Fintech is posing a big challenge to the traditional banking industry. Your view?
The fact that the banking sector has to face technological change is an ongoing thing. We took advantage of the opportunities that technology provided going back 20 years and I am sure the banking leaders of today will also take a similar advantage of technological changes that are happening. Yes there will be the new age players and these would be across the financial services spectrum. We are already seeing them mounting a challenge at the securities business. You will probably see them mounting the challenge in the asset management business and these two could be part of a continuum. But this is something that incumbent banks — small or large -will have to consider. Banks will need to think like the new digital startups. The established banks will do well.
One good thing is that the cost of technology today is a fraction of what it was 20 years back and there are platforms or
for each single area of operation, All these could be put together at a very reasonable cost. So an incumbent player would not find it difficult if they are willing to be a change agent for themselves.
Coming to corporate lending, one part of the business which may not be there as India heads to become a $5-trillion economy. The whole suite of banking products will have to be utilised by the corporates to do their own business — whether it is between themselves and their vendors, their customers and so on. Of course, there is the entire retail suite of products which will be available for banks along with access to retail money. I believe banks have it in them to be their own change agents.
The fintech valuations are running into $4-5 billion on an average in India. None of these fintechs have a balance sheet size of even a billion dollars but the markets are giving them that kind of a valuation. Is this a new change in technology which we must endorse or do you think it is a matter of time before the realisation kicks in that a financial institution needs a strong balance sheet on the borrowing side?
I think time will tell but from what I have observed, if we are expecting a valuation as a multiple of the top line — some of these companies have top line of Rs 500-600 crore, forget the losses that they are incurring — that is less than a $100 million and then we talk of a valuation of $7-10 billion. There is a disconnect somewhere. I am sure people who have put money into these companies know better. The PE companies have funded them and these are hopefully informed investors, but if these companies come to market without a proper record of what they have achieved, investors should be cautious and aware of what is happening.
I heard one of the leading investors say that as long as he does not understand these companies and as long as he does not understand the cash flows which are valuation based, he would not invest. I would think this is sound advice because there are too many players out there. At this point in time, we do not know where and when the levelling will take place and post levelling which companies will command a reasonable valuation. But if you expect valuations of 100 times your top line, that is not going to work something as to give very quickly somewhere.
