Industry Overview

India’s banking sector regulator is the Reserve Bank of India (RBI) which is an autonomous body
but accountable to the Parliament. A well-regulated banking sector in the country are far from
superior to any other developing country in the world. The Indian banking system has shown
resilience in the financial crisis 2008-09.
Indian banking industry has recently witnessed the rollout of innovative banking models like small
finance and payment banks. RBI’s new measures will go long way in helping the restructuring of
the domestic banking industry.
The Indian banking system consists of 27 public sector banks, 22 private sector banks, 44 foreign
banks, 56 regional rural banks, 1589 urban cooperative banks and 93,550 rural cooperative banks,
in addition to cooperative credit institutions.
Key developments in India’s banking industry include:

• The amalgamation of three PSB’s viz. Vijaya Bank, Dena Bank, and Bank of Baroda. It
will result in combined business of ₹14.28 lakh crore, making it the third largest bank after
State Bank of India and ICICI Bank.
• Bandhan Bank will merge with Gruh finance with it in all share deal valued at ₹81,800
crore
• In May 2018, total equity funding of microfinance sector grew at the rate of 39.88% to
₹96.31 billion (US$ 4.49 billion) in 2017-18 from ₹68.85 billion (US$ 1.03 billion).

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Porters Five Force Analysis:
1. Threat of New Entrants: LOW
Working Capital:
Banking Industry has gone through a series of changes post 2008 Crisis. In order to put customers’
interests above everything, Basel Norms were formed. Basel III is an international regulatory
accord that introduced a set of reforms designed to improve the regulation, supervision and risk
management within the banking sector. With the introduction of Basel Norms, it became
mandatory for banks to maintain 12.5 % capital adequacy in order to meet any short term liquidity
issues.
Along with capital adequacy, LCR was also introduced which enforces every bank to have a
sufficient reserve of high-quality liquid assets (HQLA) to allow them to survive a period of
significant liquidity stress lasting 30 calendar days.
Now with introduction of given norms, it became mandatory for banks to have a significant of
operating income on hands all the time. It directly implies that banks now have less cash or deposits
which can be given as loans to retail customers or corporates. It affects their profitability by a
significant amount. It also ensures that banks won’t deal with high-risk-high-yield customers(retail
or corporate).
Overall, BCBS and RBI norms keep a strict vigil on banks’ source and usage of funds. It has lead
to regularized and stringent loan disbursal which many existing and upcoming banks think as loss
of opportunity.

Licensing & Regulatory Requirement:

Over the last two decades, the Reserve Bank of India (RBI) licensed twelve banks in the private
sector which happened in two phases. Ten banks were licensed on the basis of guidelines issued
in January 1993. The guidelines were revised in January 2001 based on the experience gained from
the functioning of these banks, and fresh applications were invited. The applications received in
response to this invitation were perused by a High-Level Advisory Committee constituted by the
RBI, and two more licenses were issued.
In India, Promoters’ need to adhere to strict guidelines in order to get license for Bank/NBFC.
Some of these rules are enlisted as following:
(a) Promoters/ Promoter Groups should have a past record of sound credentials and integrity;
(b) Promoters/ Promoter Groups should be financially sound and have a successful track record of
running their business for at least 10 years.

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(c) Promoter / Promoter Groups’ business model and business culture should not be misaligned
with the banking model and their business should not potentially put the bank and the banking
system at risk on account of group activities such as those which are speculative in nature or subject
to high asset price volatility.
In order to set-up a bank, Promoters must have an NOFHC (Non-operating Financial Holding
Company) and initial minimum paid-up voting equity capital for the bank should be 5 billion.
Also, the NOFHC shall hold a minimum of 40 percent of the paid-up voting equity capital of the
bank which shall be locked in for a period of five years from the date of commencement of business
of the bank.
From given rules, it's very clear that, getting a license for banking operations is a Himalayan task.
It serves as one of the major barriers. Strict Licensing norms is the key reason for only handful
market players in private banking industry even after 7 decades of Independence.

2. Threat of Substitutes: Moderate

Fintech Companies:
Few years back, FinTech companies were seen as major threats to the banks as they provided
simpler and less expensive services compared to the traditional banks. Fintech companies are
serving as an alternate payment gateway for daily needs of customers. This has led to reduction in
direct transactions performed by banks. It has also forced banks to tie-up with Fintech companies
in order to penetrate into online payment industry. Example: Axis has acquired Freecharge.
Also, Fintech Companies are offering Financial Instruments/Services at low prices compare to
traditional banks. They have come up with new debentures/investment schemes/MicroFinance/
P2P lending/Smaller loans etc. One of the major areas where Fintech has left banks way behind is
instant loan provisions to a large section of society for their business/livelihood requirements.
Traditional banks have a very stringent framework to provide loans and Fintech companies are
capitalizing on it.

Investment Houses:
Investment Houses have strategic advantage when it comes to offering investment/wealth
management services. Investment houses (including broking houses) have become synonyms for
stock trading and financial instruments like Future Contracts and Call/Put Options. Even though
banks offer similar services, higher broking charges and poor technological infrastructure makes
them a non-preferred investment house when compared with broking houses.

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 3. Rivalry among Competitors: High
Number of Players:
There are large number of players in both Banking and NBFC industry fighting for the same set
of customers. Given the low cost of switching, the customer loyalty towards the banks is quite low.
This switching factor is playing major role for throat-cutting competition among private sector
banks.
Modern customers have also escalated competition among the banks. Millennials working in
service sector change their banking preferences frequently. Urban lifestyle has increased their
credit requirements and hence they keep on switching among players. Apart from retail banking,
industrial growth has fueled competition as SMEs/Mom-and-Pop stores are borrowing capital for
many reasons.

Undifferentiated Services:
As services offered by banks is almost non-differentiating, it's becoming difficult for them to
maintain customer base and retain existing customers. Since there is no differentiating factor is
present, it becomes difficult for one to segment and position themselves in market. This has led to
redefine STP strategies for many players among ongoing battle for revenue and customer base.

4. Bargaining Power of Suppliers: Moderate

Depositors:
Depositors are the primary source of capital for a bank. By utilizing such major suppliers, the bank
can be sure that they have the necessary resources required to service their customers’ borrowing
needs and also be able to cater enough capital to meet withdrawal expectations. Individual
depositors have have little or no bargaining power when compared to corporate depositors which
have high bargaining power.

Employees:
The other suppliers are employees, who supply the resource of labor. In regard to the bargaining
power of suppliers of labour, individual employees suppliers have little bargaining power other
than major executive employees. To address the bargaining power of employees is offering an
attractive salary and benefit packages to retain the best employees.

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Capital Suppliers: RBI
The suppliers of capital may not be a big threat, but there is a threat of suppliers poaching away
human capital. In Indian banking industry, RBI acts as a regulator which pose a big threat for
banks as a supplier of money.

5. Bargaining power of buyers: Low

Retail Customers:
Account Holders have limited powers as most of banks operate in same range of spread. On top
of that, each bank is bound by RBI regulatory norms. Due to given factors, retail customers offer
services from almost same rate from major players of industry. As only power with Retail
Customer have with them is to walk away from existing bank and manage finances through a
different bank.

SMEs:
As an individual unit, SME doesn’t enjoy any bargaining power. But together as an indsutry, they
are able to negotiate with banks for their demands like increased credit period, lower interest rates
and hassle free loan disbursal. With increasing emphasis on onboarding maximum clients, So
SMEs enjoy significant bargaining power due to Unionization.

Corporates:
When it comes to large organizations, they have made a good deal with banks as they are able to
negotiate with banks on flexible terms. However, with increasing banking regulations, these
advantages are continuously reducing.

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References:

https://rbi.org.in/scripts/bs_viewcontent.aspx?Id=2651
https://www.bis.org/fsi/fsisummaries/lcr.pdf
https://www.gktoday.in/gk/non-operative-financial-holding-company/

https://www.ey.com/in/en/industries/financial-services/banking---capital-markets/ey-banking-on-
technology-india-banking-industry

https://www.thehindubusinessline.com/money-and-banking/finmins-alternative-mechanism-
gives-nod-for-bob-dena-vijaya-bank-merger/article25798898.ece

https://www.thehindubusinessline.com/money-and-banking/finmins-alternative-mechanism-
gives-nod-for-bob-dena-vijaya-bank-merger/article25798898.ece

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