Estimating a rise in India’s share in the world economy to 9 per cent (from the current 2.7 per cent) in 20 years, the author shares ten developments that will shape the banking industry, in India’s journey towards a $20 trillion economy
For 2014, India’s per capita GDP is estimated to have exceeded US $1,500, which I expect to touch US $2,000 by the end of 2018. I consider this as a threshold level of per capita income, after which the economy becomes multifold in a short span of time as the consumption structure upgrades dramatically with past luxuries fast becoming daily necessities. China’s palpable dominance in the global economy is a brilliant example of this economic phenomenon.
The Indian economy is poised for an orbital growth over the next two decades. A nominal growth rate of 12 per cent annually will catapult India to a US $20 trillion size in less than 20 years, and subsequently lift India’s share in the world economy to 8.5-9.0 per cent from 2.7 per cent currently.
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’.
In order to remain a relevant partner in India’s growth, Indian banks need to embrace the mantra of ‘Inclusive Growth’ and ‘Creative Destruction via Innovation’ in order to cope with the growing needs of the economy.
With emerging needs in the sphere of urbanization, industrialization, digitization, education, financial inclusion, and global integration, as envisioned by the Government, I believe the following ten developments will shape the banking industry in India’s journey towards a $20 trillion economy.
- Technology will transform the way we bank
Technology will define banking contours in the future. This would include big data, cloud computing, smartphones and other such innovations. Omnichannel, not multichannel, will redefine the way customers interact with banks. For example, disseminating personalized offers on customers’ mobile phones, use of home video-conferencing system for personalized connect, leveraging face-detection technology for efficient cross-sell 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 946 million mobile users in the country but only 50 million mobile banking customers. In this respect, the JAM Trinity (Jan Dhan- Aadhar-Mobile) has the potential to change the face of banking and YES BANK fully endorses and complements the Government’s efforts in this direction.
- Technology will also lead to ‘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 JVs. Also, outsourcing utilities like customer authentication, fraud checking, payments’ processing, account infrastructure and KYC processing, to existing technology service providers, could be key steps going forward.
- Cashless Banking
In Sweden, four out of five transactions are cashless. In India, use of hard cash peaked at 11.5 per cent of 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 revolutionize ease of doing transactions with further penetration of internet (~400 million users in as of Dec-15) 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 US $11 billion in 2013 to US $137 billion by 2020, and this poses an undeniable opportunity.
- Branchless Banking: Banking of the future
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.
- Innovation in ATM usage
As per World Bank estimates, the operational cost per transaction for Indian Banks is Rs 48 per branch, Rs 25 for phone banking, Rs 18 for ATM, Rs 8 for IVR and Rs 4 for online. India has poor ATM penetration – there are only 11 ATMs for every one million people in India compared to 37 in China and 52 in Malaysia. In this regard, Solar ATMs could reduce set up cost by almost 50 per cent and also cater to power scarcity rural areas.
- Infrastructure financing; building the foundation
India has ~5 per cent share in the global infrastructure market, which is expected to increase to 9 to 10 per cent by 2025. The futuristic development models will evolve on the lines of 5:25 structure and PPP model for long-term financing. Additionally, there will be new arrangements in the form of Infrastructure Debt Funds, Green Banking and Viability Gap Funding.
- New models to serve MSMEs
The MSME sector contributes 8 per cent to the country’s GDP. SIDBI has estimated the overall debt finance demand of the MSME sector at USD 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.
- Competition and Consolidation
Banking landscape in India will see a transformation with the entry of new age specialized 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 to 20 years:
- Account number portability (on lines of mobile number portability)
- Efficient leverage of Big Data Analytics
- Securitization of retail loans
- Risk Management
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 off 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.
- Easier Expansionary Regulations
I believe that in the future, it will be important to allow easier M&A in the banking space to achieve scale, along with freedom to setup branches and ATMs as desired.
These 10 developments will present opportunities that will be critical for catapulting Indian banks in the top global league. It’s time for carpe diem and carpe noctem!
About the Author
Rana Kapoor is the managing director and CEO of Yes Bank. Under his leadership, Yes Bank has evolved into a high quality, state-of-the-art private Indian bank with a vision of ‘Building the Best Quality Bank of the World in India’ by 2020.