Banking in India: 2016 and beyond
The future of banking in India looks not only exciting but also transformative
The future of banking in India looks not only exciting but also transformative. Despite the somewhat difficult current operating environment, banks remain the largest financial sector intermediary in India. In future, technology will make the engagement with banks more multi-dimensional even as other entities, markets and instruments for credit and financial services continue to develop and expand.
The current weakness in economic activity has muted credit demand from banks. Part of this slowdown is due to excess capacities in many sectors, together with the increase in leverage on corporate balance sheets, impeding their ability to absorb credit. In addition, alternative sources of financing, both domestic and offshore, have also emerged.
Stressed assets in banks’ credit portfolios have also constrained credit delivery, but the situation is gradually improving. While banks have taken measures to clean their portfolios, with write-offs and provisions, the Reserve Bank of India has also facilitated rectification through a number of well-thought-out initiatives. Restricting incremental non-performing assets through early detection, monitoring, corrective action plans, shared information and disclosures is also likely to keep a future recurrence in check. Proposed mechanisms for asset resolution, including the Bankruptcy Code, will help speedier recovery.
The financial demands of creating infrastructure to support the aspiration of sustained high growth will be enormous. Institutions like the National Infrastructure Investment Fund will catalyse increasing funds flows to infrastructure.
As India’s integration with the global economy increases, and the rupee gets internationalized, Indian banks will facilitate corporate access to offshore markets and capital pools. Bond, currency and derivatives markets will develop and deepen; rather than being a threat to banks, these markets will complement banking services and products, with a diversity of risk management and hedging options, and enable banks to hand off credit risk.
However, as global markets become more competitive and volatile, commercial success will depend on the ability to operate and scale up in an uncertain environment. Managing risk will become increasingly important. Technology and analytics will become the cornerstones of improved risk management in the country.
In the wider banking context, technology is enabling more effective, lower cost delivery of corporate financial services, facilitating rapid and seamless payments, enhancing the retail customer experience, and increasingly, allowing increased access to financial services among the hitherto excluded. Many services can now be delivered in almost real time, including credit assessment and loan approvals. Increasing penetration of the Internet and mobile connectivity will permit delivery of an ever-widening suite of services “on the move”.
The biggest impact of technology will be the ability to personalize delivery of products and services to customers. Data analytics is an integral part of this ability to customize. Increasing use of unstructured data, generated largely from social media, will vastly add to behavioural understanding and prediction. In an environment where delivery of financial services will become increasingly commoditized, customer experience will become the differentiating norm for a preferred service provider. The ability to tailor financial solutions to customers across multiple platforms will unleash a wave of product innovations and thereby demand for financial services.
The landscape of India’s financial sector is changing. Anytime, anywhere banking, using differentiated channels and technology, will enable a multi-fold increase of reach in rural and remote areas. Coupled with the emergence of a new class of banks—the small and payments banks—one of the biggest impacts of technology adoption will be rapidly accelerating financial inclusion by making last-mile access more cost effective and expanding the reach of banking to the unbanked. The Pradhan Mantri Jan-Dhan Yojana has been an outstanding example. Direct transfers to bank accounts coupled with the range of services, envisioned in the government’s Digital India programme, will drive customer adoption and promote a savings culture. Partnerships between these specialized entities and universal banks will effectively leverage their networks to deliver financial services, including micro-credit.
Customers are increasingly weaving their digital and physical worlds together, with transactions conducted using multiple channels. Competition from unconventional entities will quicken the pace of technology innovation. Collaboration between banks and the retail ecosystem will also deepen to provide customers with a bouquet of products. In general, distinctions between financial and non-financial service providers will blur; an inter-connected and collaborative ecosystem of service providers will emerge. Through partnerships and acquisitions, banks will integrate financial services, wallets, payments, shopping services etc., to deliver an enhanced customer experience.
Yet, despite the array of financial services on offer, customers in a volatile and uncertain world will increasingly need a sense of permanency and security for their deposits. Banks will be the institutions that can fulfil this need, partly due to stringent regulatory norms, which will enhance systemic safety. In addition, due to the low penetration of formal, organized financial services among households and small and medium enterprises, the opportunities for financial intermediaries, particularly banks, remain very bright.
Shikha Sharma is MD & CEO, Axis Bank.