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MUMBAI : The shift towards digitization, disruptive innovation, and new technologies has forced lenders to invest substantial amounts to upgrade their information technology infrastructure, leading to higher operating expenses, analysts said.

Although this will benefit them in the long term, high operating expense (opex) amid hardening yields is impacting their operating profit. “Lower treasury gains and elevated opex amid business normalization and high tech spends should keep pre-provisioning operating profit growth in check at 4% year-on-year," Emkay Global Financial Services said in a note on 8 April.

Banks and non-banks will continue to spend on upgrading IT infrastructure, at least for the near term, as traditional business models are undergoing a massive digital transition not only for retail banking and small businesses but also for large corporates, experts said, and added that it is only fair that they spend more on IT systems.

For instance, consumer durables lender Bajaj Finance has announced the roll-out of a super app and is building a new web platform which will go live by the year-end. 

The initiatives are  part of its efforts to widen its omni-channel distribution network to allow customers to switch seamlessly between physical and online stores to make payments, transfer funds, borrow, and invest across channels.

In the last seven-nine months, Bajaj Finance invested in domain talent and technology to develop a large digital web platform, it said. In the March quarter, the non-bank lender’s ratio of operating expenses to net interest income (NII) was 34.6%. 

“The company continues to invest in teams and technology for business transformation. Given the deep investments being committed to omni-channel strategy—geo-expansion, app  and web platform—the company expects opex to NII to remain elevated for FY23," it said on 26 April.

Private sector lender ICICI Bank, too, reported 17.4% year-on-year opex growth for the March quarter. While employee expenses increased by 21% year-on-year, the lender told analysts that non-employee expenses increased 15.6% over the year-ago in Q4, primarily due to retail business and technology-related expenses. The bank’s technology expenses were about 8.5% of the operating expenses for FY22, ICICI Bank said on 23 April.

“As far as technology spends are concerned, it is not a constraint at all. What we have to always be vigilant about are two things: resilience of the technology and cyber risks. We spend a lot and are very focused on it, discussions happen at the highest level, and at the board level," Anup Bagchi, executive director, ICICI Bank, said at an event on 28 April.

For large private sector lenders such as HDFC Bank, Kotak Mahindra Bank and Axis Bank, technology spends are estimated to account for 7-9% of total expenses. 

Much of this investment is going into artificial intelligence (AI) and machine learning (ML), moving to cloud servers, building new platforms, improving security, and changing the back-end architecture.

“Earlier, technology used to support business, but now, technology is the business," said Deepak Sharma, president and chief digital officer, Kotak Mahindra Bank, adding that there has been an increase in investment towards modernization of applications, cloud-based solutions, new platforms, security, automation, AI and ML.

State-run lenders have also realized the need to modernize to remain competitive, and are investing substantially  in technology. While India’s largest lender State Bank of India is leading the pack in technological innovations with its Yono app or its plans to build a separate digital entity. On 6 April, public sector lender Union Bank of India said that it will invest 1,000 crore to  upgrade its IT platforms this financial year, as it looks to source half of its business from digital channels by 2025 and save costs.

gopika.g@htlive.com

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