Indian banking 2020 opportunities and challenges

1. Indian Banking 2020: Opportunities and ChallengesBanks in India will be

ending the last year of this decade on a high note. A spectacular growthrate
coupled with an increase in profitability has led to an impressive performance
asillustrated in Fig1.[Source: Annual reports; BCG analysis]Financial metrics
witnessed a significant improvement. Bad debts fell dramatically. Starting atwell
above 10 percent in the early 2000s, the gross NPA ratio is currently below 3
percent. Thecost to income ratio fell from well above 60 percent to below 45
percent. The Net InterestMargins (NIM) hovered around 3 percent with only a
slight dip in the last 2 years. Consideringthe growth prospects of the Indian
economy over the coming decade, the banking industryrightfully looks forward to
a decade full of opportunities.However, there is no dearth of challenges. The
banking industry has to live up to a range ofhigh expectations from several
stakeholders. The Indian economy stands at a critical junctureof its evolution.
Indians look at the next decade with a lot of hope. There are hopes of
rapidgrowth, inclusive growth, wealth creation, trickle down of wealth, plenty of
jobs, better livingstandards, quality infrastructure, world class Indian companies,
world class convenient bankingand access to basic banking facilities. Demands
from polity to support inclusion are growingshriller by the day. While many Indian
industries have demonstrated low-cost innovations that
2. have caught the worlds fancy, Indian banks have yet to make a substantive
impact. Theregulator who has zealously protected the banks turf for years may
be forced to relent in light ofthe demands for faster development. Weak
wholesale debt markets that have kept banks atcentre stage of corporate
borrowing may finally deepen, leading to pressure on growth and / ormargins.
Non Banking Finance Companies (NBFCs), who, barring a few exceptions
almostbecame extinct in the last decade, may make a comeback. Changing
customer preferencesand rapid technology evolution could pose challenges to
banks in many ways. On top of it, thepublic sector will face a severe handicap in
mobilizing itself unless it addresses its HR onpriority.The following major trends
will impact the banks in the forms of opportunities or threats over thenext
decade.Ten Major Trends that will Shape the Indian Banking Industry 1.
Mortgages to cross Rs 40 trillion by 2020: Mortgages typify the retail banking
opportunity in an economy. The total mortgages in the books of the banks have
grown from 1.5 percent to 10 percent of the total bank advances, in a period of
ten years. The ratio of total outstanding Mortgages, including the Housing
Finance Companies (HFCs) to the GDP is currently 7.7 percent. If by 2020, this
ratio were to reach percent, a number similar to that of China, we could expect
the Mortgages industry growing at an average rate of over 20 percent during the
next decade. The outstanding mortgages are expected to cross Rs 40 trillion
which is higher than the entire loan book of the banking industry paged at Rs 30
trillion (as illustrated in Fig. 2). Fig 2: Mortgage penetration rate Mortgage loans /
GDP (%) India 7.7% China 18.5% Malaysia 26.8% Korea 26% Germany 48% UK

80.5% USA 86% 0 50 100 Source: RBI;IBA; Capitaline; Analyst reports; BCG
analysis.
3. 2. Wealth managements will be big business with 10X growth: Going forward,
wealth is expected to get further concentrated in the hands of a few. As
illustrated in Fig 3, the top band of income distribution is expected to grow most
rapidly over the next decade. By 2020, the top 5 percent households,
predominantly residing in the metros and Tier I cities, will account for 30 percent
of the total disposable income. Wealth management services will be demanded
by the nouveau rich and will be an integral part of the product portfolio for both,
private as well as public sector banks. Fig 3: Evolving Indian demographics to
spur new demands for banking on two ends of the spectrum 3. The Next Billion
will be the largest segment: Also illustrated in the Fig 3 is the fact that the
income group right below the middle class in the annual household income range
Rs 90,000 to Rs 200,000 per annum will be the largest group of customers.
These customers will be profitably served only with low cost business models
having low break even ticket size of business. The next decade would witness
banks experimenting with different low cost business models, smaller cost
effective branches and new use of technology to serve this segment profitably.
4. 4. The number of branches to grow 2X; ATMs to grow 5X:India has a very low
penetration of branches and ATMs as compared to some of the otherdeveloped
and developing nations as illustrated in Fig 4. Exhibit 1 highlights the
usagepattern of various banking channels in terms of number of visits. It is
evident that the bankbranches and ATMs are by far the most popular channels,
despite a decade of promotion ofalternate channels. The experience in
developed economies also corroborates thatbranches and ATMs continue to be
the critical channels, although certain transactions haveshifted to alternate
channels. As such, there is a requirement of at least 40,000-50,000additional
branches and 160,000-190,000 additional ATMs in the coming decade. This
willbe 3 times more than the branches and ATMs launched in the last decade.Fig
4: Low channel penetration levels:
5. 5. Mobile banking to see huge growth and will redefine transaction-banking
paradigm:As illustrated in Fig. 5, the uptake of internet and call centres is low in
all segments otherthan foreign banks. Comparing with usage pattern in US, the
significant potential in onlineand phone channels is apparent. However, India
may evolve differently. The penetration ofinternet and broad band access in India
has been low so far. However, with the advent ofmobile banking, the access to
banking facilities could completely get revolutionized over thenext decade. Even
if 25-30 percent of mobile users have GPRS / 3G activated, there wouldbe 250
million to 300 million customers who would access banking services over the
mobile.On the other hand, customer survey of over 3000 customers in urban
areas has indicatedthat call centres and internet are the most dissatisfying
channels. We expect the Indianbanking industry to invest significant attention in
technology innovation to drive nextgeneration framework for transaction
banking. Indian banks could set an example for therest of the world.Fig 4:
Channel usage by bank category

6. 6. Customer Relationship Management (CRM) and data warehousing will drive

the nextwave of technology in banks:The average number of banking products
per customer in India is significantly lesser thanthe global benchmarks. There is
a significant potential for cross selling amongst allcategories of banks in India.
Given that cross selling is highly cost effective as comparedto all other means
of customer acquisition, banks will adopt CRM strategies aggressively inpursuit
of cost-effective business models described in point 3 above.7. Banking margins
will come under pressure:The next decade will see a dramatic change in margins
as the wholesale debt marketsdeepen and corporate customers access the whole
same markets directly. Further, shouldthe savings bank rate be liberalized, banks
will move to a regime of low margins. The publicsector banks expect to see their
margins squeeze with a much higher likelihood ascompared to the private
sector / foreign banks. The NIM of the public sector banks hasconsistently
declined and this perhaps reflects in the pessimistic view on future
marginsadopted by the public sector.8. New models to serve the Small and
Medium Enterprises (SME): Fig 5 illustrates theresults of a survey conducted by
FICCI to gauge the level of satisfaction among large,medium and small business
customers with regards to banking services. The largecustomers are more
satisfied across all dimensions as compared to the medium and smallsized ones.
The smallest businesses are most dissatisfied. Due to higher risk and lowerticket
size, the SME typically get less attention. Banks are yet to create innovative
modelsto serve SMEs with sufficient and timely credit at the right price. In
general, the level ofdissatisfaction is higher on pricing and product range. A
further analysis highlights that thedissatisfaction on pricing is higher for the
private sector banks while dissatisfaction onproduct range is higher for the public
sector ones. As the yield in large corporate bankingfalls with further deepening
of wholesale debt markets, the banking industry in India will findcost-effective
ways to serve the SME customers where yields are quite high. Fig 6highlights the
top 3 new expectations of business customers in the next decade, as per
ourrecent survey. The SMEs hope to get the basics good relationship
management, fastcredit decisions and a complete product range all at one place.
7. Fig 5: banks will need to innovate to meet the expectations of SME
customers9. Investment banking will grow over ten-fold:Investment banking will
be among the fastest growing segments in the banking industryrising from 4
percent to 7 percent of the entire corporate banking revenue pool. The
largercorporate customers expect to demand higher support for international
expansion andmergers and acquisitions over next decade as shown in Exhibit 1.
Further, as the wholesaledebt markets deepen, the larger corporate would avail
of advisory and capital marketservices from banks to access capital markets. The
revenue pool will shift from traditionalcorporate banking to investment banking
and advisory. Banks with international presencestand to benefit.
8. Fig 6: Top 3 expectations from banks in the next decade10. Infrastructure
financing to hit over Rs. 20 trillion on commercial banks books:As India continues
to rely on private funding for infrastructure development, infrastructurewill
occupy a larger share of the balance sheets. Half of the debt finance for
infrastructuretoday comes from banks. By 2020, banks would have accumulated

infrastructure assetsworth Rs 20-25 trillion on their books. This would touch 1215 percent of the total advances.Infrastructure loans coupled with home loans
would together account for about 25-30percent of the total advances of the
banking industry. This would be the limit to which bankswill be comfortable
taking long term assets on their books. Even as the asset liabilitymismatch
issues are resolved by IIFCL and the government, the real challenge for
bankswould be to develop skills to undertake the risks of long gestation
infrastructure projects andmanage concentration risk in infrastructure.Two
Challenges of the DecadeThere are two areas in which the Indian banking
industry will be severely challenged to finda solution over the next decade. First
pertains to the rising expectation from banks to find aneconomically viable
solution for financial exclusion. The second pertains to humanresources
challenge in the public sector. While the first challenge demands
unusualinnovation and experimentation, the second threatens to cripple the
ability of the largestsegment of the banking industry from being able to innovate
and stay competitive. It isunclear that the solutions to these two challenges will
be identified unless the banks were toaccord highest priorities to these and work
in concert.1. Financial inclusion:The issue of financial inclusion is at the centre
stage of the agenda of the government.While the expectation from banks is high,
the government is also starting to look at non
9. banking industries to come forward with a solution. Needless to say, if the
answer does not come from banking industry, non banks will be welcome to
nibble at its revenue pool. It is a strategic priority given that the customer
segment in question will be the largest in number over the next decade and
banks stand to lose this relationship. As illustrated in Fig 7, the banking industry
in not very confident of finding a solution. Fig 7: Bankers expectations vary. 2.
The HR challenge in public sector:The public sector banks enter the next decade
with the same expectations as their privatesector peers but with a severe
disadvantage in human resources. The HR challenge of publicsector banks has
reached a tipping point. Due to a legacy of several decades, the public
sectorbanks will witness unprecedented loss of skills and competencies in form
of retiring senior andmiddle management executive over the next few years.
That coupled with the need for largescale re-skilling, attracting and retaining
fresh talent, controlling the growing employee aresignificant challenges. As
illustrated in Fig 7, the public sector banks are almost unanimous intheir concern
about the future challenges of attracting and retaining talent.Bankers
Expectations VaryFig 7 above summarizes the views of the public and private
sector/ foreign banks captured by arecent survey conducted by IBA. The survey
responses highlight perceptions that converge onsome issues and diverge on
others. The responses capture anxieties of banks regardingcertain challenges in
the next decade.
10. Both sectors agree to different degrees on the potential of mobile banking
and wealth management. The public sector perceives a higher imminent threat
from squeezing margins and believes that there is a need to scale up and
expand globally. The private sector, on the other hand, believes that the margins
are reasonably secured and feels a relatively lesser need for international

presence and scale. Despite the recent hectic activity on financial inclusion,
14 percent of the public sector and 9 percent of the private sector banks feel
that it is very likely that a profitable model of financial inclusion will be arrived
at by the industry. However, 36 percent of the public sector banks and 27
percent of private sector banks feel that their bank will be participating in
financial inclusion in a profitable manner. Finally, there is utmost unanimity
amongst public sector banks that attracting and retailing talent will be the
biggest challenge. Overall, the public sector appears more paranoid about the
future of their competitiveness while the responses from their counterparts in the
private sector are more sanguine.Crucial Role for NBFC and DFIEncourage NBFC
in specialized segmentsBanks may not be able to live up to all expectations.
There are many opportunities that are easyto capture but there are also many
that require significant innovation or specialized skills thatconventionally not
banks strengths. The latter opportunities are at the extremes of spectrum.Very
large ticket, long term infrastructure lending requires risk management expertise
that goesbeyond traditional credit appraisals at banks. There will be significant
space for specializedentities in risk assessment and structuring of infrastructure
finance. Very low ticket unsecuredcredit requires sophisticated risk management
and cost control that is not easy in businessmodel of conventional banks. Gaps in
SME finance can be filled with asset based lending,operating leases, and
factoring. Specialized NBFCs can play a major role in all of these. Theseare
niches. But each one of them is individually large to sustain significant balance
sheets.Importance of NBFC needs to be recognized to make the decades
promise come true for India.Positive regulatory environment to support NBFC will
be crucial.Rural infrastructure needs a government backed DFI to address market
failures.Financial inclusion is being pursued as a crucial driver of inclusive
growth. However, financialinclusion is necessary but not sufficient. Sustainable
inclusive growth requires financial inclusionto be supplemented (if not preceded)
by rural infrastructure development and stimulation of ruraleconomy through
livelihood generation interventions. While commercially viable models arebeing
encouraged for financial inclusion, the same is not possible in the case of
ruralinfrastructure development and livelihood generation. Market failures
abound. Currently ruralinfrastructure is supported by government through
myriad agencies and departments-NABARD(through RIDF funding to states),
MoRD (through PURA and PPP initiatives), REC, variousstate government
agencies, etc. India needs a pivotal agency with appropriate government
11. backing to finance rural infrastructure. No DFI across the world survives
without access tocheap source of funds supported by the government.In the
current institutional landscape of India, NABARD is most suited to play this role.
Italready channelizes RIDF funds to states for rural infrastructure development.
However, RIDFfunds are hardly sufficient for the purpose and need to be
augmented. NABARD supported ruralinfrastructure development is credited to be
higher quality compared to initiatives of stategovernment due to higher
standards of quality control and emphasis on livelihood generationand citizen
participation. Explicit government financial support to NABARD has to
bestrengthened. NABARD has to be restructured to expand the breadth of its

product portfoliofrom simple loans to state governments to structured finance

options that meet needs of notonly different state governments and but also
private sector which will participate in selectsegments of rural infrastructure
through PPP route. Conclusion:Through this research, we conclude that:
During the last decade, the Banking Industry has done a fantastic revolution in
the Indian Market. Also, based on the analysis on the last decades
performance, we can as of now forecast the major trends or factors that may
impact the current decade and thus take measures accordingly. However,
there are pros and cons of each aspect, which cannot be avoided but of course
we can be prepared for them. The current decade will watch a crucial role of
the NBFC and DFIs. In addition, it needs to be witnessed what the government
can do about the rural development with the help of DFI. The Financial
Inclusion and the HR challenge in the public sector needs to be handled critically.
____________________________________________________________

Indian banking set to become

fifth largest by 2020: KPMGCII report

Indian banking sector is expected to become fifth largest in the world by the year
2020, KPMG said in a report prepared in association with the Confederation of
Indian Industry (CII).
"If we look at statistics, India being one of the top 10 economies of the world and
with relatively lower domestic credit to GDP percentage provides great

opportunity for the banking sector to grow. Indian banking is expected to become
fifth largest by the year 2020 and third largest by the year 2025," the KPMG-CII
report on the banking sector said.

It expects bank credit to grow at 17% CAGR (compound annual growth rate) in
the medium-term leading to increased credit penetration.
The need for having Indian banks among the top globalbanks is debated recently.
The country's largest lender State Bank of India (SBI) is at the 38th position
based on the size of assets, while India's largest private sector lender ICICI Bank
is at 99th position. These are the only two Indian banks that figure in the list of
top 100 banks in the world.
"In the international banking arena, size, innovation, efficiency and best
standards of customer service alone matter. There is no substitute for innovation
to survive and lead in the new-age banking. India continues to face the more
fundamental challenge of financial inclusion," the Reserve Bank of India (RBI)
said in its report on banking structure in the country.
According to the World Bank, India has around 3.5 ATMs and less than seven
bank branches per 100,000 people as compared with OECD (Organisation for
Economic Co-operation and Development), where there are nearly 30 branches
and 90 ATMs per 100,000 people.
The KPMG-CII report said policymakers need to provide a facilitating policy
framework and infrastructure support to ensure meaningful financial inclusion.
"Further, there has to be collaboration among service providers with financial
institutions partnering with telecom, technology, and consumer product
providers to create an enabling environment," it said.

India to become the third largest domestic banking sector by 2050 after
China and the US, says a recent PwC survey
1. The emerging economies banking sectors are expected to outgrow those
in the developed economies by an even greater margin than we projected
before the financial crisis.
2. By 2050 E7 could have domestic banking assets and profits that
exceeding the G7 by around 50%.
3. China could overtake the US in terms of the size of their domestic banking
sectors by around 2023.

The combined domestic banking assets of the E7 emerging economies of China,

India, Brazil, Russia, Mexico, Indonesia and Turkey will exceed those in the G7
countries sooner than predicted before the financial crisis, according to PwCs
Banking in 2050 report published today. The G7 comprises the US, Japan,
Germany, the UK, France, Italy and Canada.
Indias rate of growth by contrast is expected to overtake that of Chinas in the
long run as it has more catch-up potential and its working age population growth
will be much stronger in the long-term. Indias share of global GDP in $ terms
could therefore increase from only 2% in 2009 to around 13% in 2050 after
allowing also for potential real exchange rate increases. This makes it one of the
most rapidly growing economies over this time period. However, to sustain these
high growth rates India must continue to pursue growth-friendly policies (e.g.
invest in infrastructure, open up its markets to increased competition, reduce
budget deficits, increase rural education levels particularly for women and
reduce bureaucracy).
On the future expectations of the Banking industry, Harsh Bisht , leader
Banking and Capital markets, PwC India said:
China and India could have a combined share of around 35% of global banking
assets by 2050. The US, Japan and Western Europe are all projected to see large
falls in their share of global banking assets in the coming decades.
Commenting on the shift of global banking power to the emerging
economies, John Hawksworth, chief economist, PwC, said:
A fundamental shift in the geography of the world economies will take place
during the working lifetime of those at the start of their career with huge
implications for job creation, language learning and financial systems. The GDP
of the E7 countries is currently well behind that of their G7 counterparts but well
see them at level pegging within the next two decades and well ahead within the
next four. In the banking world, this shift is happening even faster than
anticipated and appears to have been accelerated by the financial crisis as
emerging market banks have been relatively shielded from the effects of
declining asset values. We could now be talking about global banking assets
quadrupling to around $300 trillion by 2050 with banks around the world fighting
for a share.
The report indicated that a range of M&A options are available to both emerging
and developed market banks and we can expect to see a mix of consolidation,
foreign banks entering emerging markets and banks from the E7 expanding
overseas. The E7 doesnt need the G7 for capital, decision making or consumers
so the established economies will have to make a strong case to convince new
economy policy makers of the benefits of inviting foreign competition in.
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 Rs 4.05 trillion to Rs 4.25 trillion
over the next five to six years. (One trillion equals to Rs 100,000 crore.) The high
capital requirement will also add pressure on return of equity of banks.
New banks:
BANKS OF THE FUTURE WILL NEED TO UNDERSTAND THE TECH-SAVVY GEN-Y
CUSTOMERS AND DESIGN PRODUCTS ACCORDINGLY
Although there has been little progress on the draftnorms 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 already had over 45 million users in India in 2011, which is
expected to grow to over 88 million by the
India's Best Banks 2012
next year with over 75 per cent under the
Overview
age of 35, according to media reports.
Although banks in India have been a little
The Winners
late in using social media, they have been
making fast progress.
Toppers in numbers
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.

Leaders share success

mantras

How we did it

Our coverage over the

years

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 technologysavvy 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.

ICICI BANK
Indias largest private sector bank ICICI Bank has successfully deployed Software Robotics for power
banking operations. With this, it becomes first bank in the country and among few globally to deploy
Software Robotics. ICICI Bank has deployed Software Robotics to over 200 business processes
across various functions. The 200 business processes include retail banking operations, agribusiness, trade & foreign exchange, treasury and human resources management, among others

Key Facts In banking, software robotics emulates human actions to automate and perform repetitive,
high volume and time consuming business tasks cutting across multiple applications.
It leverages recent advancements in artificial intelligence such as facial and voice recognition,
machine learning, natural language processing, and bots among others.
The software robots can perform over 10 lakh (1 million) banking transactions every working day.
The software robots at ICICI Bank are configured to capture and interpret information from systems,
recognize patterns and run business processes across multiple applications.
Besides, it can execute activities including data entry and validation, automated formatting, workflow
acceleration, multi-format message creation, text mining, reconciliations and currency exchange rate
processing among others.
Significance: The software robots help to bring operational efficiency, higher accuracy and a massive
reduction in processing time for customer services. It will help ICICI Bank to cut response time to
customers by 60 per cent and increase accuracy to 100 per cent.
Read more at: http://currentaffairs.gktoday.in/category/banking-current-affairs