Cataloging the course of indian private banks
Twenty-five years before meanwhile Aditya Puri and Paresh Sukthankar assembled with a band of bankers to show possible investors in the IPO of HDFC Bank. what they planned to do in their initial three years, few understood what was imaginable. But management required they present a sales plan if they needed funds from state markets.
Following weeks of discussions, they decided the most reliable bet would be to assume HDFC Bank would have 300 branches in three years. The approach of 2019, it has 5,130 branches and projects to open 700 parts in a year. That’s the hollow between how one visualizes the tomorrow and what it really turns out to be if something goes immediately.
For HDFC Bank, which gathered Rs 50 crore in an IPO in May 1995 at Rs 10 a share with a market capitalization of Rs 5.98 lakh crore, and 8 others that began the course in a fledgling open market for financial services, it was like overseeing into unchartered seas. It was a journey that could end up as it did for Christopher Columbus or Ferdinand Magellan.
Indian banking has its quota of Columbuses and Magellans. A fraction of a century succeeding, what is left is less than half of the series that started from the network. Events along the way eliminated some and other less effective arranged to marry themselves off to a financially stable associate.
As the government speculated with the concept of private sector banks a portion of a century after nationalizing banks in the handle of socialism, there were difficulties, concerns, and worry. Almost all of them came accurate. Some damaged value, others created – for the public, stockholders, investors, and clients.
“Largely they have turned out to be successful,” says C Rangarajan, the architect of private bank licenses as the Governor of the Reserve Bank of India. “There have been one or two failures. But that will happen. But the whole thing is that private sector banks have established a position and their share in the total market is now significant, which was negligible in 1992.”
Building the Pie
The Indian banking business was Rs 2 lakh crore in 1995 with the nationalized banks moving the sole business services providers with minuscule participation from old private area banks such as Karnataka Bank or Tamilnad Mercantile Bank. Of course, the measurement of the administration was comparatively small too at Rs 1,015 lakh crore.
Banks in the government-owned banks rarely had an angled room to do any banking with almost everything delivered by the control. The application was more like a piggy bank for the management and the tycoons it favoured. Businesspeople with associates could get their way and people just put in their deposits without much scope to appropriate from.
Traditional judgments led to many new lenders such as HDFC Bank starting as wholesale banks. But over time, they completed there is an untapped potential in retail lending and CEOs like KV Kamath of ICICI Bank changed retail lending for cars and individual loans.
“Retail had to be a big thing because Indians were underserved,” says Janmejay Sinha, chairman, Boston Consulting Group, a consultant. “We need to give credit to people like Aditya Puri, KV Kamath, and PJ Nayak. Initially, they went after foreign banks and made their presence felt in forex, trade finance, mass affluent and structured products. And then they went to take on the public sector banks.”
Lending to people was non-existent. Now the value for 27% of total banking sector loans. Home mortgages estimate for 50.5% of ICICI Bank’s retail portfolio, and for SBI direct part is 34% of total loans.
Additional than a developing direct business, the advent of private banks led to the entry of technology into banks. Opposed to bankers eradicating computers in the early 90s in turmoil facing replacing the massive black ledgers with desktop computers, they raised Core Banking Solutions which desisted almost 15 days wait to get credit for outstation cheques.
“They also encouraged existing players to introduce new technologies and also encouraged rest of the banking sector, including foreign banks to improve,” says Paresh Sukthankar, former deputy managing director at HDFC Bank. “The turnaround time that used to take days, be it sanctioning loans, settlements or cash management, has now come down to minutes. A loan can be now sanctioned in five minutes.”
Practically every change is born out of a change. So is the case with Indian economic reformations. The Balance of Payments change in 1991 forced the administration to begin dismantling the permission permit raj. As Manmohan Singh initiated inserting up a structure for fiscal reformations following Prime Minister Narasimha Rao’s direction, Rangarajan as Governor commenced fabricating a new monetary edifice.
Although had the command to issue new business licenses, it did not until 1994 when the sand over the financial mess settled. It was also the moment when the stalls were moved by frauds in the nonbanking investment organizations segment with CRB Financial being the choice example. It was a fortunate break for the RBI which was about to give a brokerage license to CRB as well.
The principal bank had to guard against one particular issue — big tycoons — a smokescreen created to nationalize banks in the first place by Indira Gandhi in 1969. They were barred from the summons.
“If we left it open, thousands of applications would come and one question that arose was whether business houses should be given the license or not,” says Rangarajan. “So we took the view that we cannot give licenses to the private corporates. We had a sort of priority in which we did give to financial institutions which were already there, where we saw ICICI, IDBI and HDFC got the licenses.”
Institutions such as IDBI, ICICI, HDFC, and UTI were given licenses. Others who operated were Centurion Bank, Bank of Punjab, Times Bank, Global Trust Bank and IndusInd Bank of the Hindujas. Barring IndusInd, all the others are merged into another bank.
Global Trust Bank, run by a previous banker Ramesh Gelli, was the first one to blow up among the new-age banks in the midst of a scandal. It raised questions about RBI’s judgment. But the central bank was quick enough to identify problems and merge it with Oriental Bank of Commerce in 2004.
“Soon after I joined as Governor in September 2003, I had to take a view on cleaning up GTB,” YV Reddy writes in his memoirs, Advice & Dissent. “GTB continued to be on the list of problem banks. We sounded leading private sector banks if they could take over GTB. Surprisingly, they did not evince interest. We decided to act before it is too late.”
Whether it was Global Trust or Centurion, the managements were in a hurry to build up market estimates. Greed got the better off virtue.
“What went wrong with the others that went bust — one tends to go on to the fringes of integrity,” says Sukthankar. “It is not black and white. Some of the easy mistakes that you made are not visible at the top level. You can generate positive returns only if you protect your integrity. The success of HDFC Bank is not because of what we did, but also because of what we did not do.”
Centurion Bank of Punjab and Times Bank merged with HDFC Bank. IDBI Bank, which merged with origin Industrial Development Bank of India, is a standing model of how not to run an institution.
“Private banks gave you a chance to become rich,” says Sinha of BCG. “But boards did not do all that well. Governance was an issue. The quality of the board of directors of these banks has been varied. They have not managed to keep a check on CEOs, succession planning and not robustly manage risks.”
Considering Rangarajan’s time of reduced authorizing and effectively excluding industrialists, the RBI has come a long way. Now licenses are on tap. That Hindujas-run IndusInd, after getting licence as a group of non-resident individuals to avoid getting grouped under ‘industrialists’ opens up many possibilities. But at the same time concerns about control have begun to surface with newcomers owning the bulk of Indian private banks.
“Foreign shareholding in the largest private sector banks is well over 70%,” Reddy said in a recent lecture. “Our banking system is predominantly owned by the government, followed by foreigners and least by Indians. I repeat least by Indians. Indian-incorporated but foreign-owned banks are no substitute for Indian-owned banks. With the widespread acceptance of proxy advisers by foreign institutional advisers, they operate in tandem. Hence, diversified ownership as a buffer is a myth.”
HDFC Bank is 38.64% owned by foreign investors. As far as ICICI Bank is concerned, 43.2% is owned by global portfolio investors. In IndusInd Bank, it is 51.47% and 40.52% in Kotak Mahindra Bank. They create 81% of the total Rs 15.4 lakh crore market capitalization of all new private sector bank.
This presents India to the impulses and fancies of political leaders elsewhere. President Donald Trump has been unconventional when it comes to global trade and investments. He has torn many conventions and arrangements putting businesses at risk.
“More than 40% of the new private banks in India are owned by US investors,” says Sinha of BCG. “So if the US President announces sanctions for some reason, then we could be in trouble. Imagine if there were sanctions against India and in case of a capital pull-out, from where could we raise so much capital? We have to deeply care about our exposure.”
At the same time, the governor also has to revisit its guidelines on licenses. Of late, the shadow banking system like the nonbanking finance companies has become critical. In fact, it is their weakness that has shaken the system in the past year.
Given that nearly half the NBFCs that estimate for more than a quarter of the section is owned by industrial groups, they may have to be admitted for a bank license with checks and balances.
But the central bank may be more accurate than ever with a lender like Yes Bank creating difficulties in the practice and many NBFCs getting into a problem because of mismanagement.
Therefore what is ideal?
“My view is that when we start giving licenses now, you should look at what India needs not now, but two decades from now,” says Rangarajan. Given the current gloom and none seeking bank licenses on tap, what’s possible for a new bank?
“Now we say our story has just begun,” says Puri of HDFC Bank. “You see us in five years from today…you will not recognize the bank. So we are again a start-up now.”