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.
Q: Just about every bankers says if my raw material becomes cheap, if money becomes cheap then we will pass it on. When Mr Pawan Goenka of Mahindra and Mahindra speaks to us and we ask him will car prices drop, he doesn’t say if my raw material prices fall I will pass it on. he tries to get cost efficiencies, he looks for productivity gains, he is ready to take a hit on his margins, he gives discounts if the market is very poor and there is no off-take, why aren’t some banks ready to take a hit on their margins, why are you guys not looking for productivity gains? I am a little agitated as Mr Mundra said that there is almost a monopolistic, oligopolistic behaviour on the part of banks. Even a few years back they were competing on deposits, they were competing on home loans about 10 years back, there was some sense of wanting to grab the customer, which is clearly not there now.
Gupta: I don’t think that is really the case. The problem is that there are several variables. We are looking at one variable but there are other variables which change in between.
Let us see how the repo rate moved. When the repo rate moved from 5 percent to 8.5 percent which is 3.5 percent at least for us our rates have not moved by more than 2.5 percent. So, it is not that rates have gone up also matching repo rate increases – step for step. The question then arises when repo rates have come off by about 1.5 percent, 1.25 percent, why has base rate come off by only 30-40 basis points for most players? In the intervening period you have seen the cycle change from one where credit off take was brisk, to a cycle where credit off take is not there and banks have given all kinds of concessions in the mean time. We for example have foregone Rs 2000 crore of potential income on our small and medium enterprises (SME) portfolio. We have reduced rates on home loans. Car loans have become cheaper; agriculture continues to be benchmarked and has grown very well. All that impacts overall profitability and net interest margins (NIMs). Now if my spread over base rate has been changed how I can drop the base rate again when the repo rate changes.
As far as non-competitive or some kind of a oligopolistic behaviour is concerned you just now said that Axis Bank or ICICI Bank or HDFC Bank charge for a minimum balance, we don’t. Does that mean that customers move from those banks to us? No. So, there is a USP, people have their own advantages, clients look at that. I think the market is quite open. It is just that banks don’t have the leeway today to do a more aggressive cut.
Talking of State Bank of India (SBI), we have waived all fee based income on so many things including transactions – National Electronic Funds Transfer (NEFT), Real time gross settlement (RTGS). But if I am putting through an NEFT and the Reserve Bank of India (RBI) charges Rs 5 on that, I definitely don’t want to out of pocket on those Rs 5 and that is the Rs 10 charge you are talking about when you say that internet transactions are not free. There is a cost, there is a cost to the platform, the same is true of debit cards and we can come to it when you touch that up in greater detail. I think banks are recovering costs.
Q: As an ex-banker and more importantly in the current position that you are in, why don’t we see any competition of people lowering their credit card charges, lowering their minimum balance charges? While there maybe a philosophical argument on the repo rate and CRR cut front, on pricing of products, look at the rapid way in which the mobile industry works. Is this market, because it requires a lot of financial savvy-ness, getting away with anti competitive behaviour on the product side?
Mahajan: I agree with you. This is oligopolistic market where one bank looks towards the other for charges. In our organisation, we studied the charges, thematic study of charges. We went to the headquarters of few banks which are based in Bombay. We went through their board notes, etc and to our surprise - we have not found any cost based analysis of levying those charges. Every note most, leave aside one or two banks, every bank board note suggests that this particular bank is charging this much, so we should also charge this much. Hence it is a peer group comparison which is forcing the banks to levy those charges. So if one is not reducing, the other will not reduce. So the charges are not cost plus. It is based on what the other person is charging and how much the market is ready to bear. If the market is willing to pay, for example you have named a few banks who are levying those charges; we think those customers are not objecting the key point charges. Reserve Bank’s deputy governor has been telling time and again, if the banks are charging for those services which they are not even providing. We have seen during our study, one bank is charging for not even operating the account. It is up to the customer whether he wants to operate the account of not. Banks start levying the charges if customer is not operating that account. Some banks are charging even for reviving that dormant account where there is nothing. So we have done certain study, we have conveyed our views to the Reserve Bank of India on the interest charges some banks are using the branch as a non-home branch and we have found it is very unjustified charges. So we are now going towards other banks also. We feel these charges are anti-customer and they should not be charged at all. Since the market rate has been freed and when we take up the industry, these Indian Banks' Association (IBA), they have suggested that it is the Reserve Bank of India which has deregulated the interest rate charges. We are free to charge anything. Though we don’t find any justification in their argument, but they are charging. So we are doing the study and we are informing the Reserve Bank about out results.
Q: What’s your sense? We used to see a lot of aggression. For instance in 2003, all banks offering competitive rates on home loans, on auto loans. We used to be flooded with advertisements. Even at a time when there was a problem of getting money like in 2008 I can remember Punjab National Bank’s Mahabachat and offering higher deposit rates. There was some shrieking and screaming to claim the customer. Is it that after licensing those first set of 12 new banks, the economy has from 2003 grown enough and now it has become a suppliers market, a seller’s market. We probably need more banks and that will perhaps instil competition, is that an argument?
Mohan: I think it is well to recognise that banking is fundamentally anticompetitive in character. This is for at least two reasons. One is that entry and exit in banking is not as free as it is in many other industries. Secondly, as you rightly pointed out, there are significant switching costs for customers. It is not easy for a customer to move from one bank to another because there are hassles involved with closing an account, with opening an account, with making alternative arrangements for electronic clearing service (ECS) payment and receipts and so on. Of course there is nothing to beat the convenience of a branch next door. You have to begin by recognising that all banking systems are more or less oligopolistic in character. Having said that; it may not be correct to ascribe the lack of monetary transmission to lack of competition in banking. There are other reasons which some of our guests have pointed out for instance the lack of adequate liquidity in the system at any given point in time. But also I believe fundamentally flaw could be the manner in which banks are pricing their products, pricing their loans. Most of the pricing today is based on weighted average cost of borrowing. Therefore at the margin, when the cost of funds goes down, it is only the margin of cost which is impacted, not the weighted average cost and therefore this is not reflected in loan pricing. So if you want to get better monetary transmission, you may have to move to the forward looking indicator of prices rather than backward indicator like the weighted average cost of loans. But I think what you are saying about bank charges- that certainly reflects lack of competition or the anti-competitive character of banking. Mahajan has correctly pointed out that there are number of banks, which levy charges which have no basis in the underlying cost at all. Having said that, I am not sure that the answer to this is injecting more competition into the system. If you look at the degree of competitiveness in banking as measured by standard indicators, one standard indicator is the share of the top five banks and assets, has come down from 50 percent in 90’s to 38 percent in 2011. At 38 percent, the ratio in Indian banking is much lower than in a wide range of other banking systems such as France, Germany or many other nations where the ratio is 60-70-80 percent.
Q: Do you think that round the corner is a chance that bankers will perhaps at least some bankers will take a hit on their margins and be willing to compete on lower interest rates. Is that coming at all?
Mundra: Quickly let me deal with two, three issues. One, as a data point you were mentioning about 2003-2004. Let me tell you if adjusted for inflation the cost of borrowing for the corporate was around 5.6 percent that time. Adjusted to inflation cost of borrowing for a corporate today is 4 percent. So, it is not fair for them to complain that they are paying high rate of interest. As far as the retail is concerned we have mentioned several times that they have already been benefited by way of reduction in spread.
Q: My central question still remains, we are living under the shadow of some signaled rate cuts. Why is it that no bank is willing to take a bit of hit on its margins and passing on that cut?
Gupta: Our net interest margin (NIM) is today closer to 3.4 as against 4.1 just a year ago. So, we have taken a significant hit on the NIM itself. It is a conscious decision. The second thing is on profitability, as a system I don’t think we are usurious because you need capital adequacy, you need to grow. If you don’t have adequate retained earnings your balance sheet cannot grow and the government will have to fund you differently. The third thing about the usuriousness of charges, ultimately the customer is being driven by convenience if he is paying more otherwise he has more than multiple choices. So, convenience has a price, on the stock market even the perception has a price so I don’t think we can paint everybody with the same brush. There maybe some charges which can always be debated. By and large if there is convenience there is a charge to convenience, if the product is good there is a premium on the product. I don’t think the banking industry is any different and therefore if somebody claims a premium for what he is giving I don’t think it can be called anti competitive.
So to conclude, to take the bankers point that, in our economy it is not very easy to pass on the Central Banks signals. But still there is not enough competition among banks. They are not willing to take a hit on their margins and going ahead and cutting rates at least in this round. Things have gotten a bit anti-competitive and maybe some deep pocketed private sector competition could perhaps reinstall this competition.