Daily Dispatches - Battle for India's unbanked

eFC logo
Map of India.

India feeling the pain

Indian public sector banks will continue their huge hiring spree, with the Finance Ministry telling local media that 10,000 new branches will be established, and another 50 000 people will be hired in the current fiscal year to man them. NDT Profit says last year, public sector banks hired 63 000 staff.

This sounds like a lot, but in the context of India's poor penetration of the population by financial services, it's still a drop in the ocean of the unbanked, and plans to tackle the problem are not being well received.

Only one in two Indians has a bank account and only one in seven has access to bank credit. Part of this is due to the fact that the country's financial system is dominated by the state-run lenders, which have struggled to expand due to capital shortages. Added to this has been the historical restriction on participation by private sector banks, with only 12 granted licenses in the past 20 years. The country has 26 public sector, 22 private and 40 foreign banks.

The Wall Street Journal reports that the Government has now been forced to turn to industrial companies to set up banks, which has been a risky policy in other parts of the world.

Haveeru Online reports that in the first opening of the banking market in a decade, India's central bank has invited - and received -  applications for new banking licences from 26 industrial companies, with Tata, Anil Ambani Reliance, engineering giant Larsen, Toubro and  Aditya Birla lining up. The new licenses will be awarded in March 2014. 

Other applicants include Bajaj; LIC Housing; Religare Capital Markets; Infrastructure Development Finance Company; Edelweiss; India Infoline; Industrial Finance Corporation of India; SREI Infrastructure; Tourism Finance Corp and India's state-run postal department, which has 90% of its 154,822 branches in rural areas.

But only eight to ten licenses will be issued, and one of the requirements of the successful bidders will be to have at least 25% of their branches in the rural areas to deal with the unbanked problem.

India's Economic Times reports that the new private banks face several tough obstacles, including reserve requirements of putting 4% of deposits with the central bank and holding 23% in government bonds from day one. The paper reports Fitch saying that some of the new banks will find the 40% cent priority-sector lending targets tough.

"Infrastructure finance companies with large existing loan portfolios that have little or no prior presence in the required sectors are likely to find the target most challenging. The strict conditions mean that profitability for new banks is likely to be limited until they secure a strong foothold." 

Temasek tells of tougher times ahead

Singapore's sovereign wealth fund, Temasek, says the unwinding of the US Federal Reserve’s quantitative easing will trigger “a lot of disruption and volatility” and it predicts slower growth in many markets in the near term. The Financial Times reports that the state-run fund - the 13th largest of its kind in the world - has been increasing the percentage of its investment portfolio in north America and Europe and away from Asia.

One thing Temasek is not worried about is China's banks, in which the fund invested USD$20bn last year. Chia Song Hwee, head of Temasek’s investment group, says that while there are some risks in the financial system, there is “sufficient liquidity” and the oan-to-deposit ratios of the banks in which Temasek is an investor “have a buffer to cushion any negative situation”.

Bloomberg reports that Temasek sees the current situation in China's banks as an opportunity to build on the fund's portfolio.

Starting to pay off

The hefty cost-to-income ratio of private banks in Asia - with some saying it is around 80% - requires strong nerves and a long-term view. But now it looks like the expansion strategy into Asia to target the growing pool of rich Chinese is paying off. Wealthy Chinese, says the Wall Street Journal, are demanding customers for private banks because they want big returns and small fees, and this has squeezed banks' profit margins. But McKinsey Consulting says this may be changing.

Profit margins at private banks rose six percentage points to 17% in 2012, although they are still well below their Western European counterparts who enjoy margins of 23%.

Unintended consequences

China's central bank's tough stance on lenders in the country has not had the desired effect, which was to stamp out underground lenders - or so-called shadow banking. Bloomberg quotes new figures from Chengdu-based Benefit Wealth that reported that a record 1137 investment plans were sold by about 70 banks in the last two weeks, almost 50% more than the similar period ended June 14.

Good news for German yuan traders

Frankfurt is vying to become Europe top trading hub for China's currency, the renminbi (RMB), with the European Central Bank set to sign a USD$130 billion currency swap agreement with the People's Bank of China. Asian Banking and Finance says 10% of Sino-German trade is handled in RMB.. If the agreement goes through it will dwarf the US$33 billion agreement recently signed by the Bank of England and the PBOC.

People Moves

BNP Paribas has hired Yung Tan from Standard Chartered to head up North Asia high-yield capital markets.

Didn't see that coming?

Chan Chun-chuen, the geomancer and lover of late Hong Kong property tycoon Nina Wang, has been convicted of forging a 2006 will that made him the sole beneficiary of her $10.7 billion fortune. Geomancy is form of divination, and practitioners claim it gives them a supernatural ability to predict the future. Bloomberg reports that Chan lost a five-year legal battle for Wang fortune in 2011 when the will in his favour was declared a forgery. The estate was awarded to Wang’s charity foundation.