Clad in a bright red sari on the veranda of her home in rural eastern India, 34-year-old Sudha Yenigalla patiently works her way through a crowd of elderly villagers, gathered to withdraw their monthly pension.
Each payment is processed in a matter of seconds, thanks to the “micro-ATM” she carries: a lightweight device comprising a Chinese-made touchscreen and a fingerprint scanner, which she uses to verify the pensioners’ identities through the government’s new biometric ID system.
As a local agent for the recently established IDFC Bank, Ms Yenigalla is part of a new generation of banks in India. Her micro-ATM is the closest thing to a bank branch that the 2,300 residents of Inapuru, in Andhra Pradesh state, have ever had — enabling them to set up and access bank accounts without a gruelling journey to the nearest town.
In the decade leading up to 2014, not a single banking licence was issued in the country — but the Reserve Bank of India then issued 21 of them in little more than a year.
The radical move, under then central bank governor Raghuram Rajan, was driven by hopes a fresh wave of lenders could shake up the industry, accelerating its embrace of new technology while dramatically extending the frontiers of India’s financial sector. A report in 2015 by consultancy PwC estimated that 233m Indians still lacked bank accounts — forcing them towards usurious loans from informal moneylenders, and crippling their ability to boost their wealth by saving.
Four years after the first licences were issued, the more successful of the new entities are helping to drive a significant expansion of India’s financial landscape, alongside a rural growth drive by the traditional government-controlled banks. But others have dropped out of the running, and analysts warn that stiff challenges remain for those that have survived.
On March 27 Bandhan Bank, the largest of the new institutions, completed a heavily subscribed initial public offering that saw a 27 per cent share price jump on its first day of trading, valuing it at $8.6bn — higher than all but one of the state-owned banks that still dominate the market.
The flotation was a milestone in the 17-year journey of Chandra Shekhar Ghosh, the son of a Bengali sweetshop owner, who became a pioneer of microfinance in India after seeing its success in neighbouring Bangladesh. New approaches are vital, Mr Ghosh says, given the banking system’s inability so far to meet the needs of most Indians. “Seventy per cent of the people in this country are living in rural areas, but only 34 per cent of bank branches are serving those areas,” he says.
After becoming a fully fledged universal bank in 2015 — alongside IDFC, previously an infrastructure financier — Bandhan opened nearly 900 branches to pull in deposits across India. But it was careful to maintain the simple image that had enabled it to thrive as a microlender, with branch staff ordered not to dress too formally.
“If I go into rural areas in this dress,” says Mr Ghosh, gesturing at his suit in his smart Kolkata office, “it will not be easy to talk to small shopkeepers.”
Having drawn in deposits of nearly $4bn within its first two years of operation, Bandhan is the most successful of the new banks, says Sri Karthik Velamakanni, an analyst at Investec.
But it is far from the only microlender to have morphed into a bank. Of the 21 new licences handed out by the RBI in 2015, 10 were for the establishment of small finance banks. The new class of institution is focused on lending to marginalised borrowers, such as farmers and small businesses.
These new institutions are required to make 75 per cent of their loans to such “priority sector” borrowers, while at least half their credit portfolio must consist of loans worth Rs2.5m ($38,000) or less.
These requirements are far from arduous for the small finance banks, most of which were previously microfinance companies targeting precisely this category of customers, says PN Vasudevan, founder of Equitas Small Finance Bank in Chennai.
“We had chosen to service this segment right from the beginning,” he says. “We thought: this suits us very well.”
Becoming a bank should enable Equitas to build more stable relationships with its customers by offering them deposit accounts and more diverse loan products, Mr Vasudevan says. Equitas previously had a team of just three people to secure funding, but now has 3,500 involved with raising deposits, which are bringing down its cost of funds, he says.
Some warn, however, the new institutions face a tough challenge to bring down funding costs. To attract depositors, they have been forced to offer generous interest rates, while the cost of debt funding has risen with weakness in the Indian bond market. If funding costs are not reduced to levels approaching those of the universal banks, “it will be a big problem”, says Venky Natarajan of investment fund Lok Capital, which has stakes in several of the small finance banks.
The sector’s cost efficiency has been boosted, however, by advances in technology — notably, those linked to the government’s Aadhaar ID system, which has compiled a database of the personal details and biometric information of almost every Indian adult. “Now a new customer can start using his account in 10 minutes — previously it was seven days,” says Sanjay Agarwal, chief executive of Mumbai-based AU Small Finance Bank.
Even for the new institutions that can offer the full range of banking services, attaining critical mass will take years, says Rajiv Lall, chief executive of IDFC. With its background in corporate lending, analysts say, IDFC has struggled to achieve rapid deposit growth — although it is hoping to strengthen its reach among consumers and small businesses through a forthcoming takeover of Capital First, a non-bank lender.
“Even as late as last year, 45 per cent of all bank lending in this country was still concentrated in 300 corporations and their subsidiaries,” Mr Lall says. “So the opportunity [to serve new kinds of customers] is there, but it takes time to build . . . It’s just a grind.”
Capital-light, tech-heavy payments banks arrive
Alongside the small finance banks, India’s central bank in 2015 launched a second new kind of institution: payments banks. Conceived as a means of driving technology-based innovation, the payments banks are forbidden from making loans and clients’ deposits are limited at Rs100,000 ($1,500) a head. The central bank reasoned that this tightly restricted model could be used by tech-heavy, capital-light businesses to extend financial services to new areas.
The most high-profile of the payments banks is run by Paytm, India’s leading financial technology company, backed by investors including Alibaba of China.
Paytm sees this new banking service, alongside others such as online shopping and travel booking, as a means of building a seamless, integrated ecosystem — much like Alibaba’s model in its own domestic market. “With the synergies of Paytm, you don’t have to withdraw your money — you only have to spend,” says Renu Satti, chief executive of Paytm Payments Bank.
But of the 11 entities that received payments bank licences in 2015, only four have launched their services, while others including the Mahindra group have withdrawn altogether. This highlights the weaknesses of the business model, says Sri Karthik Velamakanni, an analyst at Investec, which relies on eking out commissions from payment transactions rather than from lending and other, more lucrative services.
The concept has been backed by India’s four largest mobile operators, who see it as a way to boost customer loyalty as they wage an expensive price war. But only Bharti Airtel, the market leader, has so far launched its payments bank — and it has faced a high-profile scandal in recent months over allegations that accounts were opened for customers without their knowledge. Reliance Jio, the sector’s disruptive new entrant, is expected to launch its payments bank in the next few weeks.
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