Indian IT companies and banking - a match made in heaven or an encroachment of turf?

Written by Ketan Warikoo || June 10 2016

As the 'India stack' becomes mainstream, what will banking look like in the future?

The last year saw the emergence of the JAM trinity (Jan Dhan: zero balance accounts, Aadhar: demographic and identity database, Mobile: for information delivery as well as authentication) as the so called ‘India stack’. The passage of the Aadhar bill firmly established JAM as the bedrock for a number of diverse potential applications such as government benefits, banking processes and direct payments. Several other layers are being constructed on this foundation, such as the DigiLocker and the Unified Payments Interface (UPI) in an effort to move towards the end goal of driving financial inclusion and economic growth. Banks are already benefiting from an increased user base, reduced overheads from standardization of bank processes and compliances thanks to JAM.

As a result of these technological interfaces and policy implementations, banking has become simplified to the point that experts are wondering if in the future anyone could become a bank? While today that scenario might seem distant, a growing number of non-banking entities are indeed becoming banks!

IT companies especially are being asked to fulfil the role of a bank - actually being asked by the banking regulator itself. Case in point is ewallet and commerce giant Paytm’s plans for becoming a payments bank which is being cited several times in glowing terms by RBI governor Raghuram Rajan. Such an endorsement of a non-banking company from a banking regulator is quite unheard of, and is a welcome development in a country like India where a significant number of people remain unbanked and a huge chunk of financial flows are routed outside formal channels.

As these companies are increasing encroaching on banks' turf, and are enjoying regulator / government support, IT companies now have an entire gamut/trajectory of options to enter the financial world:

  1. Fintech Providers – Most companies started out by building products and services for banks to handle credit rating and scores, KYC (Know Your Customer), AML (Anti-Money Laundering), payment gateways, mobile apps, and big data applications for marketing and customer retention. Now several players are building standalone platforms that perform several of these functions to offer services to consumers without requiring a bank. Even so, there are many more potential emerging applications for fintech: UPI based payments, big data for bank processes, cybersecurity providers, payment authenticators, and P2P lending. All of these are great areas for new companies to cut their teeth in the financial world.
  2. Small Finance Bank (SFB) – With a mandate to provide saving instruments, lending and finance to small & medium enterprises (SME), the SFB model seeks to service the rapidly growing SME economy. In India, SMEs generate 45% of industrial output and employ over 80 million people, and these numbers continue to rise. Other traditional entities such as Micro Finance Institutions (MFI) and Non-Banking Finance Companies (NBFCs) are also being pushed to convert into SFBs. This entry point is more for mature players since the RBI stipulates 10 years of experience in the banking sector and standard bank compliances such as Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) besides a compulsory share of small loans in the institution's loan portfolio. Such requirements might be cumbersome but given the size of the SME economy, it is likely to be a huge money spinner.
  3. Payments Bank – Payments banks have been limited to handling payments and accepting deposits upto Rs 1 lakh INR. This newly created entity cannot give loans and according to those in the banking echelons, currently lacks a business model. However, IT companies excel at post-fitting a business model to a technology, so this will not be a barrier to most players in the market. RBI is promoting this entry point as a stepping stone to becoming a full fledged bank or at least its newest creation: a universal bank.
  4. Universal Bank – A marked departure from the earlier ‘start-stop’ policy of handing out licenses, this approach is touted as ‘banking licence on tap.’ It has been identified as an area for entry of mature players. Interestingly, the RBI is actively discouraging conglomerates or companies indirectly associated with conglomerates from entering this space, with the motive to prevent self-lending among corporates. The 10 year condition from SFB extends to the on-tap bank licence but in this case is applicable to individuals and professionals, to promote the relatively smaller companies.        

The RBI seems to be keen on having diverse non-banking institutions enter the banking sector by providing them several entry points and growth routes. This is a part of the RBI’s vision to drive credit growth in India, given the fact that the capability of banks to lend freely has been severely hamstrung after the RBI forced banks to lift the cloak of secrecy around their bad loans. While the RBI considers IT companies and non-banking institutions to be a significant engine for this goal, the important question is will IT companies step up to the challenge or will they get spooked by regulatory requirements! If they choose the former, they might be find the proverbial pot of gold which was till now the sole custody of banks.