The net new demand for modern banking services in India’s rapidly growing market is estimated to be one of the strongest in the world.
Given the rising importance of data, banks are gearing up to use analytics and technology for better risk management.
Hidden behind the dark clouds of bad loans is an opportunity for an exciting new dawn in Indian banking. Once the clouds begin to clear, over the next two-three years, there will be tremendous potential for the emergence of strong, next-generation banks. But lenders that fail to prepare for the possibility, enabled by the confluence of three key factors outlined below, could miss the bus.
The first of these are macroeconomic tail winds. India is expected to rank among the top three global banking markets in terms of revenue over the next decade. Millions of new banking customers, a majority of who will be armed with smartphones, will join the workforce every year. Thousands of new companies created by enterprising entrepreneurs will have the chance to thrive in a vibrant start-up ecosystem. Over 500 new billion-dollar companies will be created in India. The net new demand for modern banking services, in this rapidly growing market, is estimated to be one of the strongest in the world.
The second set of factors entails several positive developments in the country’s banking infrastructure, technology and regulatory framework, enabling us to leapfrog many advanced economies in quality of banking experience. Indian regulations have been very progressive in the recent past. Over the last five years, the Reserve Bank of India, has been steadily promoting a spirit of embracing technology to deepen and broaden banking in India. Innovative experiments like creation of specialized payments banks and small finance banks have been undertaken. India is also poised to have the world’s finest banking infrastructure in the form of an online identity system (powered by Aadhaar), credit information bureau coverage and inter bank payment systems.
Once these projects are completed over the next few years, every single Indian resident will have an online, verifiable bio metric identity and address record. It will be possible for banking to be almost entirely paperless. Furthermore, Credit Information Bureau scores will help bring millions under the purview of the formal banking system, creating a complete picture of the credit history of more than half the population.
The payment infrastructure in India is also poised to become one of the most advanced in the world. The National Payments Corporation of India has quietly set about connecting all the banks in the country to ensure seamless, convenient and instantaneous payment transactions across banks. The much-discussed Unified Payments Interface is just one of the organization’s many levers of change. The biggest driver of transformation, is the fact that digital technology is becoming more affordable and powerful than ever. Continuous innovation and productivity enhancements have become a norm in banking. Some global banks are discovering that India is one of the most conducive markets to pilot their digital innovations.
The third set of factors that will help raise Indian banking to greater heights are the reforms likely to be engendered by the current crisis of non-performing assets in corporate credit. These reforms will lay the foundation for next-generation data-driven credit practices. The increasing digitization of the economy is generating large volumes of useful, online electronic information on commercial enterprises. These rapidly growing data repositories are expected to get a further boost with the introduction of the goods and services tax, potentially helping digitize invoices across commercial value chains. Given the rising importance of data, banks are gearing up to use advanced analytics and technology for better risk management. In addition, the bankruptcy law is also likely to be refreshed in due course.
All these factors have the potential to create a conducive environment for accelerated growth in banking in the near future. But only those banks that embrace distinct new capabilities will be able to harness the new opportunities and emerge as winners. By building and leveraging differentiation, financial institutions can deliver a whole new banking experience for customers—individuals and corporate entities alike.
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