March 11, 2014

With the new banking licences on the anvil, it may be worthwhile to examine as to what happened the last time new banks came into being, in terms of impact on the business of existing banks. For this, we attempt here a rudimentary analysis of what happened in 2003-05.

To refresh our memories, there are five banks remaining from the 1993-95 round of licences – HDFC Bank, ICICI Bank, Axis Bank, IndusInd Bank and DCB Bank Ltd. These along with the 2 “Newbie” licensees from 2003-05, viz Kotak Bank and Yes Bank are collectively known as the New Private Banks. These 7 New Private Banks collectively had a deposit base of Rs 10.2tn as of the end of FY13, compared to Rs 74.2tn of the entire banking sector. The deposit base with New Private Banks grew at an annual average rate of 23.4% in the last 8 years, compared to 18.8% for the rest of the banking sector.

To analyse the impact that the two Newbie Banks of 2003-05 had on the sector, we define and use below two measures – the Deposit Market Share (DMS) and more importantly, the incremental DMS (iDMS). DMS of a bank at the end of a Financial Year is the ratio of the deposit base of that bank to the total deposit base of all banks. Incremental deposits for a year is the deposits added during that period. Thus, iDMS of a bank for a particular FY is the ratio of the deposit added by the bank in that FY to the deposit added by all banks combined. The iDMS gives an idea of which bank has grabbed the maximum share out of new business added in the sector, and is a better indicator to evaluate the progress of new companies in a sector. The below numbers are as of end of FY13.

Coming to the data, the two Newbies have managed to capture 11.5% of the deposits of the New Private Banks’ market (Rs 1.18 trillion of deposits out of total of Rs 10.2tn), with the other five banks having the remaining 88.5%. Thus, the DMS of the Original Five new private banks in the New Private Bank’s category has fallen from 100% in 2003 to 88.5% at end of FY13! Looking at the DMS with the all-banking sector as the base, the DMS of the Original 5 new private banks has increased from 10.3% at end of FY 2005 to 12.2% at end of FY 2013. Thus, in the first 8-9 years after getting the licences in 1993-95, these banks did a terrific job themselves of capturing 10.3% of the all-India banking Deposits. However, they have managed to increase this tally to only 12.2% in the next eight years, from 2005-2013. This has happened because of three possible reasons – the two Newbies of 2003-05 have walked away with some of the new business; the public sector banks, led by SBI have got their acts together in this period, after having realised in the first 8-9 year period as to how dangerous can new competition be. Finally, 2008-09 was an abnormally poor year for private banks when SBI managed to grab disproportionate share.

A look at the incremental DMS (iDMS) of the two Newbies further reveals the extent of impact of new competition – in the last four years from 2009-2013, the two newbies have managed to acquire a whopping 18% of the incremental deposits of the New Private Banks’ space! Even over the eight year period of 2005-2013, they had an iDMS of 14% of the New Private Banks’ space.

And all of the above is before the two Newbies launched their higher interest rates on savings accounts in middle of FY13. The full impact of that will come from FY14! Of course, mere numbers will never tell the entire story – there could be bulk deposits from few large clients helping this effort of the Newbies. The CASA numbers for the Newbies is lesser than that for the Original Five. But then, by no means does that make the performance of the Newbies on DMS and iDMS any less significant.

Now, before this piece starts sounding like a paean for the Newbies, let us revert to the main point that this is a natural outcome of new players entering a structured market with reasonable competition. This has been seen in other industries also, with the private insurers & AMCs grabbing share in a short period. This has also played out more spectacularly in the mobile telephony space with the explosive entry of Reliance Communications in 2004, and again repeated, albeit at a smaller level, with Aircel/Tata Docomo/Uninor in more recent times. Jet Airways did this to Air India and then Indigo & Spice handed the same medicine to Jet! There also used to be Kingfisher… I am sure that the existing banks, both, private sector and public sector are not taking new competition lightly. There are lessons to draw from history, both from within the banking sector and from outside. Ring-fencing high-value customers, critical employees and salient channel partners, proactively offering sharp-shooting smart deals to select bunch of customers, understanding possible sources of technology-led disruptions and even knowing what customers to voluntarily lose are some of the strategies that have been deployed in other situations by existing players to save market share. If one doesn’t create history, one may become history! I think this time it will be tougher for new banks to wrest high market share from the existing set of banks – the banks have become larger and stronger in the past ten years.