In the past, banks were known for high-ceilinged banking halls, gloomy staff and tons of paper. Since the arrival of computers in the late 1980s, banks began to change, but not entirely.
A quick look at today’s banks:
- ‘Brick & mortar’ branches continue, but with a difference—whereas, in the past, everything used to be done at the branches, today most things are done at some remote location where nameless people, whom you cannot contact, do ‘the needful’ on your bank accounts.
- Though everything is supposedly computerised, forms are still aplenty. They require you to fill in your name, account number, blah blah blah, and try to replicate the signature you had submitted to the bank a long, long time ago.
- You are not the “most important visitor on our premises” (Mahatma Gandhi) but a potential buyer of some fund, investment or product for which the bank has set a sales target.
Do we need such banks?
If not, what sort of banks do we need?
First—what we do not need:
1. Branches, because they have switched from service to sales. Everything can be done online today, except cash withdrawal from ATMs. If you have a problem, the branch people usually can’t help you—they either tell you to go online, or send your problem ‘upstairs’. What use are branches to us, then?
2. Forms, and other paperwork, especially the absurdity of having to fill in all your details, every time, though the bank has known you for many years.
3. Salespersons offering new ‘products’. We are savvy enough to figure out what we need, thank you.
4. Useless bells and whistles—concierge services, ‘points’ which can only be redeemed for useless junk, discounts at second-rate restaurants, etc.
From these “don’t need's emerges the structure of the ‘Mann ka Bank’ (MkB):
- No branches—a 100% virtual bank, remote access only.
- Everything online, on a website. Any queries, issues or problems that may arise are dealt with thus:
a.) Online resolution, with the help of a chatbot—no charge.
b.) Online audio-visual chat with an actual person. A limited number of such chats will be free and additional chats will be charged a fee.
- Transaction account with 6% interest on daily credit balances and an appropriate (more on this later) interest on overdrafts.
- Free unified payment interface (UPI), national electronic funds transfer (NEFT) and automated phone banking.
- No fixed deposits (FDs), because taking term deposits at competitive rates and keeping a part of it in statutory liquidity rate (SLR)/ cash reserve ratio (CRR) (at a loss) is a mug’s game.
- No credit cards or debit cards—just UPI, backed up by personal overdraft if needed.
- No corporate lending, because that is a ticket to disaster.
MkB will provide two types of personal finance:
- Overdraft, either unsecured (at 12%-14%) or secured (by pledge over investments in mutual funds) at 9%–10%.
- Vehicle finance for cars and two-wheelers, secured by pledge, at competitive interest rates.
MkB will fund these advances in three ways:
- In-house funds—capital, plus the balances in the transaction accounts.
- Short-time money market borrowings.
- Securitisation of vehicle loan portfolios, primarily offered to retail customers in chunks of Rs1 lakh as ‘participation funds’.
MkB will specialise in mutual fund activities, characterised by:
- High level of customer service, with good quality reports, analyses, and market studies.
- Purely advisory service—no hard-selling of funds which generate the highest fees.
- Fiduciary services, for customers who want to invest but have neither the expertise nor time to manage portfolios.
- Wealth management services that actively manage all forms of wealth, not just mutual funds, for HNWIs (high net worth individuals)—personalised service with a success-based fee structure.
- Advisory fees pegged at lowest possible levels.
MkB’s headquarters, actually its only physical location, will be in a tier-3 town with adequate infrastructure but moderate costs.
In short, MkB will minimise its own fixed costs, charge minimum interest and fees, and deliver great service—online, 24x7.
If its products are good, customers will come.
Will customers really come?
You are the judge, of course, but I think they will.
The median age of India’s population is 28.7 years and 71% of the population has smartphones. Everyone is computer-savvy and open to trying out innovative ways of doing daily tasks. Finally, very few people will go to a bank branch if they can get their job done online.
Of course, MkB-style banks cannot be the only ones around, because some people will always prefer the conventional form of banking based on people and premises. But there will be many takers for an MkB-style bank.
Will MkB be profitable?
The two major costs of banks are: overheads and provisions.
MkB will operate with almost no premises and very few staff. ICICI Bank spends Rs12,000 crore a year on staff costs alone. MkB should be able to run with staff costs limited to a tiny fraction of this amount.
On the provision front—zero corporate loans will eliminate the need for hefty provisions on big-ticket loans. A retail lending book, consisting of short-term and asset-backed personal loans, will minimise loan losses. Securitising the personal loan book will further reduce provisions.
Of course, at the end of the day, the profitability of an MkB will depend on how its business model is planned and executed. There are plenty of smart and experienced people around, and a high-quality team can be built. If the team members have ‘skin in the game’, by way of low fixed pay and large stock options, they will do their utmost to achieve success while keeping fixed costs low.
The final issue—how is it to be done?
I would say—someone with deep pockets, or some bank, takes over a small regional bank, preferably an ailing one, puts in money to close out all legacy items like bad loans, staff, premises, etc, renames the bank (not MkB, please...) and launches it as a purely digital bank.
(Deserting engineering after a year in a factory, Amitabha Banerjee did an MBA in the US and returned to India. Choosing work-to-live over live-to-work, he joined banking and worked for various banks in India and the Middle East. Post-retirement, he returned to his hometown Kolkata and is now spending his golden years travelling the world, playing bridge, befriending Netflix & Prime Video and writing in his wife’s travel blog.)