Game changers in the banking sector

Dec 24 2012, 01:56 IST
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SummaryThe banking bill and the fast forward for Aadhaar are two forces which will shape the Indian banking industry from the New Year

The banking bill and the fast forward for Aadhaar are two forces which will shape the Indian banking industry from the New Year. Each is a game changer. Both of them introduce competition for the sector at a pace that has not happened for a long time.

The Banking Laws (amendment) bill introduces competition in the sector in the way it is understood in a mature market. Though RBI has kept the right to decide which company will be allowed to bid for a 26 per cent shareholding in a bank through the fit and proper criterion, it will be soon under pressure to accept all competing challenges, irrespective of the parentage of the bidder. For instance, how can a regulator say it is satisfied that a bid for a minority stake in a bank mounted by company A will be allowed to go through and say no to B, without getting involved in every possible way with the management of a bank, its politics and exercising judgement on the corporate sector that will compromise its neutrality. The choice for the regulator will become one of either allowing every bid or none at all. Also, as foreign banks have got the clarity to become wholly owned subsidiary in India, the competition they will mount for the established players will be awesome instead of being restricted to the Mumbai-Delhi market.

A big chunk of that competition is the race to pick up Aadhaar bank accounts. These right now appear unattractive but any bank in a semi-rural area will lose out to competition if it does not provide Aadhaar-related facilities. How does one expect people to draw their government benefits from one bank and use another one to transact through? It is certain that most of the cash transactions in a rural economy will be skewed to Aadhaar-friendly banks. So for public sector banks, it is now a competition among themselves which so far they were able to shut out through the government-mandated lead bank schemes.

The combination of advantages tilts towards larger banks, irrespective of public or private sector. Already the latter have begun to pick up government business and created tensions for the smaller public sector banks. Banks, in response have to merge, as the finance minister has said.

Subhomoy is a Deputy Editor based in New Delhi

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