BackWith digital, perceived risk comes down and spreads can decrease
ICICI Bank's recently appointed retail banking head, Anup Bagchi, talks about shift in digital banking due to demonetization, changing interest rate environment and overall customer behaviour
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ICICI Bank Ltd, India’s largest private sector bank, recently appointed Anup Bagchi as head of retail banking. Bagchi was earlier managing director and chief executive officer of ICICI Securities Ltd. Bagchi spoke to Mint Money about the shift in digital banking due to demonetization, changing interest rate environment and overall customer behaviour. He says increase in digital transactions will improve credit behaviour in the overall ecosystem. Edited excerpts:
What in your opinion has been the impact of demonetization on the way banking transactions take place?
The one change in this whole demonetization drive is the whole shift towards digital from a banking and consumer perspective. I have come from ICICI Securities, which is a fully digital ecosystem. The benefit of digital is clear to me.
There are two things to note. First, the cost is less—cost of handling, offline cost and other administration costs. In digital, for a limited cost, you can put through many more transactions.
For a moment, if you take out demonetization, over a period of time the physical transactions—internet, mobile and ATM—anyway comprise upward of 80% of the transactions.
From the business perspective, when more merchants come online, there is a shift to an income-assessment market. Many of the merchants don’t have a direct income so you have to assess an income based on certain parameters. Once it becomes mainstream and you start to have a history of transactions, the credit discipline improves manifold.
Generally, the overall credit culture will improve and the spread over prime will start to decrease.
In lending, there is a benchmark rate and then there is a spread, which depends on the perceived risk of the system. If the perceived risk of the system on client A is high, the spread will be high. For example, in mortgage, the spread is very low—almost near prime. However, in case of loan against property, it is generally higher. For a business loan it is even higher.
As and when the credit culture comes in, and perceived risk comes down—because bankers have a sense of the overall business of the merchant client—you will see that the cost to the end merchant will also come down.
Some merchants are not on to digital because their operations are small, and they think they can manage with cash. But every merchant borrows; that is the lifeline of business.
Also, the overall cost of managing cash will come down and the perceived risk of the overall sector will come down since there is greater transparency with digital. You can track digital, which has a useful footprint.
Cash also has a logistics angle. If I am sitting on cash and I do not have the velocity of cash, what happens then is that the money velocity comes down and credit expansion takes a hit.
It (demonetization) is a big positive spiral for the economy.
How has digital banking changed due to demonetization?
Now, consumers are forced to use cards. Cards that were never used, have started to move. And these are all good, tax-paying customers. We hope that the habit of cash will change and digital will become permanent.
Let’s say you have to spend Rs500 in cash. You will keep around Rs1,000-1,500 with you. This cash is lying unproductive for the end consumer. With demonetization, the concept of emergency fund has come down. We have seen debit card transactions move up over 3.5 times. But I feel that the base is still very small and we are still a cash-dominated country.
Also, merchants have started asking for installation of point of sale (PoS) terminals. Meanwhile, governments too have started incentivising digital transactions.
If people get habituated to cards, then they don’t have to fall back on cash. If they don’t have to fall back on cash, essentially it also means you will get more interest. For instance, if you have Rs1,000 in your savings account, you will not leave it lying there. You might shift it to a fixed deposit, a mutual fund or equity, and thus get higher returns on it.
Cash, which is an immobile form of asset, when converted to a mobile form has many benefits. It is also a matter of customer education.
We have a total of almost 800 million debit cards, including RuPay, of which more than 60% are getting used at ATMs. It is the same PIN (personal identification number), but people don’t know that this can be used at merchants as well. People should at least try it. All the restaurants where you call and order, you can mostly get a discount if you use digital means. For instance, if they charge Rs400 for a dish, you pay online and you can get a discount of 10-15%.
There are so many digital products present in the market now. Which are some of the products that you think will be used on a large scale by end customers?
Digital products are confusing—there is e-wallet, UPI (Unified Payments Interface), debit card, credit card and others. We did a study of the merchant side of payments. Remember that it is a network business.
In a network business, you have to manage both—you need large merchants to accept and you need to have a large number of customers to make transactions. Unless both exist, your business cannot grow. For merchants who have never made a digital transaction in their lives, if I send four people and ask them to do UPI, e-wallet, debit card, PoS and credit card, they will get even more confused.
There will be PoS for larger merchants and other digital products for relatively small merchants because these are asset light.
Unless there is large-scale customer education, you will not see full benefits (of demonetization). People will not automatically embrace the best products and services. Some people pick up things automatically. But these are not the mass. The masses need customer education.
I still feel that while all other modes (of digital payment) will propagate, the easiest is the debit card as it has a full customer redressal mechanism. Our approach is not to put stickers.
After debit cards, internet and mobile banking are the most-used digital products.
When it comes to person-to-person transactions, mobile banking is the highest. There is customer redressal and banks are supposed to pay in case of fraud. Whereas in other systems, they (e-wallets) don’t always have to.
But e-wallet companies have done great work, which I won’t deny.
What is your view on the current interest rate environment? Will the deposit and lending rates continue to fall?
The Reserve Bank of India (RBI) has made interest rate calculations transparent. Interest rates are also an issue of demand and supply. If there is less demand for credit, and deposits rates are high, rates will fall. If credit demand picks up and deposits don’t keep pace, then rates increase in the short term.
In the long term, it is all about inflation. Inflation has been inching down. RBI has kept it transparent and said that there is upside risk from oil and commodities. They will see how the overall inflation basket works.
All the money that has come in due to demonetization, is transient money. It will go out. As withdrawal limit increases, the outflow will happen.
What is your view on the differential banks?
Banking is very behaviour driven. There are banks today that are at significantly higher interest rates than the largest nationalised bank of India. But deposits haven’t moved. If you do the math, on Rs1 lakh of deposit the difference is Rs2,000 for a year.
Customers are smart so we should not double guess the choices. We are looking at the (interest) rates whereas customers are looking at the overall propositions.
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