India’s Banking Revolution Has Started Without the

Banks
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December 13, 2021

No deposit-taking institution in the world is trusted more by savers and enjoys

bigger cachet with investors than HDFC Bank Ltd. What this plenitude has done to India’s
most valuable lender is make it so lethargic — literally, with its digital services suffering
repeated tech outages — that it had to be banned from issuing new credit cards for eight
months. But a regulatory slap on the wrist is no durable solution. Bank licenses are
permits to make money out of thin air. The prospect of sharing the privilege with a new
breed of digital rivals will be more effective at keeping HDFC Bank and other traditional
financiers on their toes.

On valuation metrics, HDFC Bank’s price-to-book multiple of four is way ahead of much
bigger lenders in China, the U.S., Japan, Australia, Europe, Singapore and Hong Kong.
Some Indonesian, Middle Eastern and South Korean peers, and even a couple of Indian
rivals including the Mumbai-based Kotak Mahindra Bank Ltd., are more expensive on a
per-share basis, but none can boast HDFC Bank’s $189 billion deposit base.

And yet, such is the inertia inherited by new Chief Executive Officer Sashidhar Jagdishan
that he had to thank the regulator for the ban on credit-card issuance and new digital
initiatives. “This rap has opened our eyes to the world of possibilities,” he told employees

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in August, as the restrictions were being eased. But instead of patting itself on the back for
waking the sluggish lender, the Reserve Bank of India should ask why it has to do the
market’s job of pushing firms to embrace best-in-class technology.

The country’s licensing policy for financial institutions is past its sell-by date. Innovative
solutions are out there but require regulation.

New technologies are reshaping the financing landscape. From nothing five years ago,
Indians now pay and receive 7.7 trillion rupees ($102 billion) a month via apps running
over a shared public utility. Soon 440 million owners of cheaper feature phones will be
able to conduct cashless transactions. But because innovation originated in payments,
financiers didn’t pay attention. As Uday Kotak, chairman of Kotak Mahindra Bank, said
recently in a speech, “Bankers were short-sighted. Their standard response was, ‘Oh,
there’s no money in payments.’”

But there is now. About 20% of online payments over the shared public network are being
collected by merchants. They’re shunning costly credit-card systems, but are keen to
use their online sales data as information collateral to get working-capital loans. Fintech
players seized this chance, with deposit-taking institutions passively supplying the
funds. “The principal beast of burden for credit delivery and issuance of demand deposits,
i.e. the incumbent bank, has remained undisrupted,” says NITI Aayog, the government’s
think tank.

That needs to change. The NITI discussion paper on digital banks argues that the funding
cost of India’s top nonbank consumer lender last year was more than 7%, while it was less
than 4% for a well-capitalized bank. Why not license internet-only banks to take
advantage of low-cost deposits, too, especially if they can use technology to
fill $400 billion in unmet credit needs of small business owners?

If banks keep squatting on their entitlements, customers will up and leave. Walmart Inc.’s
PhonePe app moves 47% of online money in India, while homegrown Paytm has a 10%
share. Alphabet Inc.’s Google Pay, which controls 37% of the market, is using its search
expertise to influence customers’ choice of bank deposits. HDFC Bank and its bigger
state-owned rival State Bank of India still have a stranglehold on savings. So they’re the
top remitters by default in phone payments. However, when it comes to receiving money,
the leader is Paytm Payments Bank. It’s a narrow bank with a limit on deposits per
customer. It can neither make loans, nor issue credit cards, though it has finally got
access to the central bank’s emergency liquidity window.

Not allowed to function as a proper bank, Paytm hawks credit for others. Last quarter,
third-party loans disbursed by the unprofitable fintech jumped six-fold from a year
earlier. Still, the Paytm stock is languishing 27% below its recent initial public offering
price. Instead of earning fees by creating $1 billion in yearly credit opportunities for
partners like HDFC Bank, the app may be more valuable as a digital bank, lending on its
own.

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A licensing regime that has fallen behind technological innovation has caused a regulatory
vacuum. An RBI working group estimates the number of illegal digital lending apps in
India at 600. Many of them “are collecting users’ entire phone contacts, media, gallery,
etc.” and using that information “to harass borrowers and their contacts,” the group said.

The outmoded licensing regime in India needs to be brought up to date with digitization
trends in the broader economy. It’ll force traditional players to shed their lethargy, and
show a a more certain path to profitability to well-capitalized fintech. Small businesses
will get cheaper credit, and savers won’t be left at the mercy of blackmailers
masquerading as lending apps.

More From Other Writers at Bloomberg Opinion:

• Amazon vs. Visa and the Coming Fintech Wars: Paul J. Davies

• Walmart Is Planning for a Post-Inflation World: Tara Lachapelle

This column does not necessarily reflect the opinion of the editorial board or Bloomberg
LP and its owners.

Andy Mukherjee is a Bloomberg Opinion columnist covering industrial companies and

financial services. He previously was a columnist for Reuters Breakingviews. He has also
worked for the Straits Times, ET NOW and Bloomberg News.

More stories like this are available on bloomberg.com/opinion

©2021 Bloomberg L.P.

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