Finance

Andy Mukherjee is a Bloomberg Gadfly columnist covering industrial companies and financial services. He previously was a columnist for Reuters Breakingviews. He has also worked for the Straits Times, ET NOW and Bloomberg News.

In the match for India's financial services future, fintech just scored twice while banks are still struggling to retrieve the ball they scuffed into their own net. It's just the start of what looks like a bruising battle for traditional lenders.

India's banks, which still dominate the country's financial landscape, appear to have hardly a kick left in them. Stressed assets without any loan-loss cover now exceed $96 billion, McKinsey & Co. said last week. An overwhelming 91 percent, or $87 billion, of the provisioning gap is at state-run lenders, whose net worth would be wiped out if they took the hit on their capital.

Capital Punishment
Fully providing for Indian state-run banks' stressed assets would wipe out their net worth
Source: McKinsey & Co.

Even as McKinsey was delivering this sobering reality check, fintech was running a victory lap of sorts. Paytm, a digital payments company, announced a $1.4 billion investment by Masayoshi Son's SoftBank Group Corp. on Thursday, the largest funding round by a single investor in an Indian startup.

In another vote of confidence, Singapore's sovereign wealth fund GIC Pte, which is partly liquidating a disappointing decade-long stake in UBS Group AG, bumped up its holding in Capital First Ltd. to 14 percent. The Mumbai-based financier makes loans to small entrepreneurs and shopkeepers for everything from air conditioners and bikes to working capital after analyzing their cash flows.

Move Over
Capital First, a Mumbai-based financier in which Singapore's GIC has raised its stake, is more highly valued now than India's benchmark banking index
Source: Bloomberg
*Current share price divided by 12-month forward consensus estimate of book value.

It's an opportunity that a lazy banking system, obsessed with the collateral it's lending against rather than the business it's lending for, has handed on a platter to data miners. Capital First's retail assets have grown 24-fold in six years to about $3 billion. Its bad-loan ratio of less than 1 percent compares with almost 10 percent for banks. And the latter figure is an official estimate; the reality is probably a lot worse. 

McKinsey has several suggestions on how Indian banks can deal with the mess: by quarantining assets that would eventually find their footing, liquidating those that won't, and working with professional asset managers to turn around debtors that lie in between. But even if the delicate surgery is successful, banks -- especially state-run ones -- will end up ceding a lot of ground to fintech.

As Gadfly as argued before, banks are underestimating the threat. Who can blame them? Even now, when they're collectively in the doghouse, the Reserve Bank of India is keeping their lunch warm. The central bank's draft guidelines, for instance, propose locking all customer balances with non-bank digital wallets in escrow accounts at lenders.

Banks' own wallets, however, won't have this restriction. Public policy researchers are puzzled by this stifling of innovation.

Still, the hefty checks that SoftBank and GIC wrote last week send a clear signal. All that India's banks have to show for decades of mollycoddling is a combined balance sheet on which taxpayers' equity has effectively dwindled to zero.

Only a handful of the 21 public-sector lenders have a rightful claim on survival; and even they had better raise their game.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Andy Mukherjee in Singapore at amukherjee@bloomberg.net

To contact the editor responsible for this story:
Matthew Brooker at mbrooker1@bloomberg.net