Even while the Finance Ministry is talking public sector bank mergers, the marketplace for real mergers – and not shotgun weddings forced by the government – is telling us a different story.
The government is talking mergers because it wants to create a few larger banks which are strong and can manage to raise their own capital for growth. But size does not equal strength unless focus and synergies are obvious. So, the government’s initiative can, at best, be termed a defensive manoeuvre to prevent a collapse.
On the other hand, see what private banks are up to. Yesterday (11 September), IndusInd Bank opened talks with Bharat Financial Inclusion, a microfinance company, for a possible merger.
In July, Axis Bank bought e-wallet company FreeCharge for Rs 385 crore, and, in August, Bajaj Finance bought 11 per cent in MobiKwik, for Rs 225 crore.
Kotak Mahindra, despite having its own payments wallet in the 811 product, also has a stake in Airtel Payments Bank. Reliance Jio Payments Bank has a tieup with State Bank of India (SBI), and Fino Payments Bank has an infrastructure sharing agreement with ICICI Bank.
We cannot know for sure which of these initiatives will work and which ones will fail, but one thing is clear: the private sector banks see value in microfinance and e-payments, and not in mindless mega mergers that privilege size over substance and focus. The private banks are also focusing on areas where they think there will be future growth. Their moves are about adapting to the new rules of the game.
Clearly, the pot of gold that private players are seeing in their kind of mergers is different from the defensive nature of public sector bank mergers.
The reason is this: the world of banking is going to face big disruptions, some of which are already apparent.
In a Swarajya article published some months ago, we quoted from Nandan Nilekani’s presentation on the 12 disruptions that threaten banking. (See his full presentation here). Here is our sum-up of the major ones:
#1: Low-volume, high-value transactions are passe; the shift is towards low-value, high-volume transactions. The average value of a cheque transaction is currently around Rs 75,000, but the average value of e-wallet payments is Rs 300-500, and Rs 30 for a mobile recharge. Banks cannot expect to make their moolah from high-margin businesses in the future. Now one can see what value Axis sees in FreeCharge despite having its own wallet.
#2: Credentials have moved from banks’ proprietary sphere to open spaces. When a bank gives you a credit card or a PIN number, it owns both; when transactions shift to mobile phones, the authentication factor moves to a third party beyond the bank. Effectively, you are in control.
#3: Switching costs are going down. Today, it is difficult for customers to change banks for various reasons. But with two SIM cards, mobile users can switch service providers with a simple click. As customers get wooed by multiple banks, customers can shop for the best rates from any bank using mobile interfaces. Whether it is a loan or an insurance policy or even a deposit product, switching will be easier in the future. Banks will have to compete harder for business. Easy money from current and savings accounts will shrink.
#4: Lending rates will be priced individually. Credit risk can be gauged not only from your individual credit score but from multiple records, including e-wallet and mobile payment behaviour. Credit will thus be offered on the basis of expected default risks. So, rates will be individual-specific. Interest rate divergence will also narrow, as the market becomes more efficient. Currently, there is no rationale for giving the richest customers credit at throwaway rates while fleecing rural borrowers and small businesses through moneylenders or informal lenders.
Second generation mass disintermediation is here; in the first stage, the banking industry’s best customers raised money directly from investors; in stage two, all bank customers will be able to shop around for the best borrowing and lending rates from any player, whether it’s the bank or a financial company. Banks themselves could become faceless intermediaries, entirely dispensable. This could be why IndusInd sees value in Bharat Financial Inclusion, since it is at the bottom of the lending pyramid where plain vanilla microloans will be needed.
#5: Business models are changing from fee-based to data-based. Microsoft still sells its software for a fee; Google uses its data to give you services free while charging advertisers for delivering the right customer to them. This model will impact banking too. They have to learn to use their data to build alternate revenue streams.
#6: PSU banks are losing both market share and market value. Occupying over 90 per cent of the banking market some 15 years ago, their share is now dipping below 70 per cent, thanks to an overload of bad loans. Their market valuation has taken a beating, with HDFC Bank alone exceeding the values of all public sector banks put together. SBI is valued as much as the rest of the public sector banks put together.
In this scenario, public sector banks, with their huge branch and employee overheads, and with their cumbersome decision-making processes, will be trying to compete with nimble new insurgents with no legacy problems. Goliaths will lose to Davids.
In 2015, for example, the SBI and public sector banks had more than 8.5 lakh employees on their rolls; the new mobile banking players will run with barely a few thousand employees.
If the Finance Ministry wants to see public sector banks succeeding against the odds, it needs to take a leaf out of the private bankers’ books – and privatise the good banks as soon as possible. Time is running out.
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