If the Ministry of Finance has its way, and if the Reserve Bank of India does not drag its feet, some time next year, you would be able to choose from a wider range of banks. Will this change anything for customers? Will the new banks succeed? The short answer to these two questions is No and Yes. Here’s why.
Banking seems like a tough business from the outside, a mix of expensive technology and complex processes, all designed to guard against a huge risk: Having to lend a lot of money for a small profit, money that is borrowed and many times the size of the bank’s capital. If a Kingfisher crashes, banks lose money; if the payment of an outstanding on a credit card does not come, they lose money; if the home loan borrower defaults, they lose money. And this money is not theirs—it belongs to the depositors. So managing lending risks is paramount if banks have to succeed.
Competition? Forget it. In fact, in one case reported by Moneylife, a senior finance ministry official even sent a directive to a public sector bank to follow that private sector bank’s decision to increase charges.
(This story appears in the 09 August, 2013 issue of Forbes India. To visit our Archives, click here.)