Banks are betting on a demographic dividend tripling their business in the next decade.
Banks have ended the first decade of the 21st century on a very positive note. Their cost-to-income ratio has dropped from around 60% at the beginning of the decade to around 15% in 2010. Their net interest margins are also a healthy 3%. This has left banks with a tough act to follow for the next decade. However, senior bankers speaking at the FICCI-IBA Conference on global banking were confident that the next decade will be as good.
“The next decade holds a lot of promise because this is the first time the growth would be driven by both the demographic dividend of India and investments in infrastructure and manufacturing,” said Chanda Kochhar, MD & CEO of ICICI Bank. But there was a challenge in making the growth inclusive.
She pointed out that only a fifth of the population is actually a part of the market economy. According to Ms Kochhar, banks are still developing models to operate on. However, the advances in technology, the increased penetration of mobiles and relaxed regulations compared to a decade ago are some of the enabling factors for financial inclusion.
The government recently announced its plans to provide 64,000 villages having a population in excess of 2,000 in the next two years. The operating cost of a bank branch is around Rs 4-5 lakh per annum. To operate at this level, the village would have to generate an asset base of around Rs 1-2 crore. This is practically not viable. As such, banks need to work with non-banks and develop bank-led models, which are economically viable. “A possible way to tackle this is to create a separate non-banking subsidiary which would only focus on this”, said Rana Kapoor, founder and MD of Yes Bank.
The banks also need to increase their focus towards the microfinance sector. Only a sixth of the Rs 120-crore microfinance market has been tapped till now. This presents a huge opportunity for banks to increase their investments in the SME and agri businesses. While microfinance is one focus area, the other is to capitalise on the existing customer base. “The cross-sell ratio is 2-3% in India against 6% globally,” said Neeraj Swaroop, regional chief executive — India and South Asia, Standard Chartered Bank. This represents a growing need of wealth management in India. To counter this growing need, we need to have access to different products, transactional convenience and proper advice. Organisations need to develop relationship driven models against the current product-driven models.
“A healthy competition will cause a shift in public sector banks’ focus from core banking systems to customer-relationship management,” said TM Bhasin, CMD of Indian Bank. This would eventually benefit the end consumer.
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