The financial sector has been on top of my mind (and that of many others) for some time now. My thoughts have been on a different plane and not related to the woes of Lehman, Merrill etc. More specifically I have been pondering over the banking sector in India.
The following are the characteristics of the banking sector in India.
- Uninterested competition in the presence of a large number of Public Sector banks. These banks are run for the employees and for the government and its political constituency. Sometimes they think about customers and rarely if ever about shareholders.Witness the spectacle where State Bank of India is wanting to merge with a small 100% owned subsidiary State Bank of Saurashtra. Despite assurances of no employee retrenchment and no job losses there have been numerous strikes and demonstrations opposing this. We have a situation of employees holding the government, customers and shareholders to ransom without any rhyme or reason. Just imagine what would happen if some enterprising bank Chariman or Managing Director was to try and close unviable branches or outsource some work to third parties. (To digress slightly, try opening a PPF account with any SBI branch in South Mumbai. You will be told that the branch has a lot of workload and cannot cope up and hence you should open the account in some suburban branch. The account opening form will not be given to you unless you plead, cajole, threaten and / or get some personal connections.) Witness the government directives to write off farmer loans / lower interest rates / not increase interest rates / give loans to specific sectors / geographies etc. without any indication of how the banks are to be compensated.
- Lack of alternatives. The Reserve Bank has effectively killed of the Non-Bank Financial Companies (NBFC) sector by repeatedly choking off access to funds and the way they can run their business.
- Restrictive licencing.The Reserve Bank want to keep the money of the depositors’ safe. It also wants to avoid systemic risks. Towards this end the Reserve Bank has selected to restrict the banking business to a chosen few. The ‘chosen’ ones are either government owned banks or banks promoted by government owned institutions in partnership with multilateral agencies or some large NBFCs which were allowed to convert to banks when NBFCs were being phased out. New bank licences are effectively not on offer. It does not matter to the Reserve Bank that such actions have severely limited competition in the banking sector and reduced customer choice.
- Effective Oligopoly.Hence we have ICICI Bank (earlier a government promoted institution), HDFC Bank and Axis Bank (erstwhile UTI Bank) as the flag bearers of new age private banks being run for customers and shareholders apart from employees and the government. A lot of others folded up and merged with other banks. HDFC Bank acquired (directly/indirectly) Times Bank, Centurion Bank, Bank of Punjab and Lord Krishna Bank. Global Trust Bank merged with Oriental Bank of Commerce in a shot gun merger. Sangli Bank merged with ICICI Bank. The others like Indusind Bank or the old private banks (the ones which escaped nationalisation on account of small scale of operations) or the very new banks like Yes Bank are too small to make a difference. Kotak Bank is more a stock broker and an investment bank rather than a commercial bank.
- ‘Regulated profits’ – for whose benefit? For most industries where competition is limited, the regulators step in for the benefit of the consumers. For example in the case of Power utilities, there is a cap on tariffs and on the returns that utilities can make or for example TRAI sets maximum charges for cable television, channels or mobile phone charges. In banking we have a unique situation where the regulator regulates charges to favour the oligopolistic service providers !!! Thus we have a surprising situation that current accounts pay zero interest and savings accounts pay a low interest (which is capped as per regulations) and calculated as per the minimum balance held during a month. On the other hand when it come to lending rates for the consumer, banks recently went to the Supreme Court to waive off a cap on interest rates @ 30% p.a.!!!!
- Guaranteed growth. In no other industry is growth virtually guaranteed. In a situation where money supply grows 15% to 20% each year, a growth in deposits and lending is given. Further you have uninterested competitors (see point 1) who will cede market share each year and a growth in excess of 20% is assured.
- Under penetration and cherry picking of assets.I read an article on Bloomberg today which mentioned that banks in the US have become really stringent in lending for mortgages. Really? US banks have now moved to a situation where borrowers are required to put up 3% to 5% of the house value upfront to avail of mortgage loans!!! In India 25% to 30% upfront payment is the norm. That too on the ‘white’ component if you know what I mean. This is again because there is no effective competition in the market place. Hence banks can cherry pick people to whom they will lend. The others simply have to do without credit.
If we cannot get a banking licence, we can surely buy stocks of some of these Oligopolistic businesses.