Irrational competition can play havoc in market: Parekh
Retail finance promises immense scope of growth in India but any "irrational competition" among players can play havoc, ace banker Deepak Parekh has said while cautioning against lending below the cost of funds.
London: Retail finance promises immense scope of growth in India but any "irrational competition" among players can play havoc, ace banker Deepak Parekh has said while cautioning against lending below the cost of funds.
In the financial services space, retail finance is seen as particularly promising in India due to a significant level of under-penetration despite the presence of a large number of players.
"So, as far as retail finance is concerned, there is immense scope to grow. (But) it is important to caution that in retail finance, irrational competition can play havoc," Parekh said while delivering a keynote address on financial reforms at the LSE Students' Union India Forum recently here.
"When competition is intense, it is easy to gain market share by under-cutting, but it also forces other players to match up and there have been many instances where players have burnt their hands by lending at rates that are below their cost of funds," he added.
Giving details, he said mortgage-to-GDP penetration is just 9 percent in India, as against 20-30 percent of other Asian peers.
Just 2 percent of India's population invests in equities, compared to 10 percent in China and 18 percent in the US.
Moreover, non-life insurance penetration is at under 1 percent, while life insurance penetration at 3.4 per cent is significantly below that of other comparable countries.
Parekh further noted that by and large, the financial sector in India has been well regulated.
Regulators in India have been right in guarding against the build-up of a shadow banking system, he said and added that in a bid to control indiscriminate growth of non-banking financial intermediaries, the regulators have curbed these entities from raising public deposits.
He further noted that, since 2008, large global banks have paid regulators USD 320 billion in fines for regulatory failings.
"Bank boards are compelled to spend a disproportionate amount of time on compliances at the cost of business strategy. I strongly believe that global regulators need to go slow on indiscriminate fining, given that compliance costs of banks have increased to the point where some banks have had to scale back operations, leading to widespread job losses," he added.