Competitive Advantages In Banking

Over the last few years, the liberalisation programme in India has resulted in dramatic structural changes in several industries.Several old blue-chips have lost their colour and some of the leaders of yesterday are the laggards of today.The recent liberalised policies of the government of India and the Reserve Bank of India have set the stage for a similar situation in the banking industry. While much has been said and written about the merits of several individual policy measures, the fundamental conceptual changes that have been set in motion appear to be largely ignored.

Competitive advantage in the Indian banking industry has been historically determined by factors such as size, branch or distribution capability, and artificial barriers to entry arising from the archaic credit delivery process. This has helped some of the older players in maintaining a prominent position in the industry despite their relative inefficiencies. This however is all set to change as the trend of new policies is to fundamentally alter the basis of competitive advantage in Indian banking.

 

The direction of the new policies is to establish a level playing field between various components of the industry and remove barriers to entry and exit. The creation of the term money market, the changes in the credit delivery mechanism, the flexibility in the credit assessment process and the diversification of the sources of money ( external commercial borrowings, various local debt instruments) collectively will change the factors that determine survival, growth and profitability in this competitive industry. For instance:

nThe development of an active term money market will mitigate the competitive disadvantages arising today from the absence of a branch network. Branch networks will be required in future to support some retail products, but not as a means to raise resources for lending. Constraints on lending will be determined by financial strength, risk taking ability, and capital rather than by the ability to raise resources in an imperfect market.

nThe gradual dilution of the consortium discipline will improve access of companies to banks and vice versa. The consortium discipline has been widely misused by banks and has degenerated into an old boys club