May 11, 2013, 04.10 PM IST | Source: CNBC-TV18

Are Indian banks anti-competitive and oligopolistic?

Latha Venkatesh tries to get answer to a fundamental question of why Indian banks are not as competitive as their counterpart mobile companies and whether they are oligopolistic.

Mobile phone and debit cards have become the two most important things for common men today, but very few know that banks charge its customers for debit card even when they don’t ask for it.  Zillions of semi-urban and rural Indians who would never use debit card are charged Rs 100 every year by banks.

Private sector banks like ICICI Bank and HDFC Bank charge customers Rs 250 for not maintaining a minimum balance if Rs 10,000, but these banks never compete to bring down this minimum balance requirement.

Axis Bank, whose minimum balance requirement for salary account is nil, charges Rs 750 if the salary is not credited for 3 months. In this era of technology all banks have connected their branches but they refuse to let their customers benefit from that connectivity. The country's largest private bank ICICI Bank charges Rs 250 from customer if he wants to deposit Rs 50,000 in to his account from some other branch

Banks who claim that thy don’t charge for paying bills and booking flight tickets; in reality levy Rs 10 per transaction for using insta-pay kind of payment gateways. The text message confirming payments are not for free either, insta-alert costs Rs 60 per year.

Surprisingly, banks charge for this SMS but the mobile operator who is delivering the SMS is doing it free.

There are many such examples which raise a fundamental question of whether Indian banks are anti-competitive, whether they are oligopolistic? Had these banks been fiercely competitive like mobile companies not only customer would benefit from lower charges but banks themselves would become more cost efficient. 

RBI has cut repo rate by 125 basis points in past 18 months, but none of the banks are willing compete and take a hit on its margin to gain volumes. They seem to be moving in cluster.

Latha Venkatesh of CNBC-TV18, in discussion with S S Mundra the Chairman and Managing Director of Bank Of Baroda , Diwakar Gupta the Managing Director of State Bank of India , AC Mahajan the Former Chairman of Canara Bank and very importantly Head of the Banking Codes and Standards Board of India and TT Ram Mohan the professor of banking at IIM Ahmedabad tries to get answers to the fundamental question of why banks in India are anti-competitive and whether new banking licenses will bring any change in this scenario.

Q In the past 18 months interest rates, repo rates have fallen 125 basis points from their peak levels, cash reserve ratio (CRR) has fallen 200 basis points from their peak levels and yet base rates have fallen probably by between 25 and 50 basis points (bps). The question I am asking is why are banks moving in a cluster? Why is it that none of the banks think that it is worth bringing it down by perhaps one percentage point? Why don’t we see any bank willing to take a hit on its margins but making up on volumes? There is a stony silence and all bankers are refusing to move first. Is this not anti-competitive?

Mundra: Fundamentally if you look at it, the repo rate was very well in a completely developed and mature market. In these markets if you look at the composition of bank’s balance sheet, whether it is on liability side or it is on assets side it is largely consisting of the instruments which are market driven which are market related, which are traded in the market. As a result transmission is almost instantaneously through these instruments.

When you look at the Indian side, the rigidity of balance sheet is entirely different. Liability side largely consists of the customer deposits by the nature of direct deposits. The other side these are the advances which are not market related. Even in a market like ours repo at the best works as a sentimental indicator and this indicator or this action also works well when there are certain other situations prevailing like when there is comfortable liquidity, when the inflation rate is benign, when government borrowing programme is limited, when the credit risk perception is not very high. When all these factors are prevailing even then the transmission of repo rate does happen  despite not having completely market related instruments in our books. I think that is where the fundamental situation is. If you look today all the points which I have mentioned they all are adversely placed. Ultimately when you mobilise deposits from the depositors you have to provide them some real return.

Bank of Baroda stock price

On March 26, 2015, Bank Of Baroda closed at Rs 161.20, up Rs 0.00, or 0.00 percent. The 52-week high of the share was Rs 231.50 and the 52-week low was Rs 101.80.

The company's trailing 12-month (TTM) EPS was at Rs 18.38 per share as per the quarter ended December 2014. The stock's price-to-earnings (P/E) ratio was 8.77. The latest book value of the company is Rs 167.11 per share. At current value, the price-to-book value of the company is 0.96.

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