Shape up or lose out: RBI's Gandhi to banks

NBFCs have captured space vacated by lenders ignoring SME segment

Reserve Bank of India Deputy Governor R Gandhi on Wednesday chided banks for neglecting the small and medium enterprises (SME) segment and warned that if the lenders did not fulfil their social responsibilities, the very existence of banks would be in jeopardy.

It is not that the SME segment has not been profitable, but banks have shown a lacklustre attitude towards the “big area”. As a result, new generation financial technology (fintech) companies and non-banking financial companies (NBFC) have entered the space and have become “instant success,” Gandhi said.

Indian banks are not alone in their apathy towards the SME segment. Neglected throughout the world, the funding gap to the SME segment is about $2 trillion in emerging markets alone, Gandhi said quoting a study.

In India, fintech companies have “entered the area and have become an instant success.” If banks have to be socially relevant, they need to claim the space back.

“If only you become socially relevant and not just economically relevant, you have a chance of existence,” Gandhi warned banks at the valedictory session of the two-day long Fibac conference on banking.

“Banking is necessary, banks are not,” Gandhi said, starting his speech, quoting Microsoft founder Bill Gates’ 1994 remark.

Elaborating, the RBI deputy governor said with the emergence of new players in the lending game, including social media companies engaging in banking, the relevance of banks was fast fading.

The millennial generation seeks instant gratification, and has no loyalty towards brands, while the older generation wants improved return on their investments and more transparency.

NBFCs have already cornered the banks by offering services that could be better in comparison with those offered by the existing banks. The right to enjoy a special status as well as earning fat net interest margin (NIM) is something that banks will have to justify in future. Surely, that is the situation already after the credit crisis, as demonstrated by protests in the western world, he said.

NIM is the difference between yields on advances and cost of deposits and is the most important factor in measuring a bank’s profitability. Indian banks enjoy NIM of three per cent or more, one of the highest in the world. This high NIM regime cannot continue for long, reasoned Gandhi.

“Banks of the future will not be the same as yesterday’s and today’s. A new paradigm of banking is needed,” Gandhi said. “Take advantage of the new technology to enmesh customer experience.”