On April 2, 2014, a few days before India went to the polls for its 16th general election, the country’s central bank, the Reserve Bank of India (RBI), finally announced the names of the private sector players it was granting banking licences to. Although it came amid election campaign season fever, the banking industry paid close attention to the announcement. After all, the process of granting new banking licences had been in motion since 2010, when the then finance minister and now president, Pranab Mukherjee, had announced in his budget speech for 2010 to 2011, that corporate houses would be allowed to set up new banks.
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In the end, none of the corporates that applied for banking licences, including names such as Reliance, Bajaj and Aditya Birla, made the cut. The RBI, which has always expressed strong reservations about allowing corporates into the banking sector, gave the in-principle banking licences to just two of the 25 applicants: infrastructure finance company IDFC and the country’s largest microlender, Bandhan Financial Services.
The central bank agreed that its decision to give licences so frugally could be labelled as conservative, but said that it would be working to widen the pool of entrants into the banking sector by coming up with guidelines to provide banking licences more regularly. The applicants that had been denied this time round, said the RBI, could be eligible for receiving on-tap differentiated banking licences at a later date.
“It will serve the country well to have more players coming into the banking sector,” says Rana Kapoor, managing director and CEO of Yes Bank, which, along with Kotak Mahindra Bank, received its banking licence in the last round of issues, in 2004.
“Yes Bank, with an asset book of little more than Rs1000bn ($16.7bn), has only 1% of the market share in its 10th year of operations – an indication of the opportunities that perhaps lie untapped, especially at the bottom of the pyramid,” he adds.
Mr Kapoor points out that it will take a considerable length of time for new entrants to catch up with existing players, which have already reached significant size and scale. Apart from building their operational infrastructure, new lenders have to meet various regulatory requirements, such as providing cash reserve ratio and statutory liquidity ratio reserves, and meeting the financial inclusion guidelines, which require new banks to set up one-quarter of their branches in unbanked rural areas with a population of up to 9999 people.
“New banks will take at least four to six years to be meaningful competitors to existing banks,” says Mr Kapoor.
Both Bandhan and IDFC are very well established in their respective fields, says Shinjini Kumar, executive director in charge of banking and capital markets at professional services firm PricewaterhouseCoopers. “Their challenge will be to retain their differentiation as they set up their banking infrastructure, and meet regulatory requirements such as priority sector lending and the rural-to-urban branch ratio.”
On another front, media reports suggest that the new Ministry of Finance is examining various suggestions to merge state-run banks to create much stronger financial institutions. It has often been discussed in the past that India’s banks are much smaller than their global rivals. State Bank of India, the country’s largest commercial bank, is ranked 16th in Asia, while Bank of Baroda is ranked 32nd.
Speaking with chief executives at some of the country's leading banks, The Banker explores the developments, performance and prospects of these institutions.
State Bank of India
Tracing its history back to the first decade of the 18th century, State Bank of India (SBI) was established in its present form in 1956. It is India’s largest commercial bank, with Tier 1 capital of more than Rs1250bn as of March 2013, and about 16,000 branches serving its 291.2 million customers.
For fiscal year 2014, SBI’s total business increased 15% to Rs26400bn. However, in this period the bank’s net profit declined 22.7% to Rs108.91bn. As with many of India’s state-owned public sector banks, one of the main problems that SBI has been facing in recent years is that of non-performing assets (NPAs).
Between March 2013 and December 2013, gross NPAs as a proportion of advances grew from 4.75% to 5.73%. However, the final quarter of fiscal year 2014 provided some respite in this area when gross NPAs as a proportion of advances reduced to 4.95%. Further, fresh slippages – good loans turning bad – reduced by 30% between the third and fourth quarters of fiscal year 2014, to reach Rs79.47bn. Some industry experts suggest that this signals a reversal of the rising NPA trend.
In recent months, SBI has slowly been increasing its social media presence. In November 2013, it launched its Facebook account, in January 2014, its YouTube account and in April 2014, its Twitter handle. At the last count, the bank had 9317 Twitter followers with 2069 tweets. In April, the bank, which has more than 16.5 million internet banking users and 8.5 million mobile banking users, also launched a new digital banking facility, TAB banking.
This facility was designed to make the process of opening an account with the bank easier, allowing staff to visit customers’ homes, use tablets to get the formalities completed, upload the details to the banking system and send the customer their account number via SMS or email. “This will provide convenience and time saving to the customer for opening accounts with SBI,” says the bank’s press release.
Bank of Baroda
The second largest public sector bank in India, Bank of Baroda (BoB) was established in 1908, and is estimated to have about Rs5800bn on its balance sheet. The bank has a network of 4874 domestic branches and more than 6000 ATMs. It is estimated that BoB has more than 32% of its advances coming from overseas branches. Starting its international expansion through opening a branch in Kenya in 1953, today BoB has more than 100 branches across 25 countries. This includes 60 branches of the bank, 41 branches of its subsidiaries and one representative office in Thailand. Apart from that, BoB has joint ventures with other Indian banks in Zambia and Malaysia too.
BoB reported an 11.7% increase in total income from Rs388bn in fiscal year 2013, to Rs434bn in fiscal year 2014. While its net profit grew 1.35% from Rs44.8bn to Rs45.41bn in the same period, it experienced strong 12.48% quarter-on-quarter growth in net profit between the final quarter of 2013 and the first quarter of 2014. The bank also experienced a drop in NPAs between the two quarters, with gross NPAs as a proportion of advances declining to 2.94% from 3.32%. This drop is an indication that NPAs have peaked, according to the bank.
Ranjan Dhawan, BoB’s executive director, says that the NPA situation will improve with gross domestic product (GDP) growth. “The global economy, which has been in a state of crisis, is picking up. This will influence India’s GDP growth too, and with that the banking industry’s growth will gradually pick up as well,” he says.
Union Bank of India
State-owned Union Bank of India (UBI) has 3871 branches and 6429 ATMs spread across the country, serving its customer base of more than 50 million people. The bank has two branches overseas in Hong Kong and Dubai. In 2014, transactions through the bank's electronic channels increased to 62% of total transactions from 60% in 2013.
The bank announced relatively weak results for fiscal year 2014. Its net profit stood at Rs16.9bn, a decline of 21.4% from the Rs21.58bn reported the previous year. Quarter on quarter, the bank’s profitability decreased by 26.6% from Rs7.89bn in the final quarter of 2013 to Rs5.79bn in the first three months of 2014. The bank is also facing deteriorating asset quality. Its ratio of gross NPA to gross advances stood at 4.06%, as of March 31, 2014, compared with 3.85% as of December 31, 2013 and 2.98% as of March 31, 2013.
“There are challenges in terms of improving asset quality. The government should speed up clearances for the projects [that are] stuck at different stages of maturity, particularly the ones in the advanced stages. These projects would ensure the beginning of cash flows for the borrowers, which in turn could service their debt obligations with banks,” says Arun Tiwari, the chairman and managing director at UBI.
Mr Tiwari adds that UBI has set its sights on “recouping profitability. The bank’s return on assets is presently about half of its potential based on existing capabilities.” The focus, he says, will be on improving efficiencies through orienting its advances mix in favour of retail, agriculture and the micro, small and medium-sized enterprise sectors, encouraging fee-based income through an emphasis on insurance and mutual funds business among target customer segments, challenging treasury operations to earn more profits from market participation, harnessing diversified branch presence (with 61% of its branches in rural and semi-urban areas) for low-cost savings, deposits mobilisation and containing stress on asset quality.
Bank of India
State-owned Bank of India has about 4500 branches, including about 50 branches outside of India. It has an overseas presence in 20 foreign countries spread over five continents. A pioneer in many ways, the bank is a founding member of the Society for Worldwide Inter Bank Financial Telecommunications (Swift) in India, and was the first of the country’s state-owned banks to establish a fully computerised branch and ATM facility, which it did in Mumbai back in 1989.
In the fiscal year 2014, Bank of India reported a net profit of Rs27.29bn, a slight dip from the Rs27.49bn it recorded in the previous fiscal year. Its gross NPA ratio increased in this period from 2.99% to 3.15%.
Punjab National Bank
Established in 1895 in Lahore, Punjab National Bank (PNB) has the largest distribution network among India’s public sector banks, serving more than 890 million customers. PNB has more than 6200 branches and 6940 ATMs. As of March 2014, the bank’s internet banking service catered to some 249.6 million customers. The base for its mobile banking services is much smaller, with 24.6 million customers subscribed for SMS alerts and 97,481 subscribed for mobile banking services. As of March 31, 2014, 1.7 million SMS alerts were generated every day, and 202,110 mobile banking transactions were made per month amounting to Rs1.09bn in mobile transactions.
Fiscal year 2014 saw the bank post net losses of 29.6%, going from Rs47.48bn in fiscal year 2013 to Rs33.43bn.
Asset quality at PNB is a cause for considerable concern. The gross NPA ratio at the bank – gross NPAs as a proportion of advances – has consistently increased, from 1.6% in fiscal year 2009 to 2.93% in fiscal year 2012, and 5.25% in fiscal year 2014. In actual terms, gross NPAs grew from Rs134.6bn at the end of March 2013 to Rs188bn at the close of fiscal year 2014. Large corporates are the biggest defaulters and especially those in the infrastructure sector.
ICICI Bank
India’s largest private sector lender, ICICI Bank, had total assets of Rs5946.42bn as of March 31, 2014. The bank’s net profit grew 18.7% from Rs83.25bn to Rs98.1bn in fiscal year 2014. During the year, the bank added 653 branches and 834 ATMs to its network, which, comprising 3753 branches and 11,315 ATMs, continues to be the largest among private sector banks in the country.
Chanda Kochhar, managing director and CEO of ICICI Bank, says that the bank will continue its strategy of balancing growth, profitability and risk management, “I feel that the coming year will see an improvement in the overall environment, with a moderate improvement in economic growth. We believe that our strong and diversified franchise, large distribution network and healthy capital position gives us the ability to leverage opportunities for profitable growth. We are targeting system loan growth of 16% to 18%. Our loan growth will be driven by retail in the coming year. Our retail portfolio is growing by more than 20% already. We will focus on keeping a stable average current account savings account ratio, in the range of 38% to 40%. We will also look to maintain our net interest margins around the current year levels of 3.3% and keep the cost-to-income ratio at less than 38%.”
Among private sector banks, ICICI Bank has experienced the highest NPA levels. However, there was a dip in the gross NPA ratio in fiscal year 2014. The gross NPA ratio reduced from 3.03% in March 2013 to 3.05% in December 2013. The figure stood at 3.03% at the end of March 2014. Ms Kochhar says that the bank will continue to proactively monitor its portfolio and focus on maintaining stable quality. The pace of addition to NPAs and restructured loans, she says, has peaked and the fiscal year 2015 will see lower NPA levels.
HDFC Bank
Incorporated in 1995 when India’s central bank started the liberalisation programme for the banking sector, HDFC Bank has grown into the second largest private sector bank in the country. The bank services its 28.5 million customers through a network of 3403 branches in 2171 cities and 11,256 ATMs along with telephone, internet and mobile banking services. About 55% of the bank's branches are in semi-urban and rural areas.
For the year ending March 31, 2014, HDFC Bank earned total income of Rs490.55bn. Its net revenues (net interest income plus other income) were Rs264.02bn, up by 16.5% compared with Rs226.63m for the year ending March 31, 2013. The bank’s net profits for the year ending March 31, 2014, were Rs84.78bn, up 26% compared with the year ending March 31, 2013.
The gross NPAs of HDFC Bank are significantly lower than the industry average, which the bank believes reflects its strict controls and lending policies. Gross NPAs were at 0.98% of gross advances as of March 31, 2014, compared with 1.01% as of December 31, 2013, and 0.97% as of March 31, 2013. The total restructured loans (including applications under process for restructuring) were at 0.2% of gross advances as of March 31, 2014.
Yes Bank
Yes Bank was incorporated when the Reserve Bank of India issued its second set of banking licences in 2004. Since then, it has grown to be the fourth largest private bank in the country, with more than 560 branches across 350 cities and 1139 ATMs. Its focus is on corporate and institutional banking.
For fiscal year 2014, Yes Bank’s net profit increased by 24.4% to Rs16.17bn. However, the bank’s gross NPAs as a proportion of advances grew from 0.2% to 0.31% between fiscal year 2013 and fiscal year 2014.
Mr Kapoor, the bank's CEO and managing director, says that, in the current environment, the bank would like to follow a cautious approach to growth, which includes consolidation and mitigation of risks. “While we expect the industry to grow its advances by about 13% to 14%, our assets and liabilities are expected to grow by about 20% in the fiscal year 2014 to 2015. With improving stability in the currency and the expected uptick in the macro environment, the bank is well positioned to grow its lending book, especially in the retail and small and medium-sized enterprise sector, which are expected to be important growth drivers for us over the next three years to continue through diversification and improving granularity.”
With the aim of augmenting its core Tier 1 capital base, Yes Bank recently raised $500m through a qualified institutions placement. The overall allocation to foreign institutional investors was approximately 40% from the US and Europe, 30% from Asia, with domestic insurance companies and mutual funds accounting for the balance. The issue was oversubscribed five times. The bank says that the placement increases its overall capital adequacy to more than 18% and Tier 1 capital by about 13%, ensuring that the bank is well positioned for growth.
Bandhan Financial Services
India’s largest microfinance institution, Bandhan Financial Services, received a banking licence in April this year. Bandhan was set up in 2001, and currently enjoys a 22% share of the Indian microfinance market. Its main objective is to work with women who are socially disadvantaged and economically exploited, and much of its activities are in the eastern and north-east region of the country, where banking penetration is very low. It lends as little as Rs1000 at interest rates of 12% to 22.9% to female borrowers. As of March 2014, its loan book totalled more than Rs50bn across more than 5 million borrowers.
Bandhan has to wait until October 2015 before it can start operating as a bank. It has hired professional services firm Deloitte Touche Tohmatsu India to advise it on entering the banking market. Chandra Shekha Ghosh, founder and managing director of Bandhan, says: “We have, until now, only provided credit services. Now, with the banking licence, we will also provide deposit services. Deposits will help lower funding costs as we expand into providing credit to companies and middle-class people as a well.”
According to Mr Ghosh, Bandhan’s strength lies in its 13,000-strong workforce, which remains highly committed to both the rural customers and the company. These staff members will be trained to work in a banking capacity now that the company has its licence. “Our model is to recruit people from rural areas and train them. This has worked very well for us as they are very committed,” says Mr Ghosh. Another strong point for the bank is its brand. “We have a very good brand in the rural market. And enjoy a 99.5% repayment record,” says Mr Ghosh.
Bandhan’s challenge as it goes forward will be to gain deposits, an area in which it currently does not have any expertise, says Mr Ghosh. Additionally, as Bandhan recruits people from the banking sector, it will need to ensure a seamless cultural fit.
Providing Bandhan with a banking licence forms part of RBI’s effort to further financial inclusion in the country. Harsh Bisht, a partner within the banking sector of professional services firm KPMG in India, praises the move to give a banking licence to Bandhan: “If this experiment is successful, we will see more microfinance institutions entering the banking sector,” he says.
IDFC
IDFC also received a banking licence in the latest licencing round. IDFC was established in 1997, and has been providing infrastructure finance solutions ever since. RBI has given the financial institution 18 months to set up its banking infrastructure.
Rajiv Lall, executive chairman of IDFC, says that the company’s immediate priority will be to meet RBI’s regulatory requirements. This includes taking steps such as diluting foreign ownership and the transfer of assets and liabilities from IDFC to IDFC Bank. Setting up the operational infrastructure will also be a main focus, he says, along with deciding on the strategic value proposition of the bank.
There are both advantages and disadvantages of being relatively late to the Indian banking market, says Mr Lall. With the country remaining relatively underbanked, there is an opportunity for new entrants. However, he says that with bank branches being concentrated in the largest 30 to 40 towns and cities, competition will be intense, and the cost of customer acquisition in these centres will be very high.
IDFC’s key advantage, Mr Lall says, is that it has a starting loan book of Rs500bn to Rs600bn. “We have a very strong balance sheet and very strong lending relationships across corporate India,” he says. A key advantage that IDFC enjoys compared to banks that were started earlier, he goes on to say, is that IDFC will enjoy several degrees of freedom. “The technology is developed. It is now possible to build a branch network at a lower cost.”
RBI has made it mandatory for new banks to open at least 25% of their branches in rural centres. Mr Lall says that adhering to this will not be a burden. Microfinance institutions (MFIs) such as Bandhan, he says, have proven that they can profitably provide services to the unbanked. “Learning from the experiences of MFIs, marrying that with technological development and putting that in the banking framework is a very powerful proposition,” he says.
Recently, ratings agency Fitch Ratings issued IDFC a Long-Term Issuer Default Rating of BBB. The stable outlook is driven by IDFC’s standalone credit strength and the expectation that this is unlikely to change in the near to medium term, says Fitch.
“The way IDFC rebalances its business profile and the impact of this on its overall risk profile will be important considerations for the rating in future. However, Fitch expects that such a change would take place over the medium to long term. IDFC's capital buffer with Tier 1 capital ratio at 20.1% at the end of March 2014 (compared with 19.8% at the end of March 2013) underpins the rating given the finance company's high concentration risk, which is likely to remain at high levels during the initial transition process,” stated Fitch in a press release.
