Indian Banking Sector Is Spreading Its Wings

For those who follow the Indian economic scenario closely, one fact seems absolutely clear – the Indian banking sector is going through a phase of unprecedented growth and consolidation at the same time. Yes, both are not mutually exclusive.

One other interesting thing is that in India everyone has an opinion these days – a rather strong one indeed – about the economy and about which direction each industry and sector is taking. So let’s say, even those with not much expertise in economic and financial affairs seem to have woken up to this new reality. My friend, an typical head-in-the-clouds artist, commented the other day, “I’d be an idiot to sell a banking share in the current scenario”. Touché!

The growth story

The Indian banking sector is at its prime. The unbelievable boom of recent months is only indicative of the big Bull Run to come, say experts. The country’s banking sector is headed to becoming the fifth largest banking sector across the globe by 2020 and could perhaps also get to the third slot by 2025. Between April and October 2014 bank deposits in India are estimated to be about USD 1.31 trillion (up from USD 1,274.3 billion in the corresponding period last year). Credit off-take for the period is estimated to reach USD 1.03 trillion. Total banking assets in the entire period were over USD 1.8 trillion in FY13. This is likely to be about USD 28.5 trillion in FY25.

Technology and infrastructure are the biggest differentiators in the banking sector these days. While we were struggling to get people to use net banking just about a couple of years ago, mobile apps and social media platforms are the in-thing now. Kotak Mahindra Bank’s KayPay that allows Facebook users to send money to friends is the quintessential New Age banking product. Every Indian bank is keen to jump on to the technology bandwagon now.

Mergers and acquisitions

The RBI is seen to be encouraging mergers and acquisitions when it comes to private banking players but seems to be rather cautious when it comes to PSUs, particularly PSU banks that are in the red. In June 2014, the Finance Ministry initiated consultations and planning for the merger of the 27 State-run banks in the country. IDBI and the United Bank of India were asked to submit a report leading to their consolidation and similarly the State Bank of India was likely to be asked to take up the operations of the State Bank of Patiala. Stronger PSU banks such as Canara Bank, Bank of Baroda and Union Bank of India seemed to be poised to acquire weaker nationalized banks such as Dena Bank and United Bank of India.

The RBI, however, did not seem very happy about the idea of such mergers. The RBI Governor, Raghuram Rajan, advised the Finance Minister that such consolidation would weaken the well-managed stronger banks rather than supporting the weaker ones. Such mergers with weak financial institutions may only further weaken the economy, he said. The Government subsequently gave up the plans for the merger of IDBI and United Bank of India. The merger plans of other PSU banks may also be delayed if not fully abandoned, according to a statement by Banking Secretary Gurdial Singh Sandhu.

Mergers and acquisitions have, however, looked quite welcome on the private banking front. On November 21, 2014, the merger of Kotak Mahindra Bank and ING Vysya Bank was received with much euphoria on Dalal Street. Kotak Mahindra share rallied almost 9 percent while the ING Vysya Bank share rose about 3.4 percent with the news of the merger hitting the markets. Post-merger, Kotak Mahindra Bank is now the fourth largest private bank in the country. Consolidation is likely to pick up and more bank mergers expected to be announced, say banking experts.

Wooing retail investors

Yesterday the State Bank of India (SBI) went into a 1:10 stock split. On November 21, 2014, the bank’s equity shares were sub-divided and the list of shareholders who would receive 10 equity shares of nominal value of INR 1 each in lieu of 1 equity share of nominal value of INR 10 each, was drawn up. The SBI shares trading at INR 2900+ per share levels on November 19, 2014 was trading at INR 290+ per share on November 20, 2014. However, since existing shareholders will find the number of shares in their accounts ten times the number they had bought prior to the split, the overall value is likely to be the same. Stock splits are typically done to attract more retail investors. The lower the cost per share, the more likely small-time traders and retail investors are likely to buy them.

The next major bank to have approved a stock split is ICICI Bank. The shares of ICICI Bank went up by about 3 percent with the announcement that the bank shall go ahead with its stock split on December 5, 2014. ICICI Bank has reported that eligible shareholders “would be entitled to receive 5 equity shares of nominal value of INR 2 each in lieu of 1 equity share of nominal value of INR 10 each of the bank”. Axis Bank, Bank of Baroda, Canara Bank, Punjab National Bank, Corporation Bank and Jammu and Kashmir Bank have all approved stock splits this year.

RBI’s plans for the sector

In April 2014, the Reserve Bank of India started the financial year by issuing new banking licences to two financial institutions based on the reports of the Jalan Committee. The Bandhan Financial Services and the Infrastructure Development Finance Company (IDFC) secured these banking licences bypassing many big names in the financing sector. Prior to obtaining these licences, the former was known as a micro-lending company and the latter as a specialized infra-lending company. At the time, the RBI had promised to make way for differentiated banking licences allowing financial institutions to specialize in select verticals.

In keeping with its promise, the RBI drafted terms and guidelines for the opening of payment banks. Payment banks are specialized banks that offer remittance services and shall be allowed to invest the float money (difference between the remittance sent from abroad and received in India) into Government bonds. Provisions for the operation of small banks that shall concentrate on regional finance are also being made by the Central Bank.


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