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In retail banking, 2015 took forward the government’s financial inclusion agenda, which was set out the previous year. For instance, the number of bank accounts under the Pradhan Mantri Jan Dhan Yojana (PMJDY) doubled this year compared with last year. As on December 2015, the total number of Jan Dhan accounts rose to 166.1 million from 84.5 million in December 2014.

To further strengthen the financial inclusion plan, this year the Reserve Bank of India (RBI) issued licences for differential banking—payments banks and small finance banks—as a step to include the unbanked in the formal system.

For existing large commercial banks, on the corporate front, the focus was on asset quality and non-performing assets (NPAs). At the same time, digital innovation was the flavour of the year in retail banking.

The year also saw RBI reduce repo rate by a total of 125 basis points (bps) since January. One basis point is one-hundredth of a percentage point. However, in comparison, bank lending rates have only moved lower to a median 60 bps.

Let’s take a closer look at these and other major happenings of the year in retail banking.

Going digital

Among commercial banks, the private sector ones were more aggressive on digital innovations compared with their public sector peers. Private banks came out with multiple apps and websites to encourage digital transactions. “We noticed that our customers are digitally savvy. In the retail banking space, the biggest change was in terms of customer adoption," said Rajiv Sabharwal, executive director, ICICI Bank Ltd, adding that over 60% of the bank’s transactions happen on the digital channel, and of this, over 20% on mobile platform. “The use of social media has been interesting in terms of transactions. Of our 2.8 million Pocket customers, close to three-fourth are customers of other banks. Also, our big focus has been on data analytics, such as big data, helping us target customers better," said Sabharwal. Pockets includes an app and an e-wallet, through which you can send money.

In case of public sector banks, State Bank of India was ahead of peers such as Bank of Baroda, Bank of India and Punjab National Bank in digital innovation, though many banks took a step forward by providing wallets to their customers. “Retail banking has changed a lot. Wallets are now recognized and accepted from mainstream banks as well as non-bank payments service providers. Payments have come to the fore in retail banking. Most of the innovations so far have come from larger banks as these are technology-intensive (products) and need scale," said Saurabh Tripathi, partner and director, Boston Consulting Group.

While some looked at wallets as a threat to their business and discouraged customers from loading money into them, some mid- and small-sized banks tried to incorporate technological innovation in everyday banking. For instance, Federal Bank Ltd and Lakshmi Vilas Bank Ltd are already working with fintech firms.

Some focus also shifted from ATMs to apps. “From rolling out ATMs or brick-and-mortar branches, banks have now shifted to building digital products and acquiring aggregators," said Shinjini Kumar, leader, banking and capital markets at PwC.

Allied services also took innovative steps. Credit information companies have started looking at alternative ways to gather customers’ financial information and give credit score based on this. Most credit bureaus are testing this method to understand how personal data such as SMSs and social media behaviour can be used to analyse an individual’s creditworthiness.

New kids on the block

After a decade, two new universal banks—Bandhan Bank and IDFC Bank Ltd—were launched. RBI also gave licences to 10 entities to become payments banks and to 11 entities to become small finance banks. “Two new universal banks and the 21 differential banks are complimentary to the existing commercial banks. For example, IDFC Bank has a heavier corporate loan book and hence, can handle a long gestation period. While Bandhan Bank is an example of an experiment in the rural microfinance space. Both together bring new customers and CASA (current account savings account) to the overall banking system," said Kumar.

What kind of impact will payments banks and small finance banks will have on existing banking customers? “We expect the existing digital banking customers to try services of payments banks that will kick off operations. Some of these banks, which are backed by deep pockets, can create disruptive offerings in the Indian market. We look forward to innovation and high competition. The impact of small finance banks will be localized next year, and these will most likely address current customers with deposit products to begin with," said Tripathi.

Financial inclusion

According to banking analysts, the broader idea of bringing in the concept of differential banking is to include the unbanked population into the formal banking system. This is in line with the progress seen in government’s PMJDY drive to get at least 75 million unbanked families across India into the system by opening two bank accounts per household in rural and urban pockets. In terms of value, the total balance in these accounts rose from 6,579.05 crore in December 2014 to 27,283.05 crore in December 2015. Meanwhile, the percentage of zero balance accounts declined from 74% last year to 34% this year. “By bringing in the unbanked into the money supply of the banking system will increase with the growth in CASA," said Kalpesh Mehta, senior director, Deloitte.

Government also launched Sukanya Samriddhi Account, which is specially meant for a girl child and is a small savings scheme. The government has declared 9.1% interest rate for it this financial year.

Other changes

When savings bank account interest rates were deregulated, a few banks had increased their rates to attract customers. But in 2015, some banks reduced interest rates on their savings accounts. Some banks even reduced their home loan interest rates marginally. There was even a steep decline in fixed deposit (FD) rates. Interest on FDs fell by 100-150 bps. In some cases, rates are even lower than what small savings instruments offer.

Overall, the year was about digital innovation and financial inclusion—trends that will carry forward into next year as well.

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