Looking Forward,Looking Back

The Indian banking sector has seen unprecedented growth along with remarkable improvement in its quality of assets and efficiency since economic liberalisation began in the early 1990s.

From providing plain vanilla banking services, banks have gradually transformed themselves into universal banks. ATMs, Internet banking, mobile banking and social banking have made “anytime anywhere banking” the norm now. In 2011/12, non-cash payments comprised 91 per cent of total transac- tions in terms of value and 48 per cent in terms of volume. Within noncash payments, too, the share of payments through cheques has come down from 85 per cent to nine per cent in value, and 83 per cent to 52 per cent in volume between 2005/06 and 2011/12. Banks have taken other measures to improve their functioning, too. As a result, there were 20 Indian banks in the UK-based Brand Finance’s annual international ranking of top 500 in 2010, as compared to only six in 2007, according to a report in a leading financial daily.

The growth is not restricted to the metropolitan or urban areas. Financial inclusion has been at the forefront of regulators and policy makers in India, a country where approximately half of the population still does not have access to banking services. There have been occasions when banks have acted beyond their role of finance providers. For example, a financial daily reported that Aryavart Gramin Bank, a regional rural bank sponsored by Bank of India, tied up with Tata BP Solar to finance “Solar Home Lighting System” for village homes in Uttar Pradesh. It extended finance of around `10,000 with `3,000 as margin money to be contributed by the beneficiary. The equated monthly installment towards the repayment of the loan amount was less than the amount the villagers had to spend on kerosene requirements per month. The bank’s initiative resulted in 20,000 houses getting solar power. It also meant an annual saving of about 192 tanker loads of kerosene.

India’s banking system was probably one of the few large banking systems which remained unscathed by the 2008 global financial crisis. However, there is a lot more to be done to make it a truly worldclass sector.

Some of the key developments which could shape the future are:

Basel III: India figures among the very few countries which have issued final guidelines on Basel III implementation so far. The Reserve Bank of India has given five years for the gradual achievement of Basel III global banking standard. But it seems a tall order for many banks. The challenges of implementing Basel III are further accentuated by the fact that the law mandates the Central government to hold a majority share in public sector banks(PSBs), which control more than 70 per cent of the banking business in India. Further, the high fiscal deficit is likely to limit the government’s ability to infuse capital in the PSBs to meet Basel III guidelines, which will require approximately `4.05 trillion to `4.25 trillion over the next five to six years. (One trillion equals to`100,000 crore.) The high capital requirement will also add pressure on return of equity of banks.

New banks: Although there has been little progress on the draft norms for issuing new banking licences, the entry of new banks could have a significant impact on the Indian banking system. Given the huge unbanked population, there is surely a scope for more banks .

Foreign banks: RBI has been keen on allowing foreign banks a larger role in the Indian banking system since February 2005, when it first issued the road map for presence of foreign banks in India. In May 2012, the government also facilitated the process by proposing to exempt foreign banks from the 30 per cent tax on capital gains and stamp duty while converting branches into a new entity. RBI has also mandated foreign banks with 20 and more branches to achieve priority sector targets and sub-targets at par with their domestic counterparts.

Developing corporate bond markets: Developing corporate bond markets is an important link in a well developed financial market. Although the government has taken some steps in this direction, a lot more needs to be done.

Unique Identification (UID) project: Among the many initiatives, the government’s UID project is likely to have significant impact. Given the numbers out of the reach of organised banking, it can prove to be transformational by giving banks an access to a large untapped customer base. The whole range of government payments – under subsidies and benefits of various welfare schemes – will be routed through banks.

Social media: This adds another dimension for banks to manage their relationship with customers. It al- ready had over 45 million users in India in 2011, which is expected to grow to over 88 million by the next year with over 75 per cent under the age of 35, according to media reports. Although banks in India have been a little late in using social media, they have been making fast progress.

With increasing volume and complexity of the banking business, it will be imperative for the regulator to move gradually towards more offsite monitoring than onsite. Technology will play a much larger role in the overall supervision of the banking system. There are likely to be transformational changes in the entire regulatory system for financial services. Given the significant overlap between various sub-sectors, the Financial Sector Legislative Reforms Commission, headed by former Justice B.N. Srikrishna, in its approach paper, had suggested large scale consolidation. This is expected to lead to reduced intermediation cost, benefit from the economies of scale and consistent treatment across sub-sectors.

“The future belongs to those who prepare for it today,” goes a famous quote. The changes in the banking landscape will require banks to also adapt to their new environment. Banks of the future will have to be nimble and lean organisations with technology integrated to support a sustainable and scalable business. They will need to have a flexible organisational structure with decentralised decision making to reduce turnaround time for various processes. This will be especially true when a number of new entities including non-banking finance companies (NBFCs), large corporate houses and microfinance institutions (MFIs) get banking licences.

In order to serve potential customers in unbanked areas, banks should be willing to experiment with various business models to build a scalable and profitable business. Technology resources will have to be shared to reduce cost. At the same time, banks of the future will need to understand the technology-savvy Gen-Y customers and design products accordingly. Banks will have to deploy the majority of their employees in sales and marketing roles to cross-sell services to existing customers. There will be an increased demand for skilled personnel from other disciplines. Banks will have to use data analytics tools to gain insights from their existing customers’ data to increase their business and customer loyalty. One of the prominent ingredients for the success of a bank will be its ability to partner with multiple agencies to increase its business .

The Indian banking landscape is expected to evolve to have regional as well as national players. Except for a few large banks having pan-India presence, many of the mid and small banks will specialise in certain functions/regions in diverse markets. Rather than every bank trying to carry out all the banking functions throughout the country, banks are likely to identify their core competencies and build on those. A bank that avoids “one-size-fits-all products”, acts as a knowledge banker, provides all financial needs at a click, is fundamentally strong, manages risk and adheres to global regulations, harness iOS and Android platforms to the fullest, design better, faster and convenient delivery channels will no doubt be called a successful bank.

The author is Partner and Head, Financial Services, KPMG (India)