Do we need more banks to push financial inclusion?

Saturday, 26 July 2014 - 12:50am IST | Place: Kolkata | Agency: DNA

New small banks would help push financial inclusion, tap savings of the poor, and allow new financial services to thrive

India has 155 commercial banks, including 151 scheduled commercial banks, and 115,014 banking offices. Not counting scores of cooperative banks and ATMs that dot the nooks and corners in the country. Yet Reserve Bank of India (RBI) is promoting new kind of differentiated banks like payment banks or small banks. But do we really need them?

Experts say there is huge room for several kinds of banks to thrive as India is woefully short on banking infrastructure.

According to Crisil's financial inclusion index, called Inclusix, which covers three parameters of branch, deposit and credit penetration, the index is placed, on a scale of 100, at 40.1.

This means only 40% of the country is properly covered under the banking net.

"Under-penetration is evident in terms of number of ATMs and point of sales too. Hence, there is a need for much greater banking and credit penetration, going forward. This is because despite efforts to develop the corporate bond market, the Indian financial system remains bank-dominated with commercial banks accounting for over 60% of the financial sector assets," said H R Khan, deputy governor of RBI, at a banking conference, recently.

With a stated key objective of achieving financial inclusion, promoting deposit habit with banks among the poor appears to be what RBI is focusing on.

"Both payments banks and small banks are niche or differentiated banks; with the common objective of furthering financial inclusion. While small banks will provide a whole suite of basic banking products, such as deposits and supply of credit, but in a limited area of operation, payments banks will provide a limited range of products, such as, acceptance of demand deposits and remittances of funds," RBI said while announcing the differentiated bank concept last week.

In a stroke, the central bank has created opportunities for banking correspondents, telcos, super-market chains, companies and also real sector cooperatives to enter the banking system.

These entities have a deep penetration across the length and breath of the country, which will help achieve the most important feature of financial inclusion: deposit mobilisation.

"The financially excluded segment's highest requirement is for savings services, which unfortunately regular commercial banks are unable to provide. That is the reason we periodically have the 'Sarada' type of crisis which wipes out hard earned savings of the poor," Samit Ghosh of Ujjivan Financial Services and president of Micro Finance Institutions Network, told dna.

But to achieve that the banking sector needs human intervention where people would have to reach out to the un-banked in rural as well as urban areas.

And that human resources is available with the microfinance outfits, the likes of Bandhan or Ujjivan, or with business correspondents.

"Business correspondents can definitely play a bigger role in the evolving banking environment. We have the people resource to make the poor and the illiterate open bank accounts and bring in Rs 50,000 crore into the banking channel every year," said Kumar Saha, managing director of Senrysa Technologies Pvt Ltd, a business correspondent with IDBI Bank, told dna.

But to achieve greater and meaningful involvement of business correspondents, the players should be allowed to undertake multiple financial products beyond just opening accounts or facilitating transactions, activities which alone cannot sustain the sector, said Saha.

The new kind of banks would also help companies like Sahaj e-Village Ltd, which has meticulously created infrastructure in rural areas operating over 26,000 Common Services Centres across six states.

"The new banks may completely revolutionise the financial outlook in rural India. With strict screening procedures, small banks project would let serious players like Sahaj, having one of the largest IT connected rural networks, carry forth its benefits across the country. Though there are restrictions like disallowing account holders to hold more that Rs 1 lakh in their accounts, it is envisaged that this introduction would be largely beneficial," said Sanjay Panigrahi, CEO of Sahaj, a Srei group outfit. It would however help if these small banks are allowed to execute government disbursements and are given options to invest collected deposits in infra projects, highest rated bonds, rural housing and power, he said.

They are your friend, even family

Satyanarayan Iyer :BL 12 June 2014

Banks vie to project themselves as people you can trust. 

But why do the taglines of different banks sound so similar?

Being present on Facebook or twitter certainly does not mean a bank is customer friendly. But an increasing number of banks want to enhance their presence on social media and present a more human face.

A visit to the original Facebook pages of some of the Indian banks and the record of these banks is there for all to see. India’s largest lender State Bank of India has close to 3 lakh Likes on Facebook. It is, however, the private sector banks which seem to be taking the cake when it comes to befriending patrons through social networking sites, thanks to their early start. ICICI Bank has about 2.9 million Likes, HDFC Bank has garnered about 2.2 million and Axis Bank has over 2.4 million.

While presence on social media is a relatively recent concept, banks have always tried to project a friendly face by coming up with suitable taglines, among other things.

At least four (IDBI Bank, Vijaya Bank, Syndicate Bank and Indian Bank) have the word “friend” in their taglines.

Some others want to get a step closer and even become family.

Bank of Maharashtra, Dena Bank and Karnataka Bank have the word “family” and unsurprisingly the word “trust” appears in taglines more than half-a-dozen times for different banks either directly or implicitly.

Banking on keywords

In some ways, banks have no option but to use keywords such as “trust” to further their cause.

According to Vivek Gupta, Senior Vice President - Brand Science at market research firm IMRB International, “The important thing with a bank is that people go there to save money. So, trust is the most important factor for banks and insurance companies.”

So they have to be careful about saying the right things through their communication and not take away from the trust factor. But that coin has a flip side too. The emphasis on sending out the right message is so much that banks often end up having identical taglines. At least two sets of public sector banks have similar taglines.

Punjab National Bank’s ‘The name you can bank upon’ is tantalisingly close to Vijaya Bank’s ‘A friend you can bank upon’. Similarly, Union Bank of India's ‘Good people to bank with’ almost mirrors Indian Overseas Bank’s ‘Good people to grow with’.

Explaining the rationale for such a narrow selection, Gupta says, “Banks realise that there are only limited positioning platforms available, hence you find the same words or even similar taglines among banks.”

The perception that “Banking is a boring business” among bankers gets reflected in their taglines too. Banks are chary of tinkering too much with their taglines. Changes, if any, are slight.

While taglines have been crafted to try and establish a unique customer connect, most do not reflect the organisation’s personality. Most customers will testify to sub-optimal services, or even higher or arbitrary service charges imposed by their banks. There is a wide gap between what banks put out as what Gupta calls “wallpapers,” and the real services offered.

It was only when the private sector banks came into the landscape that service quality really started improving, adds Gupta. “Now, service quality is the real differentiator among banks.”

However, in rural areas and semi-urban areas, public sector banks still continue to enjoy a high degree of trust from customers.

Fear of bad press

Given the widespread use of technology, branding must really reflect the personality of the product or service, or stand the risk of being exposed.

According to Kiran Khalap, CEO of Chlorophyll Brand and Communications, “We now live in an internetworked world; brand communication can no longer afford to be untruthful! Because the customer will not only find out but also tell others that your brand is lying.”

It is also important that banks live up to their branding not only for customers but for their employees too.

“When a brand line reflects the idea that guides the business, it is an inspiration for the internal audience too: it provides a flag under which the employees can feel proud,” reflects Khalap.

After all, bank customers choose their banking partner based on proximity, ease of operations and when they have a choice they rely on service.

And it is not just Indian banks that do not live up to the brand projection.

Khalap says, “It is not just Indian banks that are guilty of having a brand line that the experience does not live up to! The tagline of Abbey Bank in the UK was “Get on top of your money,” but it posted losses (over $1 billion) two years in a row in 2001/2002. Even today, after the bank was taken over by Santander, there are customers trying to access their money from the bank.”

(This article was published on June 12, 2014)

State-run banks may have a tough time ahead

Raising capital wouldn’t be an easy task for state-run banks as seen in the recent offering of State Bank of India to qualified institutional investors, which received a tepid response. Photo: Hemant Mishra/Mint

Dineshunikrishnan :Live Mint ;: MON, MAR 03 2014. 12 16 AM

Rising bad debt, huge capital requirements to meet Basel III norms likely to crimp growth of state-owned banks

Mumbai: A rising pile of bad loans, huge capital requirements to stick to the international Basel III norms and the inability of a cash-strapped government to fork out funds are likely to severely crimp growth of India’s state-owned banks.

State-run banks, crippled by capital constraints, will find it difficult to face competition from deep-pocketed private and foreign rivals and the new set of banks about to enter India’s Rs.83 trillion banking industry, experts warned.

While the capital needs of public sector banks are huge, the interim budget announced by finance minister P. Chidambaram earmarked only Rs.11,200 crore for them in fiscal year 2014-15, even lower than the Rs.14,000 crore in the year to 31 March. This led to immediate warnings from rating agencies, which cautioned that the limited capital infusion is credit-negative for these entities, against the backdrop of rising capital requirements.

An analysis of 40-listed state-run banks showed that at least seven public sector banks have equity capital adequacy ratio less than 8%. These are IDBI Bank Ltd (7.93%), Allahabad Bank (7.68%), Canara Bank (7.48%), Indian Overseas Bank (7.48%), Uco Bank Ltd (7.26%), Union Bank of India(6.75%) and United Bank of India (5.59%).

United Bank is already facing a crisis with its total bad loans rising to nearly 11%, and the bank’s overall capital adequacy ratio falling to 9.01%, forcing it to stop lending operations and virtually seek a government bailout. Experts expect that the government will need to infuse at least Rs.1,000 crore in funds into the bank, over and above what it was originally supposed to receive under the annual share of capital from the government.

A core capital adequacy of less than 8% doesn’t imply that a bank is in any form of trouble, but their capital position is relatively weaker than other banks, which could impact their ability to grow their business.

Of these seven banks, the government owns above 75% in three banks, and between 58% to 69% in the rest.

Warning signals

State-run banks will find it tough to grow their business and face competition, besides meeting the Basel III capital requirements, unless the government allows them to raise capital by bringing down its stake, experts said.

“It is a inflection point,” said Naresh Makhijani, partner, financial services, at consulting firm KPMG India. “The big question is that how will the government, which is running in a deficit, find money to infuse in government banks unless it reduces stake? Capital is going to be a major issue.”

The government expects to contain it’s fiscal deficit for 2013-14 at 4.6%, and has set a fiscal deficit target of 4.1% for 2014-15, suggesting that its ability to set aside additional capital for banks is limited.

But the government has also been reluctant to bring down its stake in public sector banks. “There will be no dilution of government’s shareholding,” Chidambaram said on 23 October in Delhi, responding to questions on capital infusion.

On 24 February, Moody’s Investors Services said the capital allocation made as part of the interim budget is “much smaller” than its estimate of theRs.25,000-36,000 crore required by India’s public sector banks to meet a minimum equity capital ratio of 8% under Basel III norms by 2018.

Under Basel III norms, which are being implemented in phases between April 2013 and March 2018, banks need to have a 8% core capital ratio and total capital adequacy ratio of 11.5% against 9% prescribed now, including a capital conservation buffer of 2.5%. Such a buffer is built by banks in good times to be used only in times of economic or system-wide downturns.

In February, this year, the Reserve Bank of India (RBI) permitted banks to use one-third of the amount banks have set aside as counter-cyclical buffers to make provisions against bad loans—the first time since the reserves were created starting 2010, implicitly acknowledging that mounting bad loans are a systemic concern. RBI’s concern is justified going by the sharp surge in bad loans in recent years and the resultant pressure on the capital adequacy of banks.

Gross non-performing assets (NPAs) of Indian banks rose to Rs.2.4 trillion in the December quarter, while another Rs.4 trillion is being restructured for stressed borrowers. Together, such loans constitute at least 11% of the total advances of Indian banks. Banks need to make 5% provisions for new restructured loans and the provision can shoot up drastically if the loan turn bad.

“Indian PSBs’ (public sector banks) need for significant external capital is a result of an increase in non-performing loans owing to the country’s slowing economy and infrastructure bottlenecks, and profitability that is insufficient for internal capital generation to fund loan growth,” Moody’s said, adding that it expects bad loans to continue rising in fiscal 2015.

Huge burden

“Indian banks will need sizable capital to support growth and meet Basel III requirements. Rated private sector banks are better placed than their public sector peers in terms of meeting Basel III capital requirements,” said rating agency Standard and Poor’s in its banking outlook for 2014 released on 10 February.

The agency expects weakness in banks’ asset quality to persist for the next 12 months given the tepid economic growth, and adds that capital is going to be a major challenge.

“Public sector banks will have to rely on a combination of government capital infusion and equity markets to support their capitalization.”

If the government opts to maintain its shareholding at the current level, the burden of recapitalization to meet Basel III norms will be of the order ofRs.90,000 crore, while on the other hand, if the government decides to reduce its shareholding in every bank to a minimum of 51%, the burden reduces to under Rs.70,000 crore, according to an RBI estimate in September 2012.

“No one would want to maintain the minimum capital in a highly competitive market. Government banks with a weaker capital base will either have to sacrifice their growth or will raise capital from market, which will further dilute their book value,” said Vaibhav Agrawal, vice-president, banking research,Angel Broking Ltd.

Raising capital wouldn’t be an easy task for state-run banks as seen in the recent offering of State Bank of India to qualified institutional investors, which received a tepid response.

As against the targeted Rs.9,600, the bank managed to raise only Rs.8,032 crore, with a state-owned Life Insurance Corporation of India bailing out the issue by buying 41.3% of the total shares offered.

Chidambaram to meet public sector bank chiefs on August 18

BL : K R Srivats : Newdelhi :Aug 7,2012

Finance Minister P. Chidambaram will meet public sector banks and financial institutions chiefs on August 18 in the Capital.

This will be his first meeting with PSU bank chiefs after assuming charge as Finance Minister on August 1.

This meeting is significant as it comes in the backdrop of the banking industry facing a crisis-like situation on several fronts, including rising bad loans and human resource problems.

There is also the threat of drought in several parts of the country, adversely impacting bank balance-sheets in the second quarter.

Chidambaram has also invited the heads of Nabard, Exim Bank, National Housing Bank, India Infrastructure Finance Company Ltd and SIDBI. The Chairman of pension regulator, PFRDA, has also been invited, official sources said. Chidambaram’s predecessor, Pranab Mukherjee, also followed the practice of meeting chief executives of PSU banks.

Such meetings offer an opportunity to the Finance Minister to review the status of financial inclusion, extent of farm credit growth and progress on the education loans front.

Already, Chidambaram has indicated that he would prefer lower interest rates to spur investments.

The RBI expects the Indian economy to grow 6.5 per cent in the current fiscal, while the Prime Minister’s Economic Advisory Council Chairman, C. Rangarajan, had pegged it higher than 6.5 per cent.

Pranab to meet bank chiefs

Source :The Hindu :Aug 11,2010

NEW DELHI: Finance Minister Pranab Mukherjee will meet public sector bank chiefs on August 14 and is likely to discuss the impact of the hike in lending rates for existing borrowers by banks following the Reserve Bank of India's monetary tightening steps.

Sources said the meeting would discuss the impact of a number of banks raising their benchmark prime lending rates (BPLRs), which would affect auto, home and education loan costs for existing borrowers.


Lenders like Punjab National Bank, Bank of Baroda, Oriental Bank of Commerce, Corporation Bank and IDBI hiked BPLRs following the RBI move to raise key short-term borrowing and lending rate by 50 and 25 basis points, respectively, to control double-digit inflation.


Since July, the system of BPLRs has been replaced by a base rate, which is a floor for lending rates. However, existing customers are linked to BPLR unless they decide to switch over to the base rate system.

Sources said the Finance Minister will also take stock of the financial performance of the banks and their projections for the current year.


He will also dwell upon credit flow to productive sectors, sources said.


The agenda of the meeting also includes a review of credit growth, including to the agriculture and infrastructure sectors, and banks' networks in unbanked blocks, sources said.