Creating a Bank in India|Not a child’s play

Recently India celebrated the 25th anniversary of one of the biggest economic reforms in its history- Economic Liberalization of 1991. While one can go on and on about how this changed the way business get done in India, there was a small corollary to it which changed the Consumer Banking landscape in India forever. 10 private sector entities were given banking licenses which changed the entire approach to banking from bank centric to customer centric . Enabled by the best technology of the time and products which really made a difference to the customer’s life, these banks changed the way the customers specially the Indian Middle Class managed their money.

Today 25 years later, we stand at the cusp of something equally big. While 21 new players are gearing up to set up Small Finance Banks and Payment Banks by March 2017, RBI has also opened the way for On tap licensing. Thus the platform is set for new challenger banks to make their move to snatch market share from the existing biggies on one hand and to make new in roads in the still underserved Rural market.

53% of the Indian population has bank account (thanks to Janadhan scheme of GoI), however about 43% of these accounts are dormant. Thus there is a huge untapped base of fencesitters who probably would jump on to the banking wagon if they see the value proposition. So the question remains what do the new players do to attract customers? More importantly, can we learn anything from the successes and failures of the 10 forefather banks who were in the same boat 25 years back?

To start with, let us enlist the 10 forefather private banking institutions of 1994

  1. HDFC Bank
  2. ICICI Bank
  3. UTI (Now Axis Bank)
  4. IDBI
  5. DCB
  6. Indus Ind Bank (Yes, they have been there since 1994)
  7. Global Trust Bank
  8. Centurion Bank
  9. Bank of Punjab
  10. Times Bank

HDFC, ICICI & Axis are the Big 3 of Indian private sector banks now. IDBI Bank had to reverse merge with its parent entity and is now a government owned bank. Indus Ind Bank has had a surge in the last decade and has managed to rediscover its mojo. DCB continues to work in its niche segment of SME financing. However, the fact is that 5 out of the 10 licensees (I am including IDBI) failed to make it big as private sector banks. In other words for every 1 successful player, there has been another one who went down and out. By extending that logic, out of the 21 new players (actually 18 since 3 players have already surrendered their Payment bank licenses), 10 will bow out in a couple of decades time, may be sooner. So what differentiates the winners from the losers in the banking industry? The licensees need to identify some basic pillars which they need to get absolutely right to build a strong foundation for the bank. Will try to cover a few of these pillars in the next part.

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