Threat of New Entrants

Indian Banking sector is a highly regulated sector. The threat of new entrants in the Indian Banking
Industry is considerably low making it a profitable sector for established players in the industry. The
reasons for the high entry barrier in the industry are:
The entry barriers in the Indian banking industry are quite high considering the huge initial investment
requirements for a company to procure a license from the Government to offer banking services in the
country. The minimum paid up capital required for a new bank is INR 5 billion along with a successful
track record of 10 years. This makes it difficult for new players to enter the banking industry.
The Government imposes several restrictions on the expansion of branch network by banks. Moreover,
the huge capital expenditures required for expansion of branch networks makes it very difficult for new
entrants to do business in the country.
Geographical complexity of India: India inhabits more than 65% of the population living in rural areas of
the country. This makes it extremely difficult for foreign players who have their business models shaped
around the elite commercial segment, to do business in the country. Also, it provides an edge to
nationalized banks that enjoy a greater presence in rural and semi urban areas.
Threat of Substitutes
Banking has been one of the oldest industries in the world. People have always felt the need to keep
their valuables in a safe and secure place from where they can recover their money without hassles.
Though the banking industry has seen much advancement and has evolved a lot with time, there hasnt
been a serious threat of a substitute to the whole banking industry, in general.
This trend is changing with growing number of institutions like NBFCs and micro finance companies.
Some of them provide affordable financial solutions directed at the bottom of the pyramid population.
The provision of credit on liberal terms by micro finance institutions is growing very popular in rural
areas, which is threatening the traditional banking model. Another emerging threat is the mobile
money concept being launched by many companies. These companies have huge potential in the
mobile commerce space thus threatening the mobile banking platforms introduced by many banks.
The overall threat of substitutes is low in the Indian Banking sector but with increasing innovation and
growing alternative solutions, the threat is set to grow in the future.
Bargaining Power of Buyers
The bargaining power of buyers in the Indian banking sector is substantially high. This is due to the little
differentiation in terms of products and services offered by players in this industry. More or less, there
are standardized offerings in the retail as well as in the commercial segment. The only differentiation
that banks can provide in their offerings is with respect to the services they provide, they play with
interest rates (even that is dictated by RBI which decides a base rate) and the bundling of products.
Also, there has been a significant increase in the number of banks especially in the private sector, thus
providing more number of options to the Indian customer. This has led to an increase in the bargaining
power of buyers.
Switching costs in the retail segment are very low. Account opening charges have come down with the
advent of no frills account. In the commercial segment, switching costs are relatively higher and the
process is slightly cumbersome due to the documentation requirements and shifting of huge accounts to
other banks. But since banks are always on the run to grab customers, it has become highly convenient
for customers to choose from a bouquet of options.
Bargaining Power of Suppliers
The suppliers to banking industry are the depositors of money who deposit cash and other valuables (in
terms of gold, etc.) with the bank. Since there are regulatory pressures and RBI determines a minimum
base rate through its monetary policies at which interest is given to these suppliers, therefore there is
not much bargaining power of suppliers in terms of availing of these interest rates from a bank. There
are very minor variations in interest rates of different banks. On the flip side, since interest rates do not
vary much, suppliers of money can easily switch from one bank to another as soon as they get better
rates in the market. Hence, retention of these suppliers is a challenge for banks.
Intensity of Competitive Rivalry
The intensity of competitive rivalry is high in Indian banking industry due to the presence of many
companies offering more or less the same services. Because of the lack of product/service
differentiation, marketing and customer service are the key elements to get a competitive edge. In 2012,
the marketing and advertising budgets of the operators increased by substantive percentage points to
attract new customers and increase demand deposits. In February 2013, the Reserve Bank of India
paved way for the entry of corporate houses as well as public sector undertakings in the banking sector
by announcing final norms. However, with more than 60% of population still unbanked, there is enough
room for the entry and existence of new players.