by R Jagannathan
India volition conduct keep to cut back the issue of populace sector banks either through mergers or yesteryear downsizing inwards the coming 1 or 2 years. It does non postulate 21 authorities banks; 7 or viii should live to a greater extent than than enough. If at that topographic point is 1 skillful argue why populace sector banking should live shrunk, it is this: the bigger the portion of authorities players inwards whatever industry, the slower the stride of consolidation in addition to improved efficiency. Take the example of the telecom industry, where the populace sector’s portion is less than 10 per cent today. Barely xviii months subsequently the launch of Reliance Jio alongside a super-competitive toll offer, 4 major players crashed out (Tatas, Aircel, Telenor, Reliance Communications). H5N1 5th has dived into the arms of a competition for safety, alongside Idea merging alongside Vodafone. In civil aviation, where liberalisation began presently subsequently Kingfisher flake the dust inwards 2011, populace sector Air Bharat is on the ropes. It is directly beingness offered for distress sale to a someone player. In calendar 2017, IndiGo had a xl per cent marketplace share, spell Jet (including Jet Lite) had xviii per cent, alongside Air Bharat in addition to SpiceJet alongside xiii per cent each. Given a flawed aviation policy that was crafted to assistance crony businessmen until recently, the manufacture has seen regular entries in addition to exits, but is alone directly inwards serious consolidation-cum-expansion mode. It took the ascent of an IndiGo to force the authorities to instruct out Air Bharat permanently.
The argue why consolidation isn’t happening faster is this: it’s non yet needed. Domestic aviation is withal far from saturated, in addition to rider traffic is expected to proceed growing robustly for roughly time. India is laid to transcend away the world’s tertiary largest aviation marketplace yesteryear 2020. Air Bharat is exiting because it can’t accept the heat. Its presence was, inwards fact, forcing the manufacture to bleed more.
This brings us to banking, which is the exception to the dominion (apart from insurance). The populace sector has a seventy per cent marketplace share, in addition to consolidation is slow. Bharat is overbanked inwards price of the issue of banks nosotros have, in addition to underbanked inwards price of the accomplish of fiscal services to rural areas. We postulate novel types of banks – leaner, meaner ones – to accept us yesteryear the lastly mile, but populace sector banks are exactly non quite capable of doing this, burdened every bit they are alongside excess overheads.
However, things may live almost to change. Indian banking is on the threshold of a large consolidation, alongside massive expansion inwards the someone sector banking infinite forcing the pace. Given the overload of bad loans alongside populace sector banks, they are barely able to expand their balance-sheets, but well-capitalised someone banks are hitting the accelerator.
The other day, Kotak Mahindra Bank’s executive vice-chairman in addition to managing director, Uday Kotak, predicted that the authorization of populace sector banks is ending. H5N1 business paper quoted him every bit saying: “on a delta basis, the entire increment inwards loans is happening every bit someone sector banks are growing significantly. In the adjacent 5 years, the 70:30 ratio (in favour of populace sector banks) volition motion towards 50:50”. He added, for skillful measure: “we are seeing a fundamental, sustainable change… inwards general, I produce believe nosotros should live seeing fewer state-owned banks”.
His forecast seems plausible. Of the 21 populace sector banks, xi banks are inwards the Reserve Bank of India’s “prompt corrective action” category, which agency the ICU. They are barred from expanding their balance-sheets without a meaning improvement inwards their bad loans position. The bigger populace sector banks are already inwards fresh trouble, thank you lot to the unveiling of the Nirav Modi fraud inwards Punjab National Bank, which has eroded its marketplace capitalisation. From its Oct high of Rs 213.60, the bank’s stock has crashed to a greater extent than than 55 per cent.
Other banks, spooked yesteryear other frauds in addition to bad loans, conduct keep also seen an erosion inwards profits in addition to marketplace valuation, making it to a greater extent than hard for them to heighten capital. In the electrical current atmosphere of fearfulness of fraud in addition to a high pile-up of bad debts, no populace sector banking concern is probable to accept large risks inwards lending to a greater extent than to borrowers exterior the retail sector.
Meanwhile, large chunks of their existing businesses – from payments to small-scale sector loans – are shifting to aggressive novel digital banks similar Paytm in addition to Airtel Money, non to speak of small-scale finance banks. The large someone banks similar Kotak, HDFC Bank, ICICI Bank, IndusInd in addition to Yes Bank are the ones to watch. New universal banks similar Bandhan Bank are bringing inwards hybrid problem concern models where they heighten liabilities (deposits) inwards urban centres in addition to lend to small-scale borrowers at high margins. Public sector banks are squeezed at both ends – assets in addition to liabilities. So, Kotak’s prediction is non far off the mark.
When it comes to banks, the procedure of liberalisation began inwards the 1990s, when the kickoff someone banks were licensed. But it was alone inwards the lastly 4 or 5 years that the champaign was actually thrown opened upward to all comers, alongside licences beingness showered similar confetti on payment in addition to small-scale finance banks, non to speak of e-wallets. This intensification of contest is probable to speed upward consolidation non alone inwards the populace sector banking space, but also inwards the someone sector. Small, sometime generation someone banks similar Federal Bank, Karur Vysya Bank, Karnataka Bank, Catholic Syrian Bank, Lakshmi Vilas Bank – to refer exactly a few – volition confront pressures from the large boys to sell out or narrow downwardly their focus to small-scale regions or niches.
As far every bit the populace sector is concerned, the ascent of muscular someone players volition forcefulness its hand. It volition conduct keep to cut back the issue of populace sector banks either through mergers or yesteryear downsizing inwards the coming 1 or 2 years. Bharat does non postulate 21 authorities banks; 7 or viii should live to a greater extent than than enough. While Kotak has talked of a 50:50 carve upward inwards marketplace portion over 5 years, 1 should non live surprised if this figure slips to 40:60 in addition to finally to 30:70 roughly 10 years downwardly the line.
A smaller populace sector banking manufacture volition live leaner in addition to meaner. Only these types tin survive.
(A purpose of this article was kickoff published inwards DB Post)
Jagannathan is Editorial Director, Swarajya. He tweets at @TheJaggi.
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