Innovation is a must for banks

Wed, 14 Oct Pre-Open

   Previous Close   

   09:30 am   

   11:30 am   

   01:30 pm   

   Closing   

The Reserve Bank of India (RBI) granted two preliminary licenses in the year 2014 to set up new banks in the country. The licenses were provided to Bandhan Financial Services and IDFC Ltd. The RBI had given them 18 months to comply with the requirements. The respective companies have complied with all the requirements and are now recognized as banks.

Bandhan is one of the first microfinance institutions in the country to win a banking license. Both the IDFC and Bandhan have different business models as of now.

Presently, Bandhan Bank provides loans to entrepreneurs engaged in small and medium size business. The bank has set up one-third of its branches in the rural areas. It will continue to cater to the small and medium enterprises. Whereas, IDFC caters more towards lending to the corporates. The key focus of the bank is to ease the way in which business is conducted by implementing state of the art technology. The bank is positioning itself as a smart corporate bank.

The new banks have heated up the competition in the banking industry. They are giving the incumbent banks a run for their money. As per an article in Livemint, rival banks have taken a note of the IDFC's strategy to focus on technology and are in a spree to introduce tech-based products for their customers to compete against IDFC Bank. Further, some of the banks have started making serious efforts to cater to the public in rural areas where Bandhan Bank is planning its expansion.

The competition is set to intensify going forward as 21 more banks comprising of 10-payment banks and 11-small finance banks are set to launch in the next 18 months. The payment banks are expected to put a dent to the 'fee income' of the regular banks by providing smart payment options using mobile technology. Further small finance banks will also compete with the larger ones for deposits. Therefore, as the competition intensifies, banks will have to strive for innovation to stay in the game. In a recent article in 'The 5 Minute Wrap Up', Radhika Pandit, Managing Editor of ValuePro, discussed the consequences of increased competition in the banking sector.

Ultimately, customers will benefit from increased competition. As competition intensifies, banks will be forced to pass on the benefits of a decrease in repo rates to their customers. There is a time lag between a cut in the repo rate and the time at which the bank reduces the rate. The time lag will certainly reduce as competition intensifies.