurs and managers need to keep this in mind and have patience. Most of the banks that were in a hurry in the 90s do not exist today.
Let’s look at the current euphoria on banking licences. First, it is useful to note that the banks of the early 90s which survived are those that were mainly sponsored by financial institutions – ICICI, HDFC, UTI and IDBI. This is an important point to note. Second, these banks had professional managers running them. Many of them were run by bankers and financiers who had only domestic financial sector experience – so foreign bank experience is not necessary. And finally it is important to remember that the ride wasn’t always smooth. In our early days at HDFC Bank the market critically compared our slower growth story with the scorching pace being set by banks like Global Trust Bank and IndusInd Bank.
Yes, we need more consolidation in the public sector banks. But that is a political mine field involving state politics and trade unions and is more difficult to achieve by a weak coalition government. Instead, by having more banks being set up (which are mandated to focus on inclusion) we will have more competition and that will force better pricing and services to customers. Dr Rangarajan said at one of my earlier investor conferences that more competition helps consumers.
Finally, the appointment of Raghuram Rajan, a professor at the Booth School of Business at the University of Chicago, as the next RBI Governor is a great step forward. A lot of people were worried that in this election year the government would appoint a rubber-stamp central bank chief who would be flexible in monetary policy and doling out bank licences. Raghu is not that type of person – which is why after a long, long time I am feeling a bit optimistic that this government has the balls to take a tough, market-friendly decision.
(Disclosure - I was a part of the start-up team at HDFC Bank and set up IDFC Private Equity, the PE arm of IDFC, which has now applied for a banking licence)