How will the Indian banking scene be five years down the line? Dinesh Kumar Khara explains
, Former Chairman,
SBI
, says the banking ecosystem is rapidly evolving, emphasizing customer centricity through personalized services and diverse distribution channels. Banks are leveraging technology to cut costs and support corporate ecosystems. Post-COVID, digital adoption surged, influencing payment systems and retail growth. Responsible borrowing is increasing, and
financialization of savings
is evolving with mutual funds and alternative investment funds.
Don your ex-banker's hat. How do you think the shape of
Indian banking
is going to be five years from now?
Dinesh Kumar Khara:
Well, that is a very interesting question, particularly in the context of the way the ecosystem is changing rapidly. There are two ways. One, of course, is to look at the kind of challenges being thrown up. The second is more important – how best the ecosystem can benefit the players in this ecosystem. In that context, I would like to mention that eventually what is going to matter is how fast and how relevant the
banking system
will be for the last mile in this economy.
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What we are talking about is it is not merely the growth in terms of the absolute number in terms of GDP, but the per capita income improvement as well, and that becomes a very relevant context. Herein, the banks, if at all, have to really tap the liabilities and come out with the solutions which are being sought by the customers. So, customer centricity will hold the key for the banks irrespective of their size, big or small, and it is not merely in terms of product but it will also be in terms of the distribution channels which the customers would like to use.
Maybe it is physical, maybe it is digital, and that is going to be the defining area going forward. Of course, with the help of analytics, it is going to be a different game altogether because when it comes to the hyperpersonalization, that is possible now because banks have a huge amount of data relating to their customers. They can profile their customers and after profiling, can reach out to the customers which will increase customer centricity and customer experience will go up significantly.
Going forward, in the next five years, this is how the trajectory will be defined I think and apart from that, on the asset side also, we have seen of late that corporates are actually depending upon the liquidity which is there in their own balance sheet or on the alternate sources of capital be the equity capital or debt capital for financing their long-term investments.
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But at the same time, banks have got a very relevant space when it comes to supporting the ecosystem of the corporates – be it employees or be it their supply chain. That is something which will hold the key for the banks to really scale up their asset size also. So, broadly I would say that this is how it is going to evolve and, of course, leveraging technology, cutting on the cost is going to be another focus area for the banks because of late, margins are getting squeezed. But when it comes to raising capital and cost of capital, it is very essential that you cut your operating costs somewhere. Therein perhaps one can sweat the AI and the new technologies so that they can cut on their cost also.
As far as the banking landscape is concerned, we actually define pre-COVID and post Covid and that is a very relevant context because during Covid, the adoption of the digital went up significantly and also the other very relevant aspect is that during covid people had lot of liquidity which was left out with them and that actually showed up in the subsequent years in terms of increasing spending and also the GDP the way it went up.
So, that was a defining moment and of course, at the same time, adoption of digital went up significantly and by virtue of that, when it comes to payment systems, etc, it really got evolved and also from the regulatory perspective also there was enough guidance on the payment system as well. So, that is the real defining moment and when it comes to the growth of retail, which we have seen in the economy, even that was seen soon after Covid.
So, I would say that soon after Covid, maybe a couple of years were simply an aberration. We should not really get bogged down by the fact that when it comes to credit growth, etc, there are challenges. The way I look at it is that we have to see that the banking system's
credit growth
should be at least 2% more than that of the GDP growth in nominal terms. So, in nominal terms, GDP growth is around 9.8 or around 10%. That being said, now 12% credit growth is a decent growth, but a very important aspect is that in the ecosystem in the intervening period, there is a lot of responsible borrowing which has started happening.
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Thanks to the credit bureaus, this is something which has happened, thanks to the IBC which has come into play. People have understood that if at all they have to grow, they have to move up in their life, and cannot afford to cheat the banking system. They have to follow the discipline which is required there. This is a very important change which we have seen and this is something which is going to define how the banks will really move up and how the economy will also really conduct itself with the financial sector.
Now, when it comes to financialization of savings, part of it is attributed to the same because when the customers were looking at in terms of how can they improve the yield on their savings they started trying out with the various products from the financial sector, now they have come to the maturity level where thanks to the SIP movement which was introduced by AMFI, saying that Mutual Fund Sahi Hai concept got really deep into the system.
Today, mutual fund AUM stands at about Rs 72 trillion. When it comes to banking system deposits, it is around Rs 250 trillion. Going forward, in this particular space when it comes to investing, there is going to be a significant improvement because the AIF market is also evolving, which is leading to investment into the unlisted space. Now that is one area which has started growing because mutual funds had always had a limitation in terms of only identifying from the listed space.
The listed space has got the limitation by itself, about Rs 400 trillion would be the market capitalization of the economy. So about Rs 72 trillion comes from the mutual fund and also when it comes to direct investing, that would be contributing, and this is the way forward when we look at the pension fund industry. Even that is also evolving significantly.
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So, I would say that these are the early days, and I would say that this is the foundation for any developed economy because when the market starts moving fast, when the banking system simultaneously offers fixed coupon returns, for different segments of customers there are various options available. That is going to go forward in terms of supporting this economy in the days to come.
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