Seven Things To Watch Out For In 2016

By any yardstick, 2015 was an eventful year. Banks’ bad loans swelled and, tired of setting aside money to cover the risk of default and scared of piling up more sticky assets, banks were not eager to lend. As a result, credit growth was at a near two-decade low.

When it comes to credit, another inhibiting factor for banks could probably be the lack of adequate capital, particularly at state-run banks. Indeed, the government tried to address the issue by announcing the infusion of Rs.70,000 crore of capital in the next few years, but there has been no clarity on where the money would come from. The industry would appreciate a gradual dilution of government ownership, but that is unlikely to happen soon.

While there has not been any radical change in the banking theme, it was a watershed year for other reasons. After more than a decade, India got two new banks in the private sector. What’s more, the Reserve Bank of India (RBI) gave in-principle licences to two sets of new banks—11 payments banks and 10 small finance banks. All these banks will be operational by January 2017. Twenty-three new banks in a short span of time will usher in a sort of revolution in a country where it took more than half a century since Independence to get 12 new banks.

Broadly, I would watch out for seven trends in the New Year:

A War on Non-Performing Assets: The war on bad loans will get fiercer in 2016; RBI is losing patience. The bankruptcy law—if it sees light of day—will give teeth to the sector and infuse fear and awe among recalcitrant borrowers. The idea is to consolidate all existing insolvency laws into a single resolution, and early identification of stress and revival of companies. The fast-track insolvency resolution process—within 90 days for wilful defaulters—seems ambitious even by global standards, but a beginning is being made. What debt recovery tribunals could not do, the new law will do for banks if they have the stomach to take on rogue borrowers.

Loan Restructuring: The mother of all loan restructuring programmes—the Rs.4.3 trillion recast of loans owed by power distribution companies—would certainly help banks pare bad assets, but it is not clear as yet how this will be done. The idea of conversion of bank loans into state government bonds is fine, theoretically; but who will convince banks to subscribe to such bonds, which will offer lower yields than loans?

Competition, Collaboration and Cooperation: The birth of new banks will intensify competition and also cooperation. The payments banks, which will extend last-mile connectivity and play the role of a business correspondent, will mark the alliance of banks and mobile telephone operators—something that has happened in other parts of the world.

The story does not end here. We will see multiple alliances at different levels between established banks and new banks as well as non-banking financial companies, including microfinance institutions.

Payments banks can collect deposits of up to Rs.1 lakh, provide payments and remittance services, and distribute third-party financial products. They won’t be able to offer loans and issue credit cards but they can provide debit cards and Internet banking services. While they are expected to eat into the fee income of regular banks by offering smart payment channels using mobile telephony, they can also collect deposits on behalf of other banks. Similarly, the small finance banks will fight pitched battles with big banks in different geographies for deposits, but at the same time they can have tie-up arrangements with high street banks to source customers for them.

State-run Banks Need to Pull up Their Socks: There are 26 government-owned banks, 21 private banks and 43 foreign banks operating in the country. Even though the foreign banks number almost as many as the domestic banks, their market share in loans and deposits is just around 7%. Once the small finance banks and payments banks become operational, India will have 111 banks.

Till now, the idea was to protect public sector banks, which have 70% market share, from competition and open up the sector only when they attain maturity. The regulator has changed its stance. As it withdraws the ring of protection surrounding state-run banks, it will be a battle for survival for some of them. If they do not strive to be more efficient, these banks run the risk of being marginalized.

Innovation: As competition intensifies, Indian banks will be forced to innovate—for growth and to stay relevant. We have started seeing many incremental innovations; the pace will gain momentum in the run-up to the launch of new banks. Mobile banking will probably be the theme of the year. Meanwhile, the new formula for calculating the base rate, or minimum loan rate, will force banks to pare loan rates, at least for new loans. It will take a while; but from being kings, customers may well turn into dictators and bankers assume the role that air traffic controllers play in aviation, staying wide awake 24X7.

Financial Inclusion: The Pradhan Mantri Jan-Dhan Yojana—the most ambitious financial inclusion programme the world has ever seen—has given a big push to financial inclusion in India. The banks have so far opened 196 million deposit accounts and, collectively, the new customers have put in Rs.28,012 crore of deposits.

To be sure, financial inclusion is not about deposit accounts alone and account holders would need to have access to other banking facilities; but the programme has struck the right chords and sensitized the banking industry to the need for financial inclusion. We will see the movement gaining pace this year, with technology and mobile banking playing a key role. According to a 2012 World Bank working paper, two-thirds of India’s adult population did not then have access to formal banking services. The scenario will change for the better.

Brewing Conflicts: Finally, the state-run banking industry may see internal conflicts. While the idea of hiring chief executive officers (CEOs) from the private sector is welcome, making the new system work in the public sector will not be easy. In those banks where both the CEO and chairman are outsiders, the corner office may find it relatively easy to run the show but others will see culture clashes. Things will not change in public sector banks overnight as the problems are deep rooted.

Tamal Bandyopadhyay, consulting editor of Mint, is adviser to Bandhan Bank. He is also the author of Sahara: The Untold Story and A Bank for the Buck.

His Twitter handle is @tamalbandyo

This blog first appeared in www.livemint.com