What is in new banking licence to attract companies?

By Moses Harding
Head - ALCO and Economic & Market Research, IndusInd Bank

The news of issuance of banking licenses to corporate and non-bank financial entities evoked mixed response. Let me analyse the need for more banks from the perspective of different stake holders. Need for banking licence
RBI, the regulator was initially not seen to be happy with the timing, when the economy is under serious risk of deterioration. The down-turn in the economy already exerts pressure on the productivity and efficiency of the banking system. The need was to facilitate consolidation of small/medium sized banks with large banks to create global banks with large balance sheet size and strong capital base for better capability to absorb risks across credit, market, operations and compliance/reputation.
So, adding more number of small banks may not fit into this agenda. RBI however, is keen on financial inclusion to ensure reach of banking services and financial products to rural and semi-urban areas, to cater to majority of the population at lower end of the economic pyramid. If the choice is between financial inclusion and creating mega global banks, RBI will see strong case for new banks with mandate to reach out to unbanked areas and people. The customer has more reasons to cheer; demand-supply dynamics will work in their favour leading to better reach, high service efficiency and discounted product-pricing. What is in it.......moths to a flame
What is in it for aspirants to get the banking license? This is the most important aspect of this analysis. The aspirants from the corporate sector have presence either in NBFC space or in financial markets or both. In the NBFC space, most are into lending to retail sector or commercial/corporate sector or mix of both. The brokerage houses that are in the race have extended reach to mid to top end of the economic pyramid through their products and services across asset classes spanning equity, currency and commodity markets.
So, for most aspirants, building client base and business around them is not an issue while the major advantage will be from building low-cost liability franchise through products that would involve use of checking accounts viz., savings and current account. The issue for them will be transfer of intrinsic enterprise value from existing business to a new business at discount to cover costs relating to statutory requirements and priority sector lending. The benefit will accrue from access to relatively cheap sources of funds so as to retain the net financial intermediation margin.
While there is strong business case for this transition of existing business to a new banking entity, there is huge up-side in enterprise value through access to off-balance sheet/non-credit products/services that would build significant delta to the enterprise value through higher Return on Asset/Capital. There is established track record of how Banks who started in 2004 from the scratch have built market value of stocks by more than 50 times of initial capital in 10 years! It will be a win-win proposition for all stake holders, Government/RBI, customers and investors of the new Banks. How many are likely?
Given the demand for the license, it would not be easy to select 5-6 names from the list of 26 aspirants. It may be combination of 2 PSU and 4 Private enterprises who will have the brand, reach (geography and clients) and financial strength to compete with existing Banks to propel efficiency of banking and financial services to higher level in the years to come.