New banks will need fresh models to succeed: India Ratings

New banks will have to develop a fresh business model to succeed, including making profits in rural areas and tackling risks associated with technology and cash management, according to India Ratings.

"If money was to be made in rural banking within the existing framework, people would have rushed there," said Atul Joshi, chief executive of the rating agency.

He also said the banking business is set to go through interesting times with the entry of new players in coming months.

The Reserve Bank of India (RBI) is currently in the process of shortlisting applicants for new banking licenses, for which 25 entities including those belonging to large corporate houses like Anil Ambani-led Reliance Group, Aditya Birla Group, Bajaj, L&T and Religare groups are in the fray.

The licences are being issued after a gap of about a decade and those to have applied in the current round also include India Post, LIC Housing, IDFC, Shriram group, Indiabulls, JM Financial, India Infoline and Edelweiss.

Talking about prospects for new players in banking arena, Mr Joshi said, "It would be very interesting. I would wait and watch to see how things shape up in banking space."

India Ratings and Research Private Limited is the Indian unit of global rating agency Fitch.

Observing that it would not be easy for new players to succeed with the current business framework, Mr Joshi told PTI in an interview that "nobody lets go of any opportunity where money is to be made".

"If we roll back to 2002-03, not many banks were into areas like housing loans, credit cards, personal loans and vehicle loans. Some people saw an opportunity and they rushed into it, followed by others. Some of them got it right and some of them got it terribly wrong," he said.

"In some areas like personal loans and credit cards everybody got it wrong at that time, from foreign banks to private banks to PSUs."

About the new licences, Mr Joshi said the thrust is mainly on financial inclusion this time around.

"The question that comes to the mind is that if there was money to be made through financial inclusion, people would have rushed into it," he said, while flagging off risks associated with reaching these targets.

"What we are looking into is a model that is more of technology-based, beyond the brick and mortar branches, or a fairly large access to technological devices and technological applications that would help take banking to the people.

"The problem that I see is that do we have the mechanism to control, supervise and govern that kind of banking models, with the existing knowledge of the bankers and at the regulatory levels. I think we need to develop new set of skills at both the levels to provide and govern such kind of banking transactions," he said.

"With the available Internet security, with whatever we believe, we continue to see frauds, we continue to see these frauds happening even at some of the most technologically advanced banks," Mr Joshi said.

"But if we get into fairly intensive technology driven banking, then we need to think in terms of the entire control over technology. I don't thing we are there yet, despite whatever we claim.That is one of the biggest challenges," he said.

Explaining further, Mr Joshi said that the rural banking is also mostly cash-based in India.

"People have cash and they would go to bank to deposit cash. Also, it is more like depositing cash and not much about borrowing cash," he said.

He also said that the system currently in place may not be able to handle that much cash.

"Do we have enough currency chests? Do we have necessary back-end infrastructure to manage that kind of rural banking," the India Ratings CEO said.

"There is also the governance issue and there are regulations like limits of Rs 49,000 for cash transactions. Besides, banks cannot disburse loans in cash. All these things would need a re-think," he said.

"So, things like technology, cash limits, calculation of cash reserve ration, cost of transaction, all these things would need a rework."

The rural areas of India are known to have a very strong deposit base, but people do not borrow that much in those areas, while reach of mutual funds, insurance and other financial products is also limited.

"There are issues like sales force, mis-selling, financial education, awareness about technological devices and language issues. A lot of back end things would need to come in place, which would be good eventually, but that would require a complete transformation," he said.

"What we need is a right model, which breaks into profit making in a few years. For the new banking licensees, I would want to see what kind of banking model develops over time."

Mr Joshi also said that it is a "right time for India to again do a little bit of introspection and go back and start thinking whether we need specialised institutions to fund infrastructure".

"We had in the past specialised institutions like ICICI, IDBI and IFCI, and similar structures can be created again for financing infrastructure."

"I think it would be much better if we have specialised institutions that would have specialised knowledge and they would give specialised funding, rather than having banks do these fundings," he said.