Home / Opinion / Bank wars: attack of the phones, drones and clones

The banking industry, for decades, has been granted special privileges by society. It was allowed to put in barely 10% of its own capital and borrow the rest. It was given special treatment by the central bank, whereby it could always be assured of liquidity. It was a club of a few, as not many were granted this privilege, thereby keeping competition low.

To enjoy these special privileges, the banks have, to put it mildly, not kept their side of the deal. Globally, there probably hasn’t been a decade that has been free of a banking crisis in some form or the other. Invariably, the cost of these crises is eventually shouldered by the taxpayers. Little wonder that post the 2008 crisis, banks have found little sympathy with the regulators or the governments.

Let us look at how banks have performed in India. The number of bank branches in aggregate are 127,000, but the number of inhabited villages are 600,000, resulting in poor financial inclusion. As to their ability to provide capital to the economy, the track record fares even worse.

For example, banks are unable to price risk effectively. Take the sectors where bad loans have occurred in the past 20 years. Invariably, the same sectors come up again and again. Instead of shying away when bitten, it would appear that banks relish going back into the wild. Compare the ease with which these ‘problem’ sectors raise money from banks with their ability to raise money from the capital markets. Clearly, the ability of capital markets to price risk is far superior.

Things are now about to change. The cost of computing has come down along with cost of bandwidth, resulting in proliferation of phones taking bank branches to the individual.

With automation invading every sphere of commerce, computers—drones—are now making lending money free of human interface. In the words of American entrepreneur and investor Marc Andreessen, “…the scenario of a loan officer talking to a prospective client. To software people, that looks like voodoo. The idea that you can sit across the table from somebody and get a read on their character is just nonsense."

With the Reserve Bank of India (RBI) granting more licences for banks—never mind the distinction of payments and universal—clones are on the march.

As mortals, the only finite resource human beings have is time. Any commercial entity that can help save time will succeed (remember Maggi’s success with the “two minute" slogan?). The difference between entering 16 digits of a credit card number and waiting for an SMS to conclude a transaction versus using a mobile wallet would be the difference between success and failure. Ajay Banga, chief executive officer of MasterCard, should know this. When describing his company’s investment in technology, he said, “It doesn’t matter in a hotel whether you get approved in 1/350th of a second or 1/100th of a second. It does matter at a subway turnstile. It matters at a McDonald’s".

While the technology invasion grabs headlines, this is not all that banks should be worried about. Their basic privileges are also being taken away.A bank deposit, even though it is not completely guaranteed, is considered safe as no government would let depositors lose money. Hence, when a bank goes belly up, the taxpayers foot the bill. This implicit guarantee of having access to cheap deposits, it is believed, is one of the reasons behind poor allocation of capital by banks. Taxpayers, it seems, have had enough of this. Why not let depositors give money only to the government—the safest borrower and the implicit guarantor—so that the taxpayers are not held to ransom because of poor capital allocation by banks? Sounds implausible? It is not.

All payments banks have to hold 75% of their deposits in statutory liquidity ratio (SLR) securities, making their deposits one of the safest. That is not all.

Globally, regulators are now asking banks to raise bonds apart from deposits. RBI has also asked banks to raise bonds in lieu of their infrastructure lending. These bonds have a misnomer—infrastructure bonds. In reality, these are bank bonds that will lose all their value before depositors lose any of their money. Hence, in an indirect way, the RBI is ensuring that the quantum of deposits a bank has is matched with the safest assets of the bank.

On the lending side, retail and small ticket lending will most probably get fully automated. Corporate or big ticket lending will move to capital markets (equity or debt) with higher public disclosure requirements. This will ensure that the best borrowers get the cheapest source of capital, thereby having a distinct competitive edge over their peers.

We are already seeing this happening. Over the past 12 months, banks have garnered 2% lower deposits than the previous 12 months, but have lent 6% less. This slack is now being taken over by mutual funds and non-banking financial companies in India as can be seen from their asset growth rates. Globally, excluding Chinese banks, the top five financial intermediaries by size (among banks and asset management companies) were all banks in 2007. Now, three out of the top five are asset managers.

Banks, which are the custodians of savings of millions of citizens, should enjoy the highest trust. But according to The Brand Trust Report, among the top 100 brands in India, only five are banks. The first of them is ranked 41st. Two telecom companies rank better, and both of them have now been granted payments bank licences.

Huzaifa Husain is head-equities, PineBridge Investments India.

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