Graphic: Prajakta Patil/Mint
Graphic: Prajakta Patil/Mint

What banking will look like in 2016

The sector should start to see the roll-out of differentiated banking models like payments banks and small finance banks

Disruption. That’s the one word that describes what will happen in the banking sector in 2016 and beyond. The sector should start to see the roll-out of differentiated banking models like payments banks and small finance banks. In addition, existing banks are all trying to catch up with changing financial technology trends to stay relevant.


Payment banks

Eleven payments banks will launch in 2016 and 2017. Watch out for the strategy that these entities follow to convert existing customers to consumers of financial products. Equally important to track are the deposit rates payments banks offer. Higher deposit rates may disrupt the rural, semi-urban deposit market for existing lenders. While transaction volumes will be thin initially and profitability under pressure, as the operations stabilize, these metrics will be watched to judge the sustainability of payments banks.

Small finance banks

Alongside the eleven payments banks will come the 10 small finance banks. Most of those who have received licences are microfinance firms who will look to convert into deposit-taking lenders. The first challenge for these entities will be to raise funds from the local markets and also reduce their foreign holding to bring it to 49% in line with the Reserve Bank of India rules. Expect a fair number of small finance bank initial public offerings. Once they launch, they will go head-to-head with payments banks for deposits and with traditional banks for lending.

Competition for deposits

The deposit market in India has seen very little change. Most banks have offered a steady 4% on savings deposits even after these rates were deregulated in 2011. Some think payments banks could force a change while others say that payments banks won’t make enough profits so as to offer higher deposit rates. An unrelated development to watch will be whether the government becomes more flexible on rates offered on small savings instruments, which could also lead fixed deposit rates to fall faster, improving monetary transmission in the country.

Strategic debt restructuring

Banks have become more aggressive in dealing with companies defaulting on repayments, thanks to the strategic debt restructuring (SDR) route introduced by the Reserve Bank of India in June 2015. Banks have invoked SDR on at least nine companies so far. Over the next 18 months, banks will have to find suitable buyers for the majority equity converted from debt in all these firms. Skeptics say that won’t be an easy task.

Bank balance sheet clean up

With the stressed asset scenario stabilizing and with banks taking the lead in selling stressed assets in the economy, the banking regulator envisages that the problem of non-performing assets will be tackled by March 2017. The Reserve Bank of India has provided banks with multiple tools such as the joint lender forum mechanism, 5/25 refinancing and strategic debt restructuring, which the regulator will monitor closely to ensure there is no misuse.


Bandhan Bank

The microlender-turned-scheduled commercial bank launched in August 2015. Over the course of the next year, the sector will watch how smoothly the transition plays out. Bandhan has to slowly build its base of low-cost deposits and start to diversify its lending base as well. Bandhan will be a test case for small finance banks that are due for launch in 2016 and early 2017.


It is a bank being watched for its ability to build a deposit franchise in non-rural markets and also build a digital network. The bank started with 23 branches. CEO Rajiv Lall has said he will bank heavily on technology to expand the bank’s reach. IDFC Bank may also pick up the Indian assets of the Royal Bank of Scotland Group Plc.

Post Bank

If any one organization has a shot at making a payments bank work, it is India Post, which is one of the 11 licensees. The post office has unbeatable reach with 1,54,882 post offices across the country; 90% of them are in rural areas. Not only is the payments bank licence a chance to revive the fortunes of the post office, it is also the most likely candidate to make a mark in financial inclusion.


The disruption in the payment space could come from a relative newbie in the financial services sector like Paytm. Vijay Shekhar Sharma, the founder of One97 Communications which runs mobile wallet services Paytm, is being watched closely for the strategy he will follow for his payments bank. Many bankers feel that someone like Sharma could be a disruptive force to reckon with. Sharma’s payments bank may be up and running as early as March.

State Bank of India

While 2016 will be critical for new banking models, it will be an equally important year for traditional banks who are still trying to clean up their balance sheets. State Bank of India (SBI) has been the most aggressive in pushing errant promoters to pay their dues. Strategic debt restructurings have been initiated. Taking the lead in keeping this process going will be important for India’s largest lender.