India@100: Growth Trajectory for Banks

India’s economy is slated to double its growth rate in the coming decade and the country would be the third largest economy by 2027. Is the banking sector poised to keep up with the pace of growth? A group of eminent speakers from the sector shed light on the risks, responsibilities, threats and opportunities.

Mr. Chittaranjan Chattopadhyay

Chairman, BFSIB

The Prime Minister on 15th August gave a clarion call that India has to be a developed nation by 2047. That’s why India@100 has become a new slogan. Three spells of Covid disrupted the economy like anything. One sector, at the cost of as many as 1000 lives, has helped the country to remain intact. India is one of the nations that surprised the whole world as to how this country could sustain despite Covid. Major credit goes to the BFSI sector and to the bankers. From the ICAI, we have started a journey to handhold the bankers to the financial services sectors and to the insurance sectors. Our institute always feels that it shall not only cater to the CMA professionals but it shall also have to be connected with the people who are the stakeholders of this country.

Mr. P Raju Iyer

Past President, ICAI

Today knowledge is power. ICAI is for the development of technical papers and technical support, wherever it is required. With Ramchandra University, we have started a course on healthcare management. Whoever completes the course will be able to perform better in hospital management, which is now a 5 star industry and growing very fast. We are entering into other areas also like agriculture. We are entering into a MOU with IGNOU to start a course on agriculture management. We are entering into a lot of MOUs with various Universities and colleges, so that our youth can be developed with knowledge. We have submitted our report for the Budget 23, taking inputs from the industries along with possible solutions, to the Ministry of Finance with whom we had a meeting last month. Global policies are powered by nations. The nation’s progress is powered by economy. Economy is powered by industries. Industries are powered by competition. Products and services are powered by employee productivity. Employee productivity is powered by employee motivation. Employee motivation is powered by management stewardship which is powered by quality leaders. Quality leaders are powered by us, the professionals.

Mr.  Vijendar Sharma

President, ICAI

When any corporate starts a business with a debt equity ratio of 1.5, it means that if promoter contributes one rupee, the banker will contribute 1.5 rupee. When the economy is growing, we always give the credit to the corporates but it is the banker who is supporting the corporate and indirectly controlling the economy also. During covid, there were three people on the road. One was the doctor. Second was the police officer to manage the affairs and the third was the banker. While we were sitting at home comfortably without facing any sort of scarcity, our bankers were there working full time, supporting our economy and country as a whole. Without bankers, we are unable to maintain even the local balance. Because of global competition, it is very important that our product cost should be restricted. It means that the pricing of the product is decided by the competitor. In 2016, the Government of India introduced the IBC: Insolvency and Bankruptcy Code. By that time, we have written off about 10 lakh crores from the bank systems. It doesn’t mean that whatever has been written off, we are not going to recover. We are going to recover from the people—either from their personal or company assets.

The role of a banker is very challenging. As cost auditors and management accountants, we must support the bankers. A balance sheet is not very useful for the banker as it tells what happened in the last one year. For the banker, it is very important to see how my investment is safe and secure. So, it’s very important that we should produce some sort of report in the hands of the bankers that can tell about the future prospects of the company. We are submitting Cost Audit Report to the Government of India which is a confidential report. Technology is changing fast and it decides the fate of any product and economy. We are developing a technical reporting system mechanism for the bankers, and it will tell which product has completed its life cycle and which one will be the future cash cow.  

Mr. B.Ramesh Babu

MD & CEO, KVB

Transformation today, revolves around the need to generate new value, to unlock new opportunities, to drive new growth and to deliver new efficiencies. Once branded a third world country, India is now the fifth largest economy in the world. As per the prediction of Morgan Stanley, we are slated to double our growth rate in the coming decade and we would be the third largest economy by 2027. India has risen to 46th position in the global innovation index and has emerged as a third largest ecosystem for startups after the US and China with around 84 active startups in India attaining the status of unicorns between 2018 and 2022. Also, as a jewel in the crown, India has assumed the Presidency of G20, which is a premier forum for international economic cooperation, which includes world’s major and systemically important economies.

Evolution of banking in India

It is impossible for any sector to flourish and grow without a robust banking setup, be it the managing the funds of the retail or corporate sector or providing great facilities through various schemes. The banking sector has always been the protector as well as a provider of funds for the country.

Our banking sector’s evolution can be traced in three phases. The first phase is pre-independence, second is post-independence till 1991 and the third is post-reforms. Coming to the last two decades of the banking, the Indian banking industry witnessed the rollout of innovative banking models like payments and small finance banks. In addition to many outreach programs for an inclusive growth, major banking sector reforms like digital payments, mobile banking, etc., and the rise of Indian NBFCs and Fintech have significantly enhanced India’s financial inclusion.

This also stresses the requirement of partnership between banks and fintech. The digital payment system in India has evolved the most among 25 countries, with India’s IMPS being the only system rated at level five (highest) in the Faster Payment Innovations Index. India’s UPI has also revolutionized real-time payments and strives to increase its global reach in recent years, while Application Programming Interface has enabled access of seamless banking to the customers, within a matter of seconds.

Shift in banking

In fact, UPI and Aadhar Enabled Payment System (AePS) has brought in a dramatic shift in consumer behaviour and usage, as around 400 million people tap into these digital technologies. So while we spread the credit blanket and reach out to every nook and corner of the country, banks have tightened their due diligence methods to ensure clear balance sheets. Corporates have understood their requirements in view of the various actions taken. Also bad credit history can have an adverse ripple effect on them. This has led to the gross NPA of the Scheduled Commercial Banks falling to a six year low of 5.9% in March ‘22 and would fall further to 5.3% by March ‘23, according to the Financial Stability Report of RBI published recently. During the pandemic, the government not only ensured that medical facilities were made available in every part of the country, but we even successfully launched indigenous vaccines, which not only provided protection and treatment to our own countrymen. We administered 225 crore doses, but we also arranged to make these facilities available to the world at large by providing vaccines to 85 other countries and helping them to move out of the crisis. The banking sector led by RBI remained on the forefront during the crisis. The first step that was taken to ease the pain of the commercial sector and the small-scale business class was by introducing moratorium schemes followed by introduction of emergency credit line scheme and such other schemes which ensured that economy remained strong and resilient. The banking sector also ensured the economic machinery was sufficiently oiled by keeping the branches on and working even during the peak of pandemic, when the entire country was under lockdown.

The pandemic had one positive effect. It changed the way people look at and manage money. Everyone went digital for even a meagre purchase and turned on the UPS scanner on their mobile phones. This obviously has changed banking. Many of the footfalls in the branches have reduced, but it has led to higher transactions of varying ticket values. With the launch of digital rupee in future, we may see no need for paper currency. As we move from the phase of conservative banking methods to the digital world or the digital journey, with banks offering multi-channel services, the new age banking customer does not desire to make physical visits to the branch anymore. However, we have a set of people who still require physical services. Each one of these developments presents unique opportunities, challenges and competition to the existing and new players.

Banks must have the ability to withstand unknown unknowns in this disruptive age. Banks have joined hands with various NBFCs and startups, which not only provide credit of various ticket size values through the use of technology, but also arranged credit for the untapped small scale and MSME sector, who have been the lifeline in many rural and suburban areas.

Banking tomorrow

RBI Governor Dr Shaktikanta Das in his speech on ‘Banking: Beyond and Tomorrow,’ stressed the need for adoption of emerging technologies, customization of products and services, enhanced business and process automation. He also pitched for development of suitable business models with strong governance frameworks, better information management, changes in the mode of working, building enhanced resilience capabilities, and a more responsible societal and environmental role of the banks.

It is imperative that the banking sector must buckle up and partner with the nation on a growth path, as our nation envisions to double its growth in the next decade. The Indian manufacturing sector is expected to contribute an increased GDP of 25% by 2025. The key areas that we can count are infrastructure, space, defence and startups. With the improvement in our medical infrastructure and better postnatal care, we expect an increase in the average life expectancy of our citizens and reduced infant mortality, thus leading to higher contribution to our workforce and in turn, increased customer base.

Growth prospects in Tamil Nadu

If you look at Tamil Nadu itself, it is the fourth largest state in India and one of the well-developed in terms of industrial development and knowledge-based industries like IT. It has the third largest number of MSMEs in the country and provides a strong and reliable vendor base to large industries in the state. The state also enjoys logistical advantages due to the presence of three major seaports, airports, quality of human resources, a peaceful industrial climate and a positive work culture. Tamil Nadu is the only state in India to have all its major districts covered under the industrial corridor project. Industries such as aerospace, defence, electric vehicles manufacturing, textiles, and non-leather footwear are earmarked to be the thrust areas for growth. These are great avenues of opportunities for the finance sector, both at corporate and retail level.

Like God, now Wi Fi is available everywhere. The correct password to reach God is faith. Likewise, opportunities for the banking are also immense, but we need the correct password which is the ‘customer connect.’

Mr. D Lakshminarayanan

MD, Sundaram Home Finance

The banking sector is at a turning point. Twenty-five years ago, how did our banking sector look like? Computerization was still being debated. Private sector banks were on their way. Public sector banks were fighting with their legacies. It’s quite remarkable to see how Indian banking system has weathered all the challenges and still remain resilient. Twenty-five years from now, banking will dramatically be very different from where it is today.

The biggest threat for banking, as in any other industry, is the emerging global trend. Banking is facing a future marked by fundamental restructuring. But we can also assume that the banks will navigate this and become better and more profitable and will grow faster. In the next era, banks can realign to compete in new arenas, organized around customer needs. These arenas will expand far beyond the current definition of financial services. And they will also be hotly contested by a wide range of tech giants, technology startups and other non-banks. The banks that successfully manage the transition will use technology and data quite successfully to embed themselves deeper into customers’ lives with real time services that were unimaginable just a few years ago. The opportunity is great for those who move fast into this new future.

Banking is also losing its traditional advantages. Until recently, big banks grew profits and growth by applying synergies, economies of scale and accessing large pools of capital. While traditional banks have been convenient one stop shops for businesses and consumers, many haven’t evolved their products in a way that matches the tech driven pace of change in the other industries. Products such as the savings account loans and the investment advisory platforms look undifferentiated today and people increasingly feel frustrated by the financial fragmentation that banks have imposed on many consumer processes.

Banks need to identify and engage these customers as the new competitors are doing to compete. Most banks will need to embrace technology, cross industrial platforms and manage to coexist with technology. These platforms dismantle the barrier between traditional industries, reshaping the customer behaviour to fulfil their needs.

Platformization, the new mantra

Platformization is now becoming the new trend. Banks now compete with organizations that have the capacity and desire to offer any kind of financial services. Global tech giants have used their platforms to offer banking; and they offer it seamlessly to millions of customers. They have eliminated size as a big advantage to the banks’ winning customer loyalty, aggregating and analyzing data and building networks. One recent paradox that we noticed is that a lot of these emerging FinTech startups want to be like banks and get into lending operation. And banks want to be like tech companies introducing new technologies and new platforms. So what will the next phase of banking look like? The successful bank of the future will be defined as a network of various platforms. A few banks will dominate the spectrum of banking, but many will participate in that network. The transformation is not easy. It will take time but the leaders who move in fast will stay ahead of the curve.

Indian banks must move away from the existing systems for a more modular infrastructure. They must upskill employees to spur the development of new digital solutions and services; or a more robust cybersecurity layer to safeguard their customers from data threats.

As banks gear up with an objective of meeting these goals, the adoption of a modern banking platform is very crucial. This will allow the banks to personalize solutions and customer experience.

Three things banks must do

Three things that we see banks adopting in the next few years are:

Blockchain technology: Credit rating, investment banking, loan recoveries and every other activity that bankers are doing would be driven by blockchain, cloud computing and analytics, with less human intervention to achieve better accuracy. This will also, to some extent, protect the bankers from cyber related attacks.

Secondly, there will be fewer brick and mortar banks, going by the trend of the apps and super apps that are being talked about.

Digital currency will completely replace the physical currency in the years to come, which in turn would improve compliance and help the government in wider tax collections and better tracking of cash flows. The banks should now be prepared to face the major impact of their operations due to technology and government policies more than ever before.

The winning banks will find a way to create a customer experience, rather than selling mere products and services.

Mr. S Krishnan, MD & CEO

Tamilnad Mercantile Bank

Indian Banks started in a very small scale but today they have grown in size and are giving a big challenge to the global banks. It is not only the core banking but also the interoperability that has made a big difference to banking. Interoperability helps a customer to use his debit card of any bank in any ATM of any bank. When the bank started growing, naturally, the regulations also need to be enhanced. The Indian regulator is one of the well-respected regulators across the world. Today, the world is envying India on the digital front, particularly in the banking industry. The number of transactions that take place in the UPI seamlessly is amazing. We are working on introduction of digital currency in India while various countries including the developed countries are yet to come out with it. We are already able to do this in a closed loop. The banks are keeping pace and running in the race. Banks are the backbone of the economy. When the country grows, the banks in the country should be able to match the growth. There may be a large requirement of funding. Hence, there will be a requirement of big banks and big players who will be able to reach the global market. When they are able to reach the global market, they will be able to get cheaper funds and in turn can lend at a cheaper rate. The question is: Do we need only big banks? The answer is No. We need smaller and midsize banks also, who will be able to reach the last mile and understand the local requirements and strengthen the MSMEs. As Indians have got great strength in digital, there is going to be an excellent growth opportunity for every industry, more particularly for the banking, which will be mostly on the digital front.

Mr. R Radhakrishna

Chief General Manager, SBI

With the introduction of 5G, the way the medical field is going to improve will be tremendous. Such changes are going to happen in all technological fields, which in turn will help the economy to develop. Wealth generation is going to be much faster. With all these things, the way the banking is going to develop will see a lot of changes. Traditional bankers have started to lose their mettle from time to time. This started off somewhere in the 1980s and became more pronounced in the 1990s, when for the first time, the word disintermediation got established. The role of the bank got reduced because the depositor could have access to the borrower. He could invest in companies through stock market or other instruments that had come into play during that time. So, that is how the disintermediation started.

As we now delve deeper into this, this disintermediation has become much deeper. Every non-banker has also become a banker. Google is not a banker; it is a technical platform but it has become one banker. All technical platforms and apps become a bank by themselves. Today, the government itself has become a bank. They don’t need a bank in the real sense.

There are going to be a lot of challenges. That doesn’t mean that the banks will be out of business. The opportunities for them will tremendously multiply but in a different form. They need to be as competitive as the online platforms that are available, which are helping this disintermediation. With more and more technology coming in, the requirement of energy will be tremendous and the global economy has to find better ways of producing energy. Therefore, the amount of investments that will be required for creating these infrastructures will be tremendous. So, the opportunities will be there aplenty, but the challenges also will be there.

The biggest bane of Indian agriculture has been the fact that the farmers have not been given the due price for their produce, the basic reason being his inability to hold on to his goods which he has produced because of the monetary obligations he has – already he’s in clutches of debt. Therefore, he has to dispose them as distress sale process. If that basic thing is going to change, the way the value chains will develop for him are tremendous. He will get a better price for what he’s producing and you can just imagine the money power he will get. This will have a multiplier effect and the economy is bound to grow.  

Of course, the MSME sector will continue to be the driver of the economy to a larger extent than what it is at present. We are almost seeing the last days of the public sector organizations. Slowly, they are being disinvested and we are seeing more of and more of private entrepreneurial power coming into play in most of the sectors which were originally reserved for the public sector. So, with this, the economics of the whole process will improve and there is going to be more efficiency. There are going to be some pitfalls from time to time. But such a pitfall that can happen in such a growing scenario will not be anything serious, unless it has to do with the food shortages. This is how, broadly, the banking system and the economy will develop.

Development of the economy cannot happen at cost of environmental degradation. That is why we are hearing a lot about sustainability nowadays. Going forward, I am of the opinion that GDPs will not be calculated as we do it classically today, but the environmental cost will be calculated and detected.

The outlook is very bright because of the opportunities we have and the advantage on the demographic front. This is going to result in exponential growth trajectory for the economy. Banks basically are the proxies for the economy, let it be any bank. So they also will have the same trajectory as the economy. Of course, they have their own issues to tackle which will be different from bank to bank. But what we have seen in the last four or five years is the fact that the banks have developed more robust systems as regards the credit assessment. There has been a lot of course correction, basically aimed at improving the way the creditor is assessed.