As Competition Increases, The Banking Pie Will Grow - R Venkataraman, Managing Director, India Infoline

It is crucial for the banking sector to widen its net and reach more of the Indian population. There is surely room for inclusion of more players in the industry, R Venkataraman, Managing Director, India Infoline tells us

The rural segment represents a great opportunity for banks, which have so far fallen short in terms of services due to high cost of service delivery and higher default rates. On the other hand, urban areas continue to remain attractive with the growing economy.

The Indian banking industry has witnessed strong growth in the past decade and also created wealth for its stakeholders. What kind of opportunities do you foresee in the Indian banking sector going ahead?

Banking is the core of any economy as the country’s primary facilitator of capital flow. Although Indian banking has achieved healthy growth and assumed a respectable size over the years, its service penetration leaves a lot to be desired across diverse parameters. For instance, only 35 per cent of the adult population in India has a bank account. There is a substantial percentage of the adult population without access to formal credit.

Therefore, it is imperative that the banking sector should grow. Well-managed banks with good execution skills can grow at a rate higher than the rate of nominal GDP growth, which translates with enormous opportunities.

Where do you foresee major growth coming from - urban areas or rural areas? Would your focus be on Tier I cities or Tier II and III cities?

As of now, the penetration is low in rural areas. Rising rural affluence and consumption is attracting a host of companies from auto to FMCG to construction materials like cement and paints towards this populace. The rural segment represents a great opportunity for banks, which have so far fallen short in terms of services due to high cost of service delivery and higher default rates. This can be overcome with the help of the best-of-breed technology and superior risk management to translate into a broader range of products based on a better understanding of needs and income flows. On the other hand, urban areas continue to remain attractive with the growing economy.

IIFL is relentlessly focused on retail across Tier-I to IV cities. In the last few years, our expansion has largely been in semi-urban and rural areas.

Would you like to have a pan-India presence or would it be regional play in the banking sector?

With 3820 business locations in over 900 cities and towns as on March 31, 2013, we are already a pan-India player. If awarded a banking license, we plan to convert our existing branches into bank branches and start many more in semi-urban and rural areas.

Do you feel that there still are opportunities for new players as the current environment in banking is already quite competitive?

As one of the esteemed Deputy Governors recently remarked, India probably needs 200 new banks. Besides the existing banks, several NBFCs run successful business models with similar structures and common challenges. Clearly, there is enough room for new banks backed by conviction and proven credence.

As mentioned earlier, banking penetration in India is low. Retail credit penetration is only eight to 10 per cent of India’s GDP, and the banking penetration disparity between rural and urban parts remains stark. There are 978 deposit accounts for every 1000 people in urban areas, while in rural areas the number is at a dismal 245. When it comes to accessing credit, there are only 42 accounts per 1000 people in rural India, whereas the corresponding figure for urban areas stands at 161. From the demand-side perspective, factors like strong economic growth outlook, corporate expansion, rising individual incomes and increasing aspirations would continue to drive strong credit growth in the longer term. So, as and when competition increases, the banking pie will grow substantially, providing enough space to all competent players for profitable operations.
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What kind of challenges do you foresee for new players (those who have applied for the license recently) as against the already established players?

For corporates with no prior experience in financial services, matching the distribution and customer base reach of established banks will clearly prove to be a key challenge. Further, corporates are borrowers in the system on a net basis, and extending credit and managing risk will be a totally new ball game for them.

As far as NBFCs are concerned, the challenge will be in meeting priority sector norms, getting retail deposits, diversifying the lending portfolio, opening branches in Tier-V and Tier-VI locations and meeting CRR, SLR and capital adequacy from day one.

IIFL stands on a firm footing. We are not a mono-line NBFC and have a diversified loan book of Rs 100 billion, with net NPAs of around 0.2 per cent. We have consciously and consistently invested in our brand, which is quite well-known, given the customer base of over two million. We already have branches in Tier-III and Tier-IV locations and have reached out to smaller areas through innovative methods like seminar sales and mobile van marketing. We already have almost 15 per cent of our assets in liquid government securities and cash equivalent as of March 2013. Therefore, we can easily meet the incremental requirement by running down the loan book, which will not be eligible for the bank. With a comfortable capital adequacy of over 21 per cent, we are well placed to increase borrowing, if needed.

Do you feel that new era private banks would be able to compete with PSU banks that have a better penetration in rural areas as well?

Setting up branches in rural geographies is difficult because it entails a different business model and cost structure. Our company was founded on small ticket retail clients and has attained market leadership position in most of our businesses from scratch. We would be leveraging on our rich and varied NBFC experience as also our brand name while setting up rural branches. We also propose to leverage technology to keep costs under control and service levels high. In the long term, what will also matter is whether one can sustain profitable models. Given the size of the markets and the opportunity, we are confident of carving a niche for ourselves.

Do you feel that leveraging the current infrastructure of the NBFC and distribution business is the right strategy, or are you going to build a different infrastructure?

As far as branches are concerned, we propose to convert many of our NBFC branches into bank branches, besides adding new ones in semi-urban and rural areas. To put in place the best of its kind technology and systems, we will partner with leading vendors specialising in bank domains. Similarly, we plan to bring in an experienced senior management team from the banking industry, typically with 15-20 years of experience and immaculate professional track record.