Indian Banking's Next Two Revolutions

Many Indian villages have over one thousand mobile phones. But no bank accounts.

Welcome to the great Indian revolution.

Even after the sweeping changes brought about by NREGA – the second version of which made bank accounts mandatory – real financial inclusion remains a dream.

Thanks to NREGA, many of India’s poorest of the poor now recognizes the use of a savings account. But that a bank can lend them money to meet their financial goals – even if it is microfinance - is unknown by many. A recent nationwide survey had brought out these shocking facts.

Why couldn’t the country’s public sector banks achieve within 60 years, what a handful of private mobile operators could do in 6?

The easy answer would be the scope for profits, but given the wafer-thin margins with which these large capex mobile operators function, and the efficiency with which many private micro-financiers have developed their businesses recently, bankers would need to find another excuse.

Reserve Bank of India is aware of this challenge, and is now trying to address this in two novel ways, which if fully implemented can change the very landscape of Indian banking, not to mention the achievement of amazing levels of financial inclusion.

One of the RBI strategies would seem like a throwback to the pre-nationalization era. Yes, new private banks are again welcome. But they would be back in a different avatar – Local Area Banks.

Originally conceived in the 1996 Union Budget, local area banks had got a major push with the findings and recommendations of the Raghuram Rajan Committee. RBI plans to address the safety concerns with small private banks by ensuring a higher Capital Adequacy Ratio (CAR) of above 15% - as against regular banks’ 12% - and tough regulations to prevent related party transactions.

If implemented fully, this can be a wave of opportunity for a new generation of financial entrepreneurs, cooperatives, and self-help groups. The distinct advantage RBI sees with the move - other than great accessibility – is the creation of tailor-made financial products based on local demand.

The second RBI initiative was their recent Outreach Program to commemorate their Platinum Jubilee Year. Designed around Governor Dr. D Subbarao’s Zero Finance Inclusion System, the program had inputs from all four Deputy Governors, Shyamala Gopinath, Usha Thorat, Dr. KC Chakrabarty, and Dr. Subir Gokarn.

The program has placed a new target for commercial banks that all villages with over 2000 people should get access to financial services by March 2010. Carefully selected and authorized NGOs would be allowed to assist banks in achieving this target. The critical backbone of this initiative would be cutting-edge technologies like mobile banking and biometric identification.

If RBI succeeds in these two initiatives, it would lend some credence to the tall claims of economic liberalization and the telecom / IT revolutions. Then and only then can we take the first step together, as one billion empowered people.

Because for all our optimism, there is a deep chasm between the developed and developing worlds, and that chasm is the financial security of a country’s people. And financial inclusion is the first step towards financial security.

Where Will Financial Crisis Hit Next?

1997. Asian Financial Crisis.

What started from Thailand soon spread like a contagion to Indonesia, South Korea, Philippines, Hong Kong, Malaysia, and Singapore, rattling these economies for years.

2008. US Subprime Crisis.

What started off as an aftermath of the housing boom, got a shot in its arm with the collapse of Lehman Brothers, and most of the world is yet to recover from it.

2009. Dubai Crisis.

First the world reacted sharply. Then all of us arrived at the consensus that we overreacted. But in Dubai itself, nobody is sure anymore how the drama will unfold in the coming days. Still, the consensus is that it will be a Middle East problem at the most, and maybe affecting some parts of India like Kerala, maybe Philippines and Pakistan too.

Dubai wanted to build the tallest building, the largest airport, and the biggest shopping mall. For a while – a short while – it seemed as though the geographically tiny emirate would also stake its claim for the biggest national bust in recent years.

No way. US is not willing to share that credit with anyone any soon. Dubai’s debt is $60 billion, Lehman’s was $600 billion.

Dubai is too tiny a crisis. Or is it? Even if it is, is it masking any lessons?

One thing is common behind these three crises. Sorry, two things. Real estate and the dollar.

Thailand was doing a Dubai in real estate when disaster struck. And the economic epidemic spread to those Asian nations that were following a massive leveraged real estate development program.

And needless to mention that the 2008-09 world economic crisis had its roots in US realty.

And needless to mention that Dubai’s problem is a real estate problem more than anything else. The tiny emirate - if it restarts all the current real estate projects - will double the office space from what it is now, which is but sadly 40% unoccupied now. Dubai was that confident of real estate.

Now the dollar connection. Most of the affected Asian nations in the 1997 crisis as well as Dubai have their local currencies pegged to the US dollar. In other words, these currencies’ exchange rates can’t be directly influenced by the markets on a day-to-day basis like the Indian Rupee or the Dollar itself, but remains static at a conversion rate fixed by these Governments.

In fact, the pegging to the US dollar has brought down other economies too even without an associated realty boom, the best examples being the Mexican economic crisis of the 1990s and the Argentine crisis that spanned from mid 90s to 2005.

But it is when both real estate boom and dollar pegging is simultaneously there that a real crisis of astronomical proportions can result. (As an aside, this is how Abu Dhabi still remains strong.) Dollar pegging makes the interest rates fixed by US Federal Reserve as the default interest rate of nations like Thailand and Dubai. For a while this is good, as the money supply or liquidity grows steadily.

For example in the case of Dubai, money supply grew at an annual rate of 30% between 2005 to 2008. But this has the inevitable result of fuelling inflation and negative interest rates, subsequently.

Now, if at the same time a nation decides to develop its real estate exponentially, it is a no-brainer that people will have all incentive to invest in real estate and forego bank deposits. Who can resist a market that is going up unbelievably? Many Dubai real estate prices had nearly doubled between 2005 and 2008.

Now the only relevant question is whether there are any other markets where both these conditions exist. Eerily, there is one – China.

Though the country’s currency is only partially pegged to the US Dollar since 2005, by all practical measures it still remains deeply connected. The Chinese had unofficially strengthened this pegging post Lehman as a last ditch effort to save its economy from collapse as it battles a real estate splurge that would shame even Dubai on the demand-supply mismatch.

If China fails, it has the potential to take the world with it. And for India, it poses the additional burden of a military provocation.

Of course, even without a Chinese failure, and even without rupee being pegged to the dollar, India needs to tread cautiously as it ‘suffers’ from excess liquidity driven by foreign investments that has overheated the capital markets already much ahead of the real economy warming up.

And not at all comforting is a third attribute that Dubai and China share – non-democratic decision making. The Asian economies and the US were capable of a comeback largely on their administrations’ democratic accountability. Without it in place…

Better not think about it.

HDFC Move Too Little, Too Late Against SBI & ICICI?

HDFC Ltd, India's largest home loan provider, and the key promoter of HDFC Bank, has done something to counter SBI, but it might prove to be too little, too late. The dual rate home loan scheme comes with a fixed rate of 8.25 per cent till March 31, 2012 for a 20 year loan of 30 lakh for new customers who apply till January 31. Though 0.25% above SBI's during the first year, the scheme is comparable to SBI's when taking into account the first three years. But it is still inferior in its 0.5% processing fee against SBI's nil charges.

HDFC Bank always had to be content with the No.3 position, behind SBI and ICICI Bank. But the solace was always that it could lead in two retail segments – home and auto loans. But now, even that edge is showing signs of distress.

While SBI has recently caught up with HDFC Bank in both home and auto loan growth, ICICI Bank has also made a dramatic comeback. To counter, HDFC Bank is relying more and more on growing their overall retail loan business, instead of trying to grow their corporate loans, where the competition is even tougher with the likes of PNB & BoB, apart from SBI & ICICI Bank.

The bank’s over reliance on retail segments like credit cards is troubling, and as Pralay Mondal, their Country Head for Retail & Credit Cards had recently put it, the delinquency for the credit card industry as a whole is at 30-35%.

HDFC Bank’s key problems are its highly pressured workforce and the private bank’s too selective, too restrictive home loan policies that pre-empt a significant percentage of homebuyers from a life-critical home loan.

Will Bank of India Take Over Oriental Bank of Commerce?

With its second quarter results out, speculations that Oriental Bank of Commerce might be fit for a takeover have gathered wind.

OBC went back on its good first quarter results of 46% growth by registering only 18.63% growth in net profit during the quarter ended September 2009. The bank’s total business growth during H1 of this year stands at 24%.

Making this mid-sized bank more attractive for a takeover is the fact that OBC is in urgent need for Rs. 1000 crore as capital support from the Government. Though Chairman & Managing Director TY Prabhu has claimed that it is for branch expansion, shoring up Oriental Bank’s Capital Adequacy Ratio (CAR) should also be a prime reason.

But plagued with such never ending requests from several public sector banks (PSBs), the Government has recently made it clear that it may not be able to meet the entire demand. That leaves only a few options before such PSBs, one among which is allowing a takeover by a bigger PSB.

Speculations are on that Mumbai headquartered Bank of India is eyeing Oriental Bank of Commerce for a takeover. Such a move has got some other rationale too, as BoI’s is heavily West focused while OBC is heavily North focused.

But, in any case, such a move is unlikely to be met favourably with the senior to middle level managers in OBC.

Oriental Bank of Commerce is a full service bank, featuring anytime anywhere banking that addresses retail, corporate, & industrial clients using the latest in technologies like core banking, internet, mobile, & ATMs. CMD TY Prabhu is a Canara Bank veteran, who joined OBC recently after a successful tenure with Union Bank of India as its Executive Director.

Oriental Bank of Commerce has always been in the forefront of social initiatives, be it participation in the national pension plan or poverty alleviation for the BPL classes. The bank is also on a major expansion drive with a new recruitment drive being announced.

OBC’s innovative bancassurance model – but partnered with two banks itself, HSBC and Canara Bank – has already become the fastest grower in the life insurance sector.

However, if the takeover by Bank of India materializes, it will fly in the face of the OBC management’s plans to increase branch strength by 200 new branches and a targeted business mix of Rs. 2,00,000 crore by the year end.

Kotak Mahindra Thrives on Risk?

Kotak Mahindra Bank led Kotak Mahindra Group is one financial conglomerate that seems to thrive on risk.

Group entity Kotak Securities had recently played whistleblower in exposing accounting holes in both Reliance ADAG and Reliance Industries. But as and when the Ambani brothers bury their hatchets, a headache can break out for Kotak Mahindra.

But for all his team’s research capabilities, Uday Kotak couldn’t sense what was in store in Dubai. Kotak Mahindra Bank opened their representative office in Dubai two weeks back. The timing couldn’t have been worse. A week later, Dubai World’s $60 billion hole surfaced, with the potential to sink Dubai with it.

But risk is nothing new to Kotak Mahindra. The Group already has exposure in Dubai through businesses like insurance policies, offshore mutual funds, broking revenues, and other investments.

This once non-banking financial company (NBFC) – or private financier – turned bank thrives on high risk. It specializes in acquiring stressed assets from other banks, unsecured loans, sensitive sector lending, and aggressive contrarian strategies like shunning loan restructuring against NPAs.

Uday Kotak has ambitiously built this 18,000 people empire, resorting to corporate moves like courting powerful names like the Mahindras and Goldman Sachs, and later deciding to go it alone.

Will IndusInd Ever Catch Up With ICICI, HDFC, & Axis?

During the initial years it was main promoter Hinduja Group’s controversies like Bofors that played spoilsport for IndusInd Bank. Later, it was a case of uninspired leadership. But the current MD & CEO Romesh Sobti’s radical strategies have apparently played out well for the bank, if last two quarters’ growth is any indication.

But it is also a strategy that has taken IndusInd from the safe shores of investment banking and HNI business to the risky coasts of less secured retail loans. It remains to be seen how IndusInd’s new strategy will pan out.

IndusInd Bank started out in the same year – 1994 – as ICICI Bank, HDFC Bank, & Axis Bank, with almost the same scale of capital. But now all those banks are at least 5 to 10 times the size of IndusInd. That this was despite Hinduja Group’s international expertise in banking, has been a sort of riddle in banking circles.

But with the second quarter results out, IndusInd Bank has proved that it can shrug off this lethargy and grow faster than others to catch up on lost time. IndusInd grew its net profit by 131% this quarter, and it was one of the healthier all-round results posted by any private bank or comparable public sector bank.

The even better news is that when taken as a whole, the two quarters or H1 has registered a 211% growth. With this, IndusInd has become the country’s fourth fastest growing bank in net profits.

But the bank still lags behind peers in deposits and advances growth. MD & CEO Romesh Sobti needs to address several of IndusInd’s potentials that haven’t still played out.

For example, IndusInd Bank is the country’s only bank to be originally promoted by a group of NRIs. Despite this significant exposure among the NRI community, the bank had failed to put up a good performance in garnering NRI remittances, which is always considered as a good source of low-cost funds.

Also, IndusInd Bank has always played the game conservatively, with not much enthusiasm for funding the so-called sensitive sector including unsecured retail, real estate, and capital markets. Such an outlook has prompted the bank to take a contrarian view on problematic NPAs. IndusInd was noted for opting out of the CDR process to revive Subiksha, the troubled retailer.

Anyway, under Sobti’s leadership, the bank is spreading its focus on segments like consumer loans. The bank was however always strong in investment banking and servicing HNIs, and this has helped them to grow faster now.