Follow
Luis Miranda

Why We Need More Banks

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)

Post Your Comment
Name
Required
Email
Required, will not be published
Comment
All comments are moderated
 

Comment
Yes I agree with Luis that good functioning of private banks(though with fat charges) has brought about a change in public sector banks.The services in banks like SBI have improved considerably and the response is pretty good though most of the staff still retains poker faced look.But change is there ...and that is for good.
Suresh, we have all got to get used to paying fees ... If you pay peanuts, you get monkeys. The other way is to cross-subsidise.
Luis, You bring important historical perspective to this complex subject. Allow me to share some thoughts from my years as a bank regulator, IMF (in the Raghu years!), and emerging market investor. Of course, nobody really knows the optimal size of a banking sector any more than they know the same for cars, washing machines, or rice. However, even more so than cars and shirts, we need financial intermediaries to be profitable, because without profits and capital, the entire financial system is at risk. Does competition promote bank profitability? Probably, but recent banking history in the developed world suggests unchecked deregulation can have devastating consequences. The real (pun intended!) question then is: does India have sufficient financial depth to service its productive opportunities? This goes to heart of the quality of India's real economy and its risk-taking infrastructure. The focus should not be on how many banks, but how prodcutive is the Indian economy? As the economist Joan Robinson once said "where enterprise leads, finance follows". I tend to agree, but keep a good eye on those bankers, entrepeneurs, and government officials Raghu..don't let them too cosy..otherwise we do end up banking the unbankable! Thanks for the post.
Marcel, I agree. One of the challenges of India's banking sector is the dominance of state-owned banks, which have their fair share of governance challenges because of misaligned incentives. Some of these bank chairmen are friends of mine and are doing a great job, despite their constraints. But the successful private sector banks have helped drive efficiency and have been profitable over the past 20 years. I agree that the larger issue in India is the underlying economy and the financial sector is tied to it. By the way are you the same Marcel Souza who is my cousin? Luis
Oh no! My secret is out..I am indeed the same cousin. And you hit on it, Luis: perverse incentives are not easily unwound. Whether it is Development Banks in S. Korea, Japan's and China's Construction Banks, US's Government Sponsored Enterprises (Fannie, Ginnie), or even perhaps the World Bank, these institutions tend to outlive their usefulness in the economic development timeline as vehicles of public policy; and leave behind moral hazard on a disproportionate scale (not to mention captive buyers of governement debt). All over the world, credit markets do fail small enterprises and communities: the modern day answer might well be to leverage technologies and fix these communities and countries first; a healthy banking system will surely follow. Keep up the good work, Cousin!
Capital structure etc ...development will be faster , inclusive and will meet locals needs
Luis - well articulated article. We should consider development community banks - like US - to address some of the development needs at interior locations . Currently banks are asked open branches at interior locations. With community banks , with specified objectives , rules , capital structu
Shrini, I don't know too much about US development community banks.
Luis great to hear about your visits to the fat east and seeing banking there. I am very keen to see more banks coming and more so in the areas of micro banking like the "Grameen" bank in Bangladesh. Since our banking penetration is approx. 20% in rural areas there is a need for induction of more inclusive banking for the masses, now that many public schemes are linked to adahar cards, incentives for banks to enter..
Rajesh, I hear mixed signals fom banks regarding rural penetration and many do not give loans in rural areas. we need inclusive banking, which is something the new banks will have to do.
a.balasubramnian
Luis in his own style has covered all - how inclusion and competition have achieved tangible results in banking so far and gentle hints on ingredients for new banks to succeed and to raghu as well- coming from some one who was part of HDFC Bank original team he does not mince words- kudos Luis
Thanks, Bala. Inclusion doesn't mean making a loss!
 
 
Luis Miranda
Luis Miranda started investing in India's infrastructure before it became fashionable. He started IDFC Private Equity and was earlier a part of the start-up team of HDFC Bank.
Luis has invested in and has been on the boards of companies like GMR Infrastructure, Delhi International Airport, Gujarat Pipavav Port, Gujarat State Petronet, L&T Infrastructure and Manipal Global Education.
Today he is involved with various non-profits like Centre for Civil Society, SNEHA, Human Rights Watch, Gateway House and Samhita Social Ventures. Luis graduated with an MBA from Chicago Booth.
 
 
 
Luis Miranda'S POPULAR POST(S)
Most Popular
Luis Miranda's Activity Feed
August 17, 2013 22:39 pm by Luis
Commented on Why We Need More Banks
Suresh, we have all got to get used to paying fees ... If you pay peanuts, you get monkeys. The other way is to cross-subsidise.
August 15, 2013 22:53 pm by suresh
Commented on Why We Need More Banks
Yes I agree with Luis that good functioning of private banks(though with fat charges) has brought about a change in public sector banks.The services in banks like SBI have improved considerably and the response is pretty good though most of the staff still retains poker faced look.But change is ther...
August 11, 2013 20:41 pm by Marcel Souza
Commented on Why We Need More Banks
Oh no! My secret is out..I am indeed the same cousin. And you hit on it, Luis: perverse incentives are not easily unwound. Whether it is Development Banks in S. Korea, Japan's and China's Construction Banks, US's Government Sponsored Enterprises (Fannie, Ginnie), or even perhaps the World Bank, thes...
August 11, 2013 16:11 pm by Luis
Commented on Why We Need More Banks
Marcel, I agree. One of the challenges of India's banking sector is the dominance of state-owned banks, which have their fair share of governance challenges because of misaligned incentives. Some of these bank chairmen are friends of mine and are doing a great job, despite their constraints. But th...
August 11, 2013 08:31 am by Marcel Souza
Commented on Why We Need More Banks
Luis, You bring important historical perspective to this complex subject. Allow me to share some thoughts from my years as a bank regulator, IMF (in the Raghu years!), and emerging market investor. Of course, nobody really knows the optimal size of a banking sector any more than they know the same f...