Spurring financial growth
Financial regulators in India have helped build one of the world's strongest banking and financial systems. Under changing economic parameters, we are yet to see the final structure of banking
The Indian financial services’ industry has remained stable in recent times. The banking sector has unbundled with a range of service providers widening, technologies making service offerings more personalised and customers making informed decisions by leveraging advances in data science. Players are using agile processes so that products and services can get to the market soon and be adjusted along the path. Customers in the banking sector widened post demonetisation and following financial inclusion agenda. This was possible only with the use of technology and transforming conventional bank to a ‘digital bank’.
Spurred by increased awareness among customers and a shift in expectations, emerging competition from start-ups and limitations in traditional models of conducting business, banks have reached a tipping point. To stay relevant in the business and become the ‘go-to’ platforms in the industry, they are forced to redefine their purpose and align with a new vision. Creating smart products that self-optimise around customer ecosystem; leveraging, mining, and sharing data; investing in technologies and cybersecurity are necessary steps to be taken in this journey and will be a net positive for the bank tomorrow.
Indian FinTech is one of top five markets by value of capital funding and investments in the sector with nearly $270 million of funding in 2016. India remains one of the largest markets where structural enablers have come together to setup and incubate FinTech at an apt time. A combination of steady economic growth with low penetration of financial services and availability of supporting infrastructure, such as Internet data access, smartphones, along with utility infrastructure, including Aadhaar-based authentication and India stack capabilities, are likely to provide the required impetus to India’s FinTech sector.
We have analysed the breakout potential of India’s FinTech sector across six segments — payments, credit, investment management, personal finance management, bank technology and insurance technology across 20 sub segments. Expectedly, payments and lending are the likely candidates for breakout in the short-term as new FinTechs target the quest for offering cashless digital payments services. On the lending side, low penetration of retail and MSME credit, along with the promise of better experience and faster turnaround time, have created strong propositions for customers. FinTechs, in other segments, including investment management, personal finance management, BankTech and InsurTech, have initiated the market making process and currently target specific market niches. We believe that armed with right value proposition and by gaining confidence of customers, these segments are likely to witness their own break out moments and it’s just a matter of time, some entrepreneurial energy and creativity before it happens.
Incumbent players have up their ante and are embracing these changes, as well as emerging competition, while they are seeking to convert banking consumers, who use digital touch-points to brand loyalists, as also to widen their user base. Use of data to deliver the right customer experience, leveraging innovations to make banking simplistic and to give the customer complete control, are the new guiding principles for financial service providers. Some firms are choosing to bridge gaps in internal capabilities to adopt a more holistic and value-based approach by understanding that all these applications are not always a panacea. Organisations will have to make choices that include trade-offs. They will need a vision of their future, the applications of these in the context of their overall strategy, culture and structure. They have to evaluate the key considerations in implementing changes and aligning them with their ambitions.
Demonetisation too has given rise to digital banking. It is also a pragmatic step towards creating a cashless economy. It is time that banking leaders lived up to the challenges by adopting new technologies in operations and customer service and also embrace appropriate business models. It also time for microfinance institutions and non-banking financial companies (NBFCs) to adapt to the digitised economy.
The Reserve Bank of India (RBI), after having banking license on tap, released a discussion paper on proposal for setting up of long-term finance banks, especially to fund infrastructure and greenfield projects of industries with a minimum capital requirement of Rs 1,000 crore. The Wholesale and Long-term Finance Bank, which will finance infrastructure and core industries, will not have the mandate to open branches in rural and semi-urban areas and lend to agriculture and weaker sections of society. With a record budgetary allocation of Rs 396,135 crore this year, infrastructure has received a boost and affordable housing has been given infrastructure status. At an ecosystem level, development in banking infrastructure and implementing regulations, that are receptive to innovations and data requirements, are also required.
Moody’s outlook for the Indian banking system as of September 2017 was stable, although on the back of improved prospect for asset quality. Managing stressed assets poses a growing risk to the Indian economy. Due to the inadequate leverage of multiple options to manage stressed assets and NPAs, a few banking behemoths, like public sector banks, have suffered the most so far. In fact, the problem that confronts the banking industry is a huge pile of non-performing assets (NPAs).
According to the Economic Survey 2017, stressed assets, ie bad loans and restructured loans, constitute 20 per cent of the total loans in the system. So is the Insolvency and Bankruptcy Code 2016 which binds defaulters with a timeline — something which did not exist in the past. For the Government, merger and consolidation is a next bold step towards resolving the problem.
Respective industry players can fund these assets during the cash generating projects life cycle. These players are those with large capital under their asset management arms, or well settled players in the industry where stressed assets belong. By analyzing the different options available, and using the opportunity under NPA resolution rules (with the introduction of new policies), the Indian economy is gearing up to resolve the issue of NPAs. For speedier recovery proceedings and settlement of debts, the Insolvency and Bankruptcy code (IBC) has been introduced. The code provides the insolvency resolution process, or liquidation as two paths to recovery of stressed assets. Most standard restructured loans are now NPA.
Defragmentation for SME and mortgages sector have emerged as a trend and sectors, who have access to the customer ecosystem, have been looking at venturing into financial services segment. It began with telco, but will now be aggregators and retailors, who will converge into financial services. Further, disintermediation/crowd sourcing will be the key trends to pick up in future.
Another measure which would impact the business model and performance of banks is the proposed introduction of the Indian Accounting Standards (IndAS). With the industry seeking advocacy and standardisation, ensuring robust implementation of the IndAS is critical. An organisation-wide transformation to ensure the business model of the bank is in line with the changing laws and policies of the Indian banking industry, and the need for coordinated efforts of stakeholders that will drive the implementation of Ind AS.
Recently, the Indian economy has seen a massive change in its indirect tax regime with the introduction of the Goods and Services Tax (GST). Its biggest impact is the shift to decentralised registration in financial services, in turn requiring robust operations, IT and accounting systems. The GST regime is bound to increase compliance across the economy. Though the impact on FSI is not that significant, the effect over other commercial transactions/ industries is slowing financial transactions, and hence, the effect on banking.
As per World Bank estimates, India’s rural population in 2016 stood at 66.86 per cent of the total population. Many living below the poverty line can be pulled out of poverty with basic access to financial services, such as payments, insurance and savings. Given the systemic barriers to inclusion, efforts to serve this very attractive segment will require fundamentally different business models. Innovative approaches will help achieve the desired social progress (not just economic progress). Innovation (both, technology and non-technology), across all areas of impact in product and delivery of financial services will be desirable in making the rural segment attractive to service providers, in a way that providers of financial services in-fact, compete for these customers.
(The writer is Partner, Deloitte India. Views are personal)
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