A research report prepared by Credit Suisse First Boston (CFSB) on the Indian financial sector states that the large public sector banks will be unable to compete profitably with the financial institutions and new banks.
The report has also questioned the competitive funding advantage of large banks. It suggests that the stock valuation gap in favour of banks when compared with financial institutions is an anomaly waiting to be corrected.
The paper has analysed the relative competitive strengths of banks and institutions on the basis of funding, asset creation, cost structure and profitability.
More From This Section
On the funding front, the study suggests that the institutions are, currently and largely, wholesale bankers. "They borrow funds from other financial intermediaries and corporates and lend to the corporate sector." If the institutions target an increase in their share of short- and medium-term lending, they can clearly have two options _ wholesale or retail banking. The report suggests that the inter-bank market is not a stable source of funds due to small volumes, varying liquidity and volatile rates. And wholesale banking is unlikely to be the sole long-term strategic option of any serious entrant into working capital finance. The other option before the institutions is to emulate the structure of established commercial banks.
"The giants in commercial banking have a network of around 45,000 branches. SBI has around 9,000 branches, and over half a dozen public-sector banks have over 2,000 branches each," says the report.
It further states that over the next three to five years, the institutions and new banks could have around 200-250 branches which is very less compared with the branches of large banks. On this front, the report concludes that the development of the retail branch network is an inevitable structural option for the new entrants.
"The differences in network size perhaps drives the popular perception that the key competitive advantage of large state-owned commercial banks is their ability to mobilise large volumes of funds at low interest costs," the report states.
Commenting on the second factor, the report suggests that funding volumes are a function of distribution network and competitiveness in products and services.
"There is a popular myth that a small, predominantly urban branch network of financial institutions and new banks cannot match the quantum of deposits of large state-owned commercial banks with a countrywide network," says the report.
However, data released by the Reserve Bank of India reveals that there are around 36,000 centres in the country with bank branches. Of this, the top five centres account for 35 per cent of the deposits, while the same top five centres account for only eight per cent of the branches. The top 100 centres account for 60 per cent of deposits, while they account for only 21 per cent of branches. "If 20 per cent of the branches, lying in less than 0.5 per cent of the banking centres, account for 60 per cent of the deposits mobilised, the marginal contribution of other branches is clearly very low," says the report.
Hence the report concludes that the branch network of large banks is not geared to commercial needs but to perceived social needs. The value of rural branches as a source of `competitive strength' in reaching the depositor base is a myth. FIs and new banks can reach the bulk of the deposits with a smaller network.