New lenders to transform India's banking scene

India is set for a "fundamental transformation" of its banking sector over the next decade as a new generation of private sector lenders sweep past state-backed rivals to win more than half of the market for the first time in a generation, the head of the country's newest bank has predicted.

Rajiv Lall, who in October will launch IDFC Bank, the first new full-scale private Indian lender in more than a decade, told the FT that private banks would "easily" control more than 50 per cent of the sector's assets in 10 years time.

Taken together, private domestic and foreign banks today hold roughly a quarter of assets. Public lenders control three quarters, a level that has been falling only gradually since private players like ICICI and HDFC Bank were set up nearly two decades ago.

But Mr Lall says better customer service and use of technology at lenders like IDFC Bank will now prompt a much faster shift - one that would arguably represent the most significant change in Indian banking since nationalisation in the 1970s.

"This is the fundamental transformation that we are seeing unfold," Mr Lall said in an interview. "Over the next decade their [state-backed banks] market share will be really whittled down . . . it will be dramatically lower than it is today."

The prediction has far-reaching implications, and is likely to attract attention in India given Mr Lall's reputation as a senior financier and public intellectual.

Prior to his current role as managing director of infrastructure lender IDFC, the new bank's parent, Mr Lall was a partner at private equity group Warburg Pincus in New York. He has held senior roles at Morgan Stanley and the World Bank.

IDFC won a licence for a new universal bank last year, marking the first step in wider plans to boost competition that central bank governor Raghuram Rajan has dubbed a "dramatic remaking" of Indian financial services.

Mr Rajan has given out just two new licenses so far, the other being to a smaller microfinance institution. But he is soon expected to hand out many more, creating a new wave of universal, local, and payments-focused institutions.

"More banks, particularly private banks, are very much needed," Mr Lall says. "The quality of service and the range of products that public sector banks are able to deliver to their customers leaves quite a bit to be desired."

"When the first generation of private banks came into this market . . . it really helped drive standards," he adds. "There is a huge opportunity, and need frankly, to not only extend the reach of the existing banking system, but also to diversify and make more sophisticated the range of product offerings."

Rapid economic growth is likely to see India's banking sector become the world's third largest by assets over the coming decade, behind only the US and China.

Rapid consolidation will also create a top-tier of institutions with systemic international importance, Mr Lall claims, even if says none will yet match the size of leading Chinese banks, which he describes jokingly as "global monsters".

"There will be a few bank that will emerge as consolidators in the Indian landscape," Mr Lall says. "That will certainly make them among the some of the larger financial institutions across the world."

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