Indian Banks – From Liberalisation Towards Digitisation

Mumbai, December 13, 2016: This year, marks a quarter of a century since India’s landmark reforms of 1991 were initiated. Significant ‘credit’ for fuelling the nation’s growth must go to the banking sector – the sector has seen manifold growth on some dimensions (size of advances, reach of branches and ATMs, automation) Despite this rejuvenation of the sector, the full promise of reform remains unfulfilled. Do we stand today at a new inflection point for the sector? New technologies, combined with mobile penetration, UID and the “India Stack” and the impact of demonetization have the potential to vastly increase the access to financial services across the population. The extent of the transformation which can be achieved is as yet uncertain. It is also an open question which types of players will be able to drive and benefit from the transformation. Fintech players are rapidly encroaching into spaces previously owned by banks at a time when banks are ‘bogged down’ by capital constraints and other challenges. The sector is therefore at another inflection point, and how well today’s banks respond will determine the future of banking in India.

Oliver Wyman believes that the opportunity for banks is substantial, if they can successfully address their current stresses and re-invent business models. Oliver Wyman, has explored the sector’s progress and outlook in their latest report: Indian Banks – Tacking into the Wind. The report looks back at the successes as well as the unfulfilled expectations a quarter century of reform. The report also considers the medium-term outlook for the sector and the imperatives for banks seeking to position their institutions for success in going forward.

 First, banks need to address the present-day balance sheet challenges head on – they need to greatly enhance transparency in order to rebuild investor confidence, they need transform their approaches to managing risk and capital, and they need to ‘clear the muck’ with NPA resolutions and fixing gaps in credit risk management approaches.

Second, business models need to be re-invented across client segments. The largest opportunity is with Small and Medium Sized Enterprises, estimated at $140 BN, which is currently under-served due to high costs. New technologies and data analytics make this segment very attractive to serve. In the retail sector, banking remains vastly underpenetrated in the country; digital technologies and the India stack are opening up vast new opportunities to serve customers with affordable propositions – banks need to embrace these opportunities through innovating on digital front. Leading banks are adopting right combination of “beat”, “join” and “ignore” towards to FinTech sector to service this segment. Lastly, the Corporate segment has been disproportionately served by banks but with limited innovation. Going forward, banks will need to push frontiers of excellence in execution anchored around sector specific solutions, data-driven pricing, productivity enhancement and automation of business processes.

Lastly, the sector needs to address the ‘softer aspects’ of the change to lay the foundations for sustainable banks for the future. These softer aspects include the talent management model of banks as well as approaches for governance, compliance and future.

David Bergeron, Partner and Market leader, Oliver Wyman India said, “25 years ago, I was a tourist, and not an advisor, but it’s been remarkable what I have witnessed as a transformation during that time. I can’t help but think that 25 years from now, we’ll look back to today as the start of the second revolution in banking.” While the past 25 years have seen a vital transformation in the Indian banking sector with regard to glittering branches and ubiquitous reach provided by new technologies, the current era presents multiple critical junctures for the evolution of the industry. While there are some changes that have already started – e.g. move towards modular services, focus on transparency, democratisation of banking – there are a number of questions that remain unanswered yet e.g. role of public sector banks, consolidation as a cure to banks’ problems, rise of specialised banks and FinTechs. It is imperative for Indian banks to act upon the opportunities and challenges presented by the onset of the revolution in Indian banking.”

On demonetization, Dr. Bergeron commented, “the currency shortage of the last month has given a massive impetus towards adoption of electronic payments. It’s too early to declare that we are at a tipping point, but clearly this is going to accelerate the digital trends we talk about in the report. If it brings more transparency to SME financials it will clearly be easier to develop the “SME 2.0” propositions as well. But at the same time, it will put some short term stress on asset quality, and it’s unclear how sustainable the liquidity boost will be.”

About Oliver Wyman
Oliver Wyman is a global leader in management consulting. With offices in 50+ cities across 26 countries, Oliver Wyman combines deep industry knowledge with specialized expertise in strategy, operations, risk management, and organization transformation. The firm's 4,000 professionals help clients optimize their business, improve their operations and risk profile, and accelerate their organizational performance to seize the most attractive opportunities. Oliver Wyman is a wholly owned subsidiary of Marsh & McLennan Companies [NYSE: MMC]. For more information, visit www.oliverwyman.com. Follow Oliver Wyman on Twitter @OliverWyman.

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