Impact on low-cost liabilities, transaction fees and zero-cost float funds
Transaction Banking products have come into being post the technology-driven approach to Banking since 1994, led by new generation private sector banks and select few foreign banks. The agenda of Transaction Banking began with provision of "Anywhere Banking" services transforming the clients of a particular branch to the Bank, and extending further to all Banks through shared ATM network. The focus then moved on to seamless handling of "Payment and Receipts" to companies through "Cash Management" systems and technology, and now to all (including individuals) through Internet Banking and emergence of non-bank service providers who use Banks only for transaction facilitation with Current Account relationship. The threat to Banks are from two counts: (a) migration of Current Accounts of service providers to their own Payment Bank and (b) risk of retail client migration from Commercial Banks to special service Payment Banks.
The benefit from these developments are many to customers from combination of convenience and optimum use of funds plugging interest leakages. The instant money transfers is delight to the recipient for immediate use of funds, and relief to the remitter cutting the end to end lag time of the transaction. The details of the end to end flow is now available to customers on their Hand Phone through SMS alerts. All taken, Transaction Banking services and on-going improvisations have turned out to be customers delight (with monetary benefits) for small price. The resultant shift from usage of paper to Plastic money/Technology transfers is good for the financial system and the Government. The transaction fees paid for these services is seen as "value for money" by most customers.
The benefit for Banks is from combination of cost optimisation, by reducing "feet-on-branch" customers to ensure productive use of branch manpower from "service" to "cross-sell" and revenue maximisation through fees and build-up of low cost CASA deposits. All combined, critical analysis of cost-benefit for Banks is not seen very favourable. With introduction of "sweep-in and sweep-out" time deposit facilities, no savvy clients maintain high balances in CASA accounts by moving funds from Term deposits on need basis. The concept of "float funds" has now become irrelevant. When the end to end transaction time was high, Banks enjoy the use of funds till the payment is credited to the beneficiaries. Now, the end to end transaction time is same day on most cases. If Banks evaluate the cost-benefit of their Transaction Banking products, it may become evident that the bottom-line impact will be insignificant. The pain however is from increased competition on liability products at lower end of the rate curve, at 0-4%.
Impact on high yield retain loan portfolio
Small Finance Banks build competition on loan products at higher end of the rate curve (from retail customers), at over 11%. Banks NIM strategy is from increase of high-yield retail portfolio. While wholesale portfolio provides not more than 1.5-2.0% spread, retail credit exposures are lucrative with spread of over 4% despite marginally higher cost of credit. It is also fact that managing retail credit stress is not difficult as corporate NPA management. The retail credit risk is well-spread and the impact is not severe. Small Finance Banks will reach out to these clients to compete with well established commercial banks. Can they succeed? Not in the short/medium term! Given the initial high cost of funds for new Small Finance Banks, it is difficult to compete on interest rate with existing players. The reach advantage may not be relevant as retail credit delivery gets extended on the technology-driven platform. All combined, impact on commercial banks from new SFBs may emerge as long term risk, and not as immediate threat!
What is RBI agenda on this strategy?
Most Commercial Banks have emerged as full-service" holistic financial super market, handling products/services across retail to wholesale, high end to low end and plain-vanilla to exotic. The intent of RBI may be to create "specific focus" specialised Banks that could lead to larger coverage/client reach and better efficiency. To this effect, three specialised groups may emerge: (a) Small Finance Banks catering to small-ticket retail clients with focus on high risk - high yield credit products/services (b) Payment Banks catering to retail category customers (individuals and small companies) with focus on low-cost non-credit products/services and (c) Wholesale Banks catering to SME/Large value clients across high end products with limited competition on specialised products around Cross-border business, Treasury and Global markets. If linkages could emerge through distribution (of others products/services) arrangement/relationship (including minority equity stake), then it would be win-win for all. It will lead to collaboration avoiding cut-throat competition. What about competition to NBFCs? It is possible that NBFCs role as step-down financial intermediaries, with source of funds from Banks will be at risk. NBFCs may need to work on reducing the high dependence on Banks to build their loan book.
So, entire client segment is now seen split into two parts - low value and high value, SFBs covering low value credit customers, Payment Banks covering low value non-credit customers and Commercial Banks focus on credit and non-credit products for high value large customers. The strategic vision and execution mode is seen to be good for the system and beneficial for end use customers.
Should commercial banks worry from this competition? Not at all!
There is no immediate threat on the bottom-line efficiency of commercial Banks in the medium term. It is couple of years away for them to emerge as risk. By this time, it is a great opportunity for Commercial Banks to expand its reach to Investment Banking products/services. Most boutique investment Banks tap into the client base of wholesale customers of commercial banks. The revenue from Investment Banking products/service are more efficient (cost-revenue ratio at sub 25%) than the revenue from Payment and Small Finance Banks. Therefore, risk from emergence of Payment and Small Banks is indeed on the NBFCs and boutique Investment Banks, and not on existing commercial banks.
Moses Harding
No comments:
Post a Comment