The Indian economy is poised for an orbit changing growth over the next two decades. A nominal growth rate of 12 per cent annually will catapult India to a $20 trillion size in less than 20 years, and subsequently lift India’s share in world economy to 8.5 to 9 per cent from the current 2.7 per cent. The banking system will undoubtedly have to play the protagonist role in this transformation. Not only are we going to witness a sustained rise in banking assets but we will also see an increasing sophistication of products and solutions, banking of the unbanked and rapid consolidation in the sector — in short, a life-cycle transformation!
With emerging needs in the sphere of urbanisation, industrialisation, digitisation, education, financial inclusion and global integration, as envisioned by the Indian government, I believe the following developments will shape the banking industry in India’s journey towards a $20 trillion economy.
Technology will define banking contours in the future. This would include big data, cloud computing, smart phones and other such innovations. Omnichannel, not multichannel, will redefine the way customers interact with banks. For example, disseminating personalised offers on customers’ mobile phones, use of home video-conferencing system for personalised connect, leveraging face-detection technology for efficient cross-selling are some of the avenues through which technology will aid banking in the future.
Prescient marketing, which involves banks providing customers with the right incentives to tap social network usage to learn about customer preferences, will be another game changer in this Digital Age.
And it goes without saying that mobile banking and mobile payments/commerce is truly the future. Amidst a high mobile density in India, the potential for leveraging this technology for offering financial services remains immense.
There are over 900 million mobile users in the country, but only 40 million mobile banking customers. In this respect, the JAM Trinity (Jan Dhan-Aadhar-Mobile) has the potential to change the face of banking and we fully endorse and complement the government’s efforts in this direction. Technology will also lead to a creative destruction of banks.
Banks will need to focus on innovation that raises competition and leads to better and cheaper services for customers. Banks may also partner to achieve scale and find best practices, combining their infrastructure into joint ventures (JVs). Also, outsourcing utilities such as customer authentication, fraud checking, payments processing, account infrastructure, know your customer (KYC) processing to existing technology service providers could be key steps in going forward.
Next comes cashless banking. In Sweden, 4 out of 5 transactions are cashless. In India, use of hard cash peaked at 11.5 per cent of gross domestic product (GDP) in 2009. Since then, it has moderated but continues to remain high at 10.5 per cent as of 2014.
In the future, cashless banking will revolutionise ease of doing transactions with further penetration of internet (300 million users in 2014) and mobile phones metamorphosing into a personal bank branch (smart phone usage doubled to 80 million in 2014 in just one year).
As per Morgan Stanley, Indian internet market could rise from $11 billion in 2013 to $137 billion by 2020, and this poses as an undeniable opportunity.
Branchless banking could help in achieving economies of scale in revenue generation and cost management. The increasing trend of branchless banking is leading to closure of traditional brick-and-mortar branches in advanced countries (Bank of America closed down more than 1,000 branches in last five years). Banking business model innovations could be combined with national platforms such as Aadhaar to reduce customer acquisition cost by 40 per cent in order to make branchless banking model even more viable.
As per World Bank estimates, the operational cost per transaction for Indian banks is `48 per branch, `25 for phone banking, `18 for ATM, `8 for IVR and `4 for online. India has poor ATM penetration — there are only 11 ATMs for every 1 million people in India compared to 37 in China and 52 in Malaysia. In this regard, solar ATMs could reduce infrastructure cost by almost 50 per cent and also cater to power-scarce rural areas.
India has about 5 per cent share in the global infrastructure market, which is expected to increase to 9-10 per cent by 2025. The futuristic development models will evolve on the lines of 5:25 structure and Public-Private-Partnership model for long-term financing. Additionally, there will be new arrangements in the form of Infrastructure Debt Funds, Green Banking and Viability Gap Funding.
The Micro Small and Medium Enterprises (MSME) sector contributes 8 per cent to the country’s GDP. SIDBI has estimated the overall debt finance demand of the MSME sector at $650 billion. New structures such as cluster-based financing, capital subsidy policy for technology upgradation, MUDRA Bank, credit guarantee schemes, incubation centres and start-up facilities will play an important role in the coming years.
Going further, banking landscape in India will see a transformation with the entry of new-age specialised banks. The urge to innovate, compete and remain in business will also pave way for synergetic consolidation.
The following are a few innovative thoughts that could become a differentiating reality over the next 15-20 years: Account number portability, on the lines of mobile number portability, efficient leverage of big data analytics and securitisation of retail loans.
As businesses evolve and the scale of banking increases, principles like dynamic risk management with Early Warning Signal approach need to be strengthened. US (Resolution Trust Corporation) & South Korea (Korea Asset Management), set up ARCs nearly 20 years ago to effectively dispose of bad assets, paving the way for their de-stressed banking future. The idea of setting up a National Asset Management Company, which will pool the larger stressed assets into one and find a suitable resolution package, needs to be taken forward.
I believe that in the future, it will be important to allow easier Mergers & Acquisitions in the banking space to achieve scale, along with the freedom to set up branches and ATMs as desired. These above developments will present opportunities that will be critical for catapulting Indian banks in the top global league.
The writer is the Founder, Managing Director & CEO, Yes Bank. E-mail: rana.kapoor@yesbank.in