India's Oligopolistic Banking Sector High Lending-Deposit Spread (NIM) due to Lack of Competition

India’s Banking Sector is highly profitable earnings very high Lending Deposit Spreads.India’s Central Bank RBI has said that this spread (NIM) needs to come down in order for India to grow by double digits.However the Banks are in no mood to change their highly profitable business model.With India’s Economy growing at a rapid pace the banks are seeing high credit growth and net interest income as well.They are opposed to any change in the status quo which allows them to make supernormal profits in the highly regulated banking sector.Note I am calling the Financial Sector as an Oligopoly because the Central Bank strictly controls the entry of new players in the Banking Sector.RBI has recently proposed giving new banking licenses to some more companies but it won’t change the structure of the industry.

India’s Banking Sector does not like competition and favors regulation over savings bank rate which is quite low.Deregulation of this rate would decrease their profits and thus they favor regulations which safeguards their profits.While RBI has  managed the fallout from the Lehman crisis well mainly due to the conservative nature in which banks have to keep a large part of their deposits in the form of government bonds,it has failed to increase the pace of financial reforms.India’s Banking Industry manages to live ensconced in their own safe cocoon.The recent Housing Loan Scam in which top PSU bank officers were implicated for taking bribes exposed the the problems with the Banking Sector.The Best Way to break the Oligopoly of Indian Banks would be to freely allow a large number of players into the sector.This would foster more competition amongst banks for deposits favoring Indian consumers.The success of Microfinance sector is partly due to the fact that Indian Banks have failed to penetrate the underserved rural sector.The Banks are managing to get huge profits from the urban sector and have little reason to get their hands dirty in the rural sector.

RBI: Banks need to cut lending margins – NDTV

Indian bankers are a happy lot. The demand for credit is starting to rise and profitability is high. But banks could come under pressure to keep profitability in check to support India’s ambitions of achieving double-digit growth.The Reserve Bank of India has hinted that banks should raise deposit rates and drop lending rates to keep India’s economic wheels well-oiled.Statistics also show that Indian banks have among the highest net interest margins across the globe. For example, HDFC Bank maintains a margin of 4.2 per cent while Axis Bank has a NIM of 3.2 per cent. Even PSU banks like PNB manage to maintain margins of 3.2 per cent while the largest Indian bank SBI holds on to a 2.5 per cent margin.But Indian bankers argue that the situation in India is different due to regulatory and priority sector requirements imposed on banks.

Aditya Puri, MD of HDFC Bank, said, “In the long run it’s a laudable thought. There are challenges in terms of the delinquency levels in this country, there are challenges about the ticket size, cost, SLR, CRR, priority sector.”