The banking industry in India is at a crucial crossroad. On the one hand, it is supporting the world's fastest growing economic power, while also grappling with its challenges and problems at the same time. Even as some banking players are harnessing their growth through the medium of digital banking, legacy banks are faced with critical issues such as growth in non-performing assets, inadequate capital, and loan stagnation.
On the positive side, retail banking sector continues to grow at a healthy rate of 18-20% and an estimated 89 million households likely to join this banking segment as customers by the year 2025 (as per the McKinsey report). This is being primarily driven by the upward mobility and increasing income of the middle-class Indian families.
India is also encouraging the growth of payment banks by domestic companies and the setting up of small finance banks. Conceptualized by the Reserve Bank of India (RBI), payments banks are a new banking model that only manages account deposits to a limit of INR 1 lakh for each customer. Small finance banks are being set up to provide banking services to underprivileged people of the society.
With significant problems and challenges still surrounding the Indian banks, it will be interesting to note how technology will play a crucial role in revolutionising the banking landscape in India.
Issue: Growth in non-performing assets
Recent developments in the banking sector have revealed the growing problem of distressed loans and gross non-performing assets (NPAs) for Indian banks.
Also referred to as bad loans, NPAs are loans which have not been repaid by the loan borrowers. State-owned or nationalised banks account for more than 75% of NPAs, which is now valued at more than the net worth of all the banks. Used as a safeguard against bad loans, provision levels in these banks are insufficient, as an estimated 28% of the NPAs and other bad assets are being held as provisions.
Another factor that affects the bank’s profitability is the growth of restructured loans, where the lending bank must make the loan term more flexible to allow for more manageable repayment. According to the data released by the RBI, the overall value of NPAs and restructured assets in Indian banks reached a value of USD 150 billion (in April 2016) and had been growing at an annual rate of 25% since the year 2013.
Issue: Decline in Credit Deposit Ratio (or CDR)
The growth of corporate loans in Indian banks has remained slow for the 2017 fiscal year. Along with a rough 40% of the outstanding loans to corporates facing difficulty in debt repayment, the total volume of corporate loans declined by 3% between April to December 2016. Along with the stagnation in loan growth, the current and savings account (CASA) deposits have surged mainly due to the currency demonetization drive.
This combined effect has resulted in the lowering of the Credit Deposit Ratio (CDR), which is a significant problem for Indian banks.
How Is Technology Playing a Role in Revamping Banking?
Despite the challenges and problems, the Indian government is banking on technology to revolutionise the Indian banking system. Setting up the Unique Identification Authority of India (UIDAI) to issue biometrics-based identification cards (or Aadhar) to millions of Indians, along with the linking of the country’s financial instruments to promote the unified identification system is a step in this direction.
The Indian government is also pushing India towards becoming a cashless economy by promoting the use of digital technology in completing regular banking transactions. According to March 2017 statistics, India has added around 280 million bank accounts for customers (previously without bank accounts) with the launch of the government-backed Jan Dhan (or People’s money) program.
With the increasing adoption of smartphones and mobile Internet technology, mobile banking is also witnessing a significant upswing among smartphone users in India. According to a 2016 survey made by the Indian Bank’s Association, nearly 80% of the transactions made in new Indian banks are completed through the digital medium.
The banking landscape in India is also being transformed by the launch of low-cost alternatives to the traditional banking industry. This includes the launch of the RuPay initiative as an alternative for international payment gateways like Mastercard and Visa, along with the UPI (or Unified Payment Interface) to facilitate the transfer of funds between accounts in different banks using your smartphone.
Kotak Leading the Digital March with Its 811 account.
Among India’s leading banks, Kotak Mahindra Bank is enabling digital banking for its customers with the launch of its Kotak 811 account. Referred to as India's first downloadable account, the Kotak 811 account can be opened and operated entirely from the customer's smartphone. Along with the regular benefits of a banking account, the Kotak 811 includes features such as a virtual debit card (that can be used from a smartphone app) along with the Scan and pay option where customers can use the smartphone app to make online payments to select merchants. Such an advanced step reflects that today’s banks have realised that customer expectations have increased due to the advent of technology and if they want to be on top of this game it is imperative for them to address the growing needs and evolving demands of customers.
India’s economic growth with the GDP increasing to around 7% in recent years, along with a projected growth of 7.7% by the year 2020 (as estimated by the International Monetary Fund) augers well for the future of the banking segment in the country. Despite the numerous challenges and disruptions caused by the entry of new technology-enabled platforms in the banking and financial segment, the banking industry continues to be the lifeline of the world’s fastest-growing economy. With the impressive use of the Internet and smartphones among Indian customers, banks must focus on making banking less process-centric and more customer-centric. To survive and thrive in this changing landscape, banks must develop and adapt with innovative banking models that can provide value to the modern banking customer.