Fair point. This is fairly broad question.
Before answering this, let me share an example for you to ponder upon.
Gold loan case:
Lending by taking gold as mortgage is pretty straight forward business and very less risky- you don’t even need to know the name of the borrower if you have verified the ornament quality. Disbursements usually happen on same day.
So, folks like SBI offer gold loans at 7.5% interest and folks like Manappuram, Muthoot, IIFL lend at 18% interest.
yet, these three NBFCs have gold loan book over 50kcr and for SBI its hardly 6kcr.
my opinion on your question:
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Lending is usually done based on pre determined policies.
These policies are drafted based on previous lending experience+ Business inputs - This usually leaves lot of niche credit pockets.
eg: Some have policy of minimum income >25000 or minimum age 23, now what about people who are earning Rs.10,000 or <23 ? Here you’ll have pricing power along with risk.
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When you are in desperate need of liquidity- rate is the last thing you’ll look at- Agility matters.
eg: Business folks, emergency needs etc.
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In Low ticket size or low duration loans, absolute value of interest rates look insignificant for individuals.
eg: Appliances EMIs
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Borrowing is not E-commerce.
It is not that you compare price in different banks and choose the lowest rate one and it can never be that coz, rates vary across risk profile for each and every bank. Rate which is quoted before processing the loan may not be the same as after processing the loan.
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Absolute amount matters for many.
eg: Answer to above SBI examples lies in this pocket, same application across lender might have different loan eligibilities.
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There are dedicated companies in US who help you to reduce your cost of debt-
so ya, there are always low risk borrowers ending up paying high interests. For instance, HDFC market share is 10% in loan book and 16% in net interest income yet, there they are managing a 10lakcr loan book.
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On retail side, public and private banks price the loans almost at similar rates [Barring SBI].
Real low cost lending happens in SME,Infra, corporate lending and we all know that they own 65%+ market there.
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You can always change your customer segments and products.
eg: Kotak after cracking the market with 7% interest, they have reduced the deposit rates and made their cost of funding profile close to that of big banks. and now offering HLs starting at lowest rate in the market.
In aggregate, there are enough niche pockets in lending where you have significant chunk of profits to be made, that too in a country where organized employment is less than 10%.
Also,
you don’t need private banks to take 100% market share to create wealth- if private banks share moves from 35% to 50% along with industry size expanding 10-12% every year, you can multiply your wealth significantly.
Pvt banks outstanding credit - 35lakcr
Public bank share credit- 65lakcr
Market size: if GPD moves To 5 trill $ and credit to GDP moves to 70% you’ll have 350 lak cr credit outstanding.
In this 35lakcr > 175lakcr journey there is simply too much wealth creation potential.
Not just in IDFC but in HDFC B, Kotak,Bandhan,Indus,CSB etc - Many retail focused or prudent underwriters.
So, our big question shouldn’t be will Pvt banks be competitive enough or is the market big enough,
it should be-
- Will the lender i invest in have stable earning profile - without ups and downs [You should be able to draw a upward sloping straight line and earnings should follow]
- Will the company maintain brand equity
- Is the risk adjusted return profile good enough for the segments - NIM, Credit cost, ROA
- Do company have depositors and stakeholder confidence -Liability gathering ability
- Are they building competencies in their target markets- platforms, partnerships etc.
- Are they customer centric and digital savvy enough.
