Opportunities For 'Sachet Banking' - C S Ghosh, CMD, Bandhan Financial Services

Financial inclusion offers another opportunity for new players. But the challenge is to set up a business model that is economically viable for the service provider. So, new banks need to devise a delivery model based on strong last mile connect.

After a long wait of about 3 years, the guidelines with regard to issuing new banking licences in the private sector were issued on February 22, 2013. This opens up a dream for many aspirants like us who are doing everything a bank still remain on the fringes.

But as they say, every dream all comes with its share of challenges. Coming after about 13 years, the new guidelines contain substantially tougher criteria. This is evident from the fact that only 26 applications have been submitted in 2013 as compared to over 100 in 2000-01. However, one striking difference is that the regulator is now permitting entities as diverse as those in realty, construction and broking to apply. Of course, applicants are required to be able to demonstrate sound credentials as well as a credible operational track record of at least 10 years. In short, there is opportunity for all.

Besides, applicants will only be able to float a bank through a wholly-owned Non-Operative Financial Holding Company (NOFHC) owned by a resident promoter group. They will need to bring about a minimum capital of Rs 5 billion, with foreign capital limited to only 49 per cent and individual holding of such foreign capital being upto five per cent. If granted a licence, the promoter needs to reduce its equity stake to 40 per cent within three years, 20 per cent in 10 years and 15 per cent in 12 years.

Despite all these challenges, however, the new banking licence holds immense growth opportunities. India holds tremendous growth opportunities, currently being the second most populous country with a reasonably high growth rate and which has more than 1.2 billion people, over 60 per cent of whom are below 35. To add to this, the fact that almost half of adult Indians do not have any banking relationship throws open a large undiscovered market. Thus, the new entrants will have a ready market to explore. 

However, it all depends upon how the new players can strategise their plan for market penetration. To my mind, a bank which is not passionate about financial inclusion and is not ready to innovate on products which can easily be sold to them at an affordable price and convenience may not survive the stringency of the licensing conditions.

Secondly, financial inclusion offers another opportunity for new players. But the challenge is to set up a business model that is economically viable for the service provider. So, as I see it, new banks need to devise a delivery model based on strong last mile connect as well as products suitable for the millions of customers at the bottom of the pyramid, which can be termed as ‘sachet banking’. 
[PAGE BREAK]

Thirdly, growth opportunity relates to the bourgeoning middle class. In the wake of globalisation, the salaried class and its aspirations are defining business. Today, a mall is not an unfamiliar sight even in Tier III or Tier IV centres. This has also given rise to new activities/services which can be converted into profitable banking business products and services. For the growing middle class, financing requirements will also grow in line with its growing aspirations and a business space will be created for the new banks. 

However, no growth can be achieved without crossing hurdles. To my mind, the new banks will have to contend with challenges in more than one way. The first of these will be to meet the CRR/SLR requirements. This is more so for a running NBFC. Since the RBI will not relax the norms, many new entrants may have to spend a lot more time on the drawing board. 

Secondly, new banks will need to maintain 13 per cent CAR from day one as compared to that of nine per cent by the existing players. Such dis- parity may place the new banks at a slight disadvantage in terms of investor attractiveness and product pricing. 

Thirdly, Priority sector compliance may pose a problem for new entrants. To add to this, there is the stipulation of opening of at least 25 per cent branches in rural, unbanked areas. These obviously make the game that much stiffer.

Finally, under the new guidelines a ‘model bank’ cannot be a model unless powered by latest technology and an advanced integration methodology. A nationwide challenge for rural connectivity is now in the court of the new banks, which will have to carefully leverage their IT might into business opportunities.

As far as Bandhan is concerned, we need to upgrade both our physical and IT infrastructure. For physical infrastructure, we need to adopt standard banking norms such as adequate security, ATMs, etc. As far as our reach is concerned, we have 1800+ branches in 18 states, and these are mostly in the unbanked areas. Also, all our branches are computerised. Our current business model is based on door-step service. Given a chance, we will fine tune this model to suit the regulatory requirements and carry the flagship of financial inclusion ahead. While our reach will give us a huge competitive edge, we are confident that we will be able to bring banking services to our million customers at an affordable price. 

At present, our interest rate is close to 23 per cent as against the RBI’s prescribed limit of 26 per cent. A banking licence will help us reduce the interest rate by 10 per cent, as we will not have to depend upon banks for funds.