As he approached his 30th birthday, Rajkumar Jain realised it was high time he bought a house. He applied to a leading public sector bank for a home loan. He waited for weeks, but there was barely any communication from the bank. Ultimately, a close friend advised him to approach private banks or a non-banking finance company (NBFC). Rajkumar followed the advice and in few weeks, he was a proud homeowner.
Like Rajkumar, many have achieved their financial goals over the last decade by choosing private banks and NBFCs.
Here are some reasons how private banks and NBFCs are gaining market share in lending:
The government is emphasising on financial inclusion. As a part of this effort, it has eased bank licensing norms over the past few years. The Reserve Bank of India has also made lending norms easier for non-banking finance companies. In fact, the total number of private banks that have emerged in the past four years is greater than all put together since independence. This is also reflected in the way the stock market puts a value on financial services businesses. HDFC Bank is the most valuable bank in the country. The market cap of HDFC Bank is more than all public sector banks put together. Similarly, Bajaj Finserv, a non-banking finance company with a focus on consumer spending, has witnessed share price skyrocket nearly 500% over the past 5 years. State Bank of India, the biggest public sector bank in India, has witnessed the share price nosedived 87% during the same period.
Private sector banks have come a long way since the banking reforms of 1991. Their focus on retail banking and better service to customers ensured that retail assets grew rapidly and increased the overall credit growth. A key indicator of the preference of retail borrowers is the current and savings accounts ratio or CASA. This is down to 25-30% for public sector banks. The number is well over 40% for private sector banks. Borrowers of all type prefer private sector banks. This is also reflected in the overall credit growth data. According to the latest RBI annual report, overall credit growth at public sector banks was 6.6% in 2015-16 against 6.5% in 2014-15. For private sector banks, credit grew 24.7% in 2015-16 against 17.4% in 2014-15.
Technology is ruling our lives today and banking is no exception. In fact, technology is at the heart of modern banking. While paper transactions haven’t died out yet, you will find that most young people have become very tech savvy where banking is concerned. Private Banks are at the epicenter of this revolution, creating new ways to digitally connect with customers. Leveraging on the wearable devices craze, HDFC bank, for example, has launched a new service called ‘watchbanking’, where customers can conduct transactions through their Apple watch. Similarly, Axis bank has enabled customers to make payments through social networking sites like Facebook and WhatsApp.
In the recent years, many public sector banks have been weighed down with non-performing assets. This has greatly impacted their ability to lend. As of March 2016, the total NPAs for public sector banks was 6.1%.In comparison; you will find that private sector banks have lower levels of NPA at just 4.6%. As a result, the provision for bad loans for public sector banks is nearly eight times that of private banks. In fact, the Union Finance Minister, Arun Jaitley has urged public sector banks to take greater initiative to solve their problem of NPAs.
The Indian banking sector has changed dramatically since the introduction of economic reforms in 1991. Today, customers have a wide range of creditors to choose from. This has all been possible due to private banks and NBFCs who compete fiercely to offer the best products and services to their customers.