Where is the Indian Banking Industry Headed to?

At the recent 2010 Annual Budget,the Finance Minister Mr.Pranab Mukherjee announced

the plans of government to allocate licenses to set up new banks, which had been a matter of discussion for sometime. The Indian Corporate giants group companies like Reliance Capital, Mahindra Finance Cholamandalam, Religare, Tata Finance and Birla Group have shown keen interest in foraying into the banking Industry.

With the Good News of new licenses for these corporate giants comes a clause which would require the new banks to operate in the rural areas for the first 2 years and thereafter on the basis of the lending done to the priority sectors like agriculture they can start opening their branches in the urban areas. The clause is in line with the government's aim to provide appropriate banking facilities to habitants with a population of more than 2000 by the year 2012.The upcoming banks are supposed to provide credit for the priority sectors like Agriculture and rural development which aims to materialize the mantra of "Inclusive Growth" of the government.

But the important clause of rural banking by private sector is a risky venture for the new banks, as the banks will have to show an initial Rs.500 crore net worth before starting the banking operations and the rural clause also applicable onto it. Currently the penetration of the PSU banks in rural areas is around 13,381 branches compared to the 1,113 branches of the private sector banks. The main reason for private sector to keep away from the rural segment has been the poor performance of the agricultural sector in the last few years and this has led to enormous amount of Non Performing Assets in the books of account of the PSU banks and the Private sector Banks.

The biggest headache for the new banks would be the credit lending facility wherein the governmentt itself came into rescue mode in the 2008 budget by providing a loan waiver of Rs.60,000 crore to the banks, and cooperatives and to provide relief to the marginal farmers and the increasing Non Performing Assets of the Banks and cooperatives. If the new banks venture into the rural areas with the credit facility there are chances of high Non Performing Assets for the new banks impacting the sustainability, and reaching a break-even would be a Herculean task. But at the end of the day there lies much bigger questions in front of the corporate giants, first and foremost as to whether the government will come to the rescue of the new banks in case of high Non Performing Assets and treat the banks on par with the other PSU's, when it comes to loan waiver schemes, and wont count out the banks unlike done by the government when it came to petrol retail business wherein giants like Reliance Industries, Essar and Shell got step motherly treatment when it came to controlled pricing of petroleum products by PSU oil companies and oil bonds were not offered to private sectors and the companies had to finally shut down many of its petrol pumps and incur losses in their Balance Sheet.

The second biggest question lies with the number of banks, will the banking industry be flooded like the telecom sector and cut throat competition in providing services will ultimately affect the balance sheets of the organization, stock prices and result into consolidation, is the industry ready for it in the current economic scenario?

At this point of time the best option available in front of the corporate giants is to take a controlling stake in the current private banks and expand it rather than getting a new license as the route to success is easier and banks like Indusind bank, and Yes Bank are looking for more funds and expansion in the coming years ahead.

Where is the Indian Banking Industry Headed to?

By: Akshay Rao

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