‘Ship Has Sailed’: Rashesh Shah Of Edelweiss On Banking And Why He Isn’t Keen On A Licence
Becoming a bank would have been an exciting opportunity ten years back, according to Shah. The golden ticket of receiving a banking licence doesn’t hold the same appeal anymore
Flipkart founder Sachin Bansal’s Chaitanya India Fin Credit has been refused a universal banking licence, Paytm’s payment banking licence has been revoked, landing it in a crisis. Most small finance banks are seeking licences to become universal banks. Yet, Rashesh Shah, founder of financial services major Edelweiss, is not keen on one.
The Edelweiss group is present across various financial services, from insurance to brokerage to private equity, and is also an non banking financial institution (NBFC) or shadow bank. Unlike most of its peers, it’s not keen on becoming a universal bank, which allows it CASA (current account savings account) privileges for deposit taking.
Becoming a bank would have been an exciting opportunity ten years back, according to Shah. The golden ticket of receiving a banking licence doesn’t hold the same appeal anymore. According to him, that ship has sailed.
“Not anymore. If you see what is happening in banking, CASA is becoming very expensive. So, 8-10 years ago, it was still an opportunity. There were spots available. India was underbanked, and it had unbanked parts. Now India is fairly well banked. There are branches all over the place. It's a very highly competitive market,” Shah explained.
A few years ago, however, a universal banking licence was what most people hankered after. An NBFC looking to become a bank was a good way to raise deposits that would decrease its cost of funds. Many, like L&T Finance, had tried extensively to become a bank around 10-12 years back.
Yet, the regulator gatekeeps these licences zealously. In fact, no entity received a universal bank licence after IDFC First and Bandhan in 2014. Since then, however, the Reserve Bank of India (RBI) has given 10 licences for small finance banks (SFBs) and 11 licences of payments banks. All this was to serve the vast majority of India’s unbanked and underbanked across towns and villages.
Most of the SFBs are in a state of flux, too. Most of the recent licensees are not doing well too, in spite of listing their businesses as per the norms. “Most of the banks are trading at book value. We are seeing a lot of the small finance banks and others with much harder struggles because the market has evolved. The bank market has got much more competitive. It requires more capital, more really long term,” said Shah.
‘Banking On A Tough Business’
Since the pandemic, a lot of changes have taken place in how Indians save, spend and invest. One of the themes being ‘financialisation of savings’. A lot of money which was lying in deposits flew into equity and stock markets. While it’s good for brokerage, mutual fund and asset management businesses of Edelweiss, becoming a bank is now far from its ambitions.
“We are currently not applying or we are not looking for it. It’s a great business to be in, but not for a new entrant as of now. A new entrant today will take about 10-15 years, and a lot of capital, staying power and the ability to burn a lot of effort before building CASA,” he added.
Shah isn’t the only one who thinks banking is now difficult. Top banker Uday Kotak, the founder of Kotak Mahindra Bank has recently spoken out how difficult banking has become, and how banks are losing margins on home loans.
“Leading banks are taking one-year wholesale deposits at around 8%. It translates to a loaded marginal deposit cost of 9% after CRR (0 interest), SLR, deposit insurance, priority sector. Excluding opex. Low cost Retail Deposits (CASA non-wholesale) show muted growth across the system.
Yet, banks are issuing home loans at 8.5% floating rate. Borrow at 9% and lend at 8.5! -0.5% spread. And repo rates are likely to drop. What about the opex/ credit costs? If the deposit tightness persists it is a challenge to the banking business model,” tweeted Kotak.
Capital Markets, Insurance Are The New Bets
In spite of his bleak outlook on banks, Shah is bullish on financial services, and he believes the next big opportunities are in capital markets as well as insurance. They’re at the growth stage where banks were 15 years back.
“Fortunately for us, we are in the capital markets. We have a small housing finance business which is also scalable. We have insurance and all these are the ones where as much capital may not be required. It will be more capital, not as intensive,” he said.
As businesses grow, scale will bring more efficiency. The company has also been using technology and training people to bring down costs. As unit economics improve, it leads to further market expansion. AI and blockchain too are expected to become real, and add value.
“You have to grapple with your cost economics and we have done that in brokerage and wealth management. We are able to give the same quality of service to a ₹10 crore client what we could give only a ₹100 crore client earlier,” he explains. The company sees more opportunities in housing finance and other such businesses.
Deregulation: An Effect Of Slowdown
The ongoing chaos and uncertainty in international markets and the tariff war haven’t mar Shah’s optimism on India's growth story. He is betting on long-term growth of India, and says that it's much easier to predict what would happen ten years down the line, than 2-3 years.
He does however believe that the growth is slowing down. “India’s growth is slowing down much faster than we realise. If you look at the last 4-5 quarters, quarter on quarter there is a slowdown of growth. There is no corporate capital expenditure, consumption is low, household debt payments have gone up. There is a slowing of growth that is real in India and all over the world,” says Shah.
With a cup is half full approach, Shah also has an interesting prediction on what slow growth across the world can do. It might force governments to go easy on regulations to spur growth. That’s good news especially for the financial services businesses both in India and elsewhere.
While the world tightened the nuts and bolts on the sector after the 2008 sub-prime crisis, India went the same way after 2018’s IL&FS crisis, as the infrastructure financier defaulted on the loans to the tune of Rs 91,000 crore. The government responded by inching up regulatory intensity across NBFCS, asset reconstruction companies (ARCs), and insurance companies. Now, however, it could reverse to become more accommodating.
“The US is swinging back to deregulation. I think it will come to India also. There is a feeling and if you see what the RBI governor is saying, what the new Securities and Exchange Board of India chairman is saying, they are all saying we need to grow also and make it easier to do business,” Shah says.
Indian businesses, Shah believes, are better equipped to handle chaos in the short-term, to gain in the long-term. The market veteran who has seen many cycles says that very rarely has India’s GDP gone above 8% or below 5%, which indicates stability on an average.
“India is more chaotic than maybe a more developed country from an economic point of view. What is hidden in that chaos is long term stability. That is what I think the opportunity for an entrepreneur in India is,” Shah says.
A lot can change in India in the short term — be it GST rules or any regulation. But in the long term – even with a delay of 4-5 years, it has always delivered on its promise of growth. That’s the reason why Shah has always been bullish on India since the 90s and continues to be so, for the foreseeable future — in the long term.
