With its jaunty branding and stewardesses decked out in identikit 50s-style wigs, India’s IndiGo airline seems a world away from the sober image most financial institutions are keen to project.But for Rajiv Lall, as he prepares to launch the country’s first new full-service private sector bank in a decade, the highly profitable budget carrier — whose clockwork punctuality and spotless planes quickly made it India’s most popular — is nothing less than an inspiration.“We want to be a totally new kind of bank, one which is lower-cost, higher technology, which gives customers a basic service they like, just like IndiGo,” says Mr Lall, who will head IDFC Bank when it opens in October. “It sounds simple but it is going to be horribly difficult to deliver.” India’s banking system has been largely static over the past 20 years. Private lenders have chipped away at dominant state institutions, but it is slow work: today, public banks still control three-quarters of the county’s Rs96tn ($1.5tn) in bank assets. That may soon change, however, with a profusion of Indian upstarts readying to enter the market, starting with IDFC, an infrastructure financier, and Bandhan, a Kolkata-based microlender. More will follow as Reserve Bank of India governor Raghuram Rajan hands out licences to niche payments and regional lenders too, part of broad plans to bolster competition. Will this new generation succeed? Mr Lall thinks his own venture can, by pushing a radically new low-cost model, inspired by budget airlines and mobile telecoms operators.At least initially, IDFC Bank will focus on corporate lending, tapping its parent’s infrastructure contacts. Strict rules require it to open a quarter of its branches in rural areas so it also will target India’s potentially vast but generally unprofitable rural market.But to deliver what he calls his “new-age universal bank”, Mr Lall needs a stable retail franchise and the deposits that come with it — which means taking on both lumbering public-sector giants such as State Bank of India, and nimble private sector operators including HDFC Bank and ICICI.Only about half of adults in India have bank accounts, but IDFC’s research shows that even the ones who do are unhappy. A blizzard of forms greets those looking to open an account. Applying for other products, such as credit cards, typically means reams more paperwork and weeks of delays.“Customers are not satisfied . . . Banks are seen as product pushers,” says Mr Lall, who cut his teeth at global financial institutions including Morgan Stanley and Warburg Pincus.To gain an edge, IDFC Bank will focus on basic services, delivered quickly. Some type of money-back guarantee may be offered too, Mr Lall hints, claiming that no existing Indian bank “is able to make a promise that, if I don’t do this for you, there is a certain penalty for me. No bank is putting its money where its mouth is”.He plans to be “parsimonious” above all, opening relatively few branches, spending on good technology and relying on mobile phones to connect with customers. “Over a five to six-year range our cost-to-income ratio should be 40 per cent lower than the best in class in India,” he says. “That would be huge.” Analysts, at least, concur that delivering on these ambitious goals will be tough. Despite its vast unbanked population, the upper end of India’s retail and wholesale markets in its richest cities is saturated and ferociously competitive. Picking off customers from efficient incumbents such as HDFC Bank will be difficult.Regulations also mean that if new institutions such as IDFC Bank and Bandhan want to build up their balance sheets quickly, they must take on evermore poorer customers — an area in which few financial institutions have found a way to make money.India’s earlier generation of new private banks like ICICI often gained scale through acquisitions, according to analysis from broker Investec, meaning that IDFC Bank and others may have to consider buying out competitors — or risk being snapped up themselves.“Within five to seven years, IDFC will be bought out by one of the big three Indian banks, or if the rules further liberalised, by one of the foreign banks,” reckons one Mumbai-based banking analyst who asked not to be named.Mr Lall dismisses that prospect, envisioning growth done “aggressively” but organically over the next decade, again citing IndiGo as an example of a company that rose quickly in a highly competitive sector. “It isn’t as if they do anything which is crazily fancy,” he says. “But IndiGo . . . redefined what service is. They have hit a sweet spot. It is no-nonsense, straightforward. You get what you pay for. We can do that too.About the Author:James Crabtree, head of the FT's Mumbai Bureau, leading coverage of corporate India, having previously worked on the paper's opinion page in London, as Comment Editor.
