Future of the Indian Banking Sector

– Manisha Sharma

 

Introduction:

A decade ago, visit to a bank would mean spending money on travel, waiting in long queues and missing a half day’s work. Now, with the growing usage of digital banking, the number of visits to bank branches have reduced.  The latest innovation by HDFC Bank in the self-service channel is the humanoid robot, so you no longer need to wait in long queues. Banks are aggressively using digital marketing strategies to attract new customers and enhance the experiences of existing customers. However, much of the banking sector depends on investment cycle, working capital demand, monsoon, commodity prices and government spending in some sectors such as infrastructure sector.

An assessment of the current scenario indicates that the credit growth has declined to 4.4% in 2016-17 from 8% in 2015-16. The asset quality has deteriorated further in the current fiscal leading to a Gross NPA Ratio of 9.5% with Public Sector Banks contributing the most. The macroeconomic indicator – inflation has dipped to a record low in 2017 and RBI intends to keep it at ~4% by the end of 2017-2018. This, coupled with softer commodity prices induces difficulty in recovery of credit growth. Is this scenario going to change in future?

The future of the banking sector will revolve around evolving customer expectations, technological innovations, improved regulatory requirements, increased competition and change in demographics. Following is the detailed explanation of how these forces will shape the banking sector in future.

A shift from product-centric approach to customer-centric approach:

The demand from customers are evolving and banks are focusing on providing tailor-made products in order to satisfy their needs.  Banks in India are also establishing their footprints in the hinterlands. With the advent of technology and deep branch penetration, agricultural loans will be delivered within 2-3 days in the future, a change from the current 3-4 days. The corporate loan portfolio’s growth rate is declining. This will lead to a shift in focus of the banks towards the retail lending. The banks will invent new loan products in the future to target the retail segment.

Evolving Technology:                                                                                                                  With the growing influence of fintech companies in India, banks will use new technologies like Artificial Intelligence, Machine Learning, Blockchain, Robotics, IOT, etc. not only to enhance customer experience but also to achieve operational efficiency.

 

Picture1Source: PWC Report

 

ICICI Bank will launch a blockchain pilot network for international remittances and trade finance in partnership with Emirates NBD. HDFC Bank is using robots in its branches to enhance customer experience. Artificial Intelligence will help in reducing the response time to customers by more than 70% in future. Technology is going to transform the Indian banking sector completely.

 

Improved Regulatory Requirements: 

With advancement in technology, innovation and processes, the regulatory environment is likely to develop in the future. The Indian banking sector will have to comply with Basel III norms, OTC derivative reforms and develop effective anti-money laundering (AML) and cyber security frameworks. The reforms will help in strengthening liquidity conditions, reducing NPAs, recognising systemic risk and maintaining financial stability across all banks in India.

Increasing Competition:

The number of payment banks by non-bank players is increasing. The Government has liberalised the banking sector and is providing new banking licenses to new players. Although there is a consolidation in the existing Public sector banks, the chances of consolidation in some of the private banks are also evident (like the integration of Kotak Mahindra Bank and ING Vyasa Bank). The increasing number of players will force the banks to focus on attracting new customers while retaining the existing base.

Demographics:

The Indian population consists of a mix of young and old citizens. Banks will focus more on wealth management practices as the customers will become more responsible towards their financial planning. The increase in urban migration in future is expected to create new customers for banks. Banks are also focusing on female customers to make the overall banking experience more female friendly.

 

Conclusion:

Much being said, the future of banking sector in India is promising. With improving regulatory reforms, the NPAs are likely to reduce after 2019. Credit growth is expected to increase from 2018 onwards owing to improvement in commodity prices and good monsoon which in turn will enhance profitability. The retail segment is projected to experience the highest growth rate of 16% to 19%. Banks which innovate using new technologies and are more customer-centric will thrive in future.

 



References

  1. Industry insights, CRISIL Research
  2. Fintech Trends Report, India 2017, PWC
  3. A bright future for Indian Banking, Mahua Venkatesh and Zehra Kazmi, Hindustan Times
  4. Annual Reports 2016-2017, HDFC Bank & ICICI Bank