As the Indian economy heads into 2018, it is likely to see a discreet but profound change. For the first time, the per capita dollar income of the country will touch the 2000 mark, a threshold, which in global economic history is usually associated with multifold expansion in domestic consumption with improving affordability turning past luxuries into necessities. The Indian banking system will have to play the role of a protagonist in this economic transformation. Not only are we going to witness a sustained rise in banking services, but we will also see increasing sophistication of solutions and delivery.

Factors which contributed towards increase in market share for private sector banks in the last 10 years are predominantly:

1.Vintage:

With public sector banks undertaking most of the industrial infrastructure financing, their balance sheets naturally bore the brunt of business downswings. In contrast, most of the new age private sector banks were bereft of any asset quality baggage as they spawned in the post-liberalization era with bulk of their expansion in 2000s. Relatively newer vintage also helped private sector banks to invest in latest technology intensive solutions and enhancing their capabilities which are key in scouting for new revenue fronts in addition to improving customer experience. An example of early adoption of technology by private banks is seen in the expansion of point of sale machines. Despite having only 18 per cent share in credit in 2012, private sector banks had started expanding their reach via installation of POS machines where they had 80 per cent share in 2012. While public sector banks have played a rapid catch up since then, private sector banks still have a majority share of 57 per cent – this is likely to be a steady source of revenue generation. It is noteworthy that with this diversification, other income contributes 20 per cent to the total income for private sector banks vis-a-vis 14 per cent for public sector banks.

2.Productivity:

• Analysing the cost to income ratio —

CI – (employee expenditure + other operating expenditure/ (net interest income + other income) for banks a stark difference between public and private sector banks can be seen.

1. For private banks, CI has consistently been on the downtrend, coming down from 47 per cent in FY12 to 43 per cent in FYI 7. Whereas, for public sector banks, this ratio has increased from 44 per cent to 49 per cent in the same time period.
2. Keeping overall costs under control is a major competitive advantage as it improves the return on assets which enables the firm to perform on both fronts – it delivers sufficient return to the existing shareholders and provides opportunity to raise more capital for further expansion.

3. Agility:

• Most new age private sector banks are remarkably flexible in hiring the right talent, while also ensuring that compensation and retention policies are attractive.
• Private Sector Banks are also nimble footed with respect to making decisions regarding early identification of stress, followed by its resolution/recovery thereafter. This has worked in their favour so far both with human resource challenge and asset quality concerns (post the recent Asset Quality Review by the RBI) having a disproportionately larger impact on the public sector banks.

Public Sector Banks

 While the public sector banks have lagged behind their peers in the private sector over the last one decade, recent structural reforms undertaken by the governance could certainly help them in consolidating their position hereon.

• Governance reforms like setting up of Bank Board Bureau splitting up CMD’s post into non-executive Chairman and a CEO, and recommendation for a longer tenure for CEO (5 years) are expected to help improve efficiency in the longer run.
• The creation of CRILC (Central Repository of lnformation on Large Credits) and the implementation of IBC (Insolvency and Bankruptcy Code) have provided an institutional framework for sharing of information and resolution of stressed assets. This will unlock a large part of stuck capital on banks’ balance sheets currently, and thereby hone their appetite for credit expansion.
• The large scale recapitalization plan worth Rs 2.11 lakh cr recently announced by the government for public sector banks can be a potential game changer. While it is timely and will ensure that public sector banks will be able to meet Basel III regulatory requirements, it also incorporates room for ‘growth capital’ for banks which are able to display Superior performance metrics. This is an efficient way to incentivize competition among public sector banks, which would eventually benefit the overall economy.

Next Generation Banking:

With India expected to become the fourth largest economy in the world by 2025, the following 4Ds will determine and drive the banking landscape:

• Development: This includes government’s financial inclusion agenda and other key sectoral and structural reforms.
• Deregulation: policy improvement in financial intermediation and savings.
• Demographics: Market getting dominated by young and digitally equipped population.
• Disruption: This involves digitization and the integration of banking, telecom and financial space digitization and the integration Of banking, telecom, and financial Space Based on these 4 Ds, the following seven trends will define the next generation banking in India:

Transforming banking:

• Technology will define banking contours in the future. This would include big data, cloud computing, smart phones and other such innovations.
• ‘Omnichannel’, not multichannel, will redefine the way customers interact with banks. For example, disseminating personalized offers on customers’ mobile phones, use of home video-conferencing system for personalized connect, leveraging face-detection technology for efficient cross-sell are some of the avenues through which technology will aid banking in the future.
• Amidst a high mobile density in India, the potential for leveraging this technology for offering financial services remains immense. In this respect, the JAM Trinity (Jan Dhan- Aadhar Mobile) has the potential to change the face of banking.

Creative Destruction of Banks:

• Outsourcing utilities like customer authentication, fraud checking, payments processing, account Infrastructure KYC processing, to existing technology service providers, Could be key steps going forward in terms of innovation in banking.
• Post demonetization and with active policy emphasis on cashless economy, cashless banking will revolutionize ease of doing transactions with further penetration of Internet and mobile phones metamorphosing into a personal bank branch.
• Branchless banking could help in achieving economies of scale in revenue generation and cost management.
• Banking business model innovations could be combined with national platforms such as Aadhaar to reduce customer acquisition cost by 40 per cent in order to make branchless banking model even more viable.
• India has poor ATM penetration – there are only 11 ATMs for every 1 million people in India compared to 37 in China and 52 in Malaysia. In this regard, Solar ATMs could reduce set up cost by almost 50 per cent and also cater to power scarce rural areas.

Infrastructure Financing:

• India has about 5 per cent share in the global infrastructure market, which is expected to increase to 9-10 per cent by 2025.
• The futuristic development models will evolve on the lines of 5:25 structure and Private- Public-Partnership (PPP) model for long-term financing.
• Additionally, there will be new arrangements in the form of Infrastructure Debt Funds, Green Banking and Viability Gap Funding.
• The MSME sector contributes 8 per cent to the country’s GDP. SIDBI has estimated the overall debt finance demand of the MSME sector at USD 650 billion.
• New structures such as Cluster Based Financing, Capital Subsidy Policy for Technology Up gradation, MUDRA Bank, Credit Guarantee Schemes, Incubation Centres and start-up facilities will play an important role in the coming years.

The following are a few innovative thoughts that could become a differentiating reality over the next 15-20 years:

• Account number portability (on lines of mobile number portability)
• Efficient leverage of Big Data Analytics
• Securitization of retail loans Conclusion

A complete embracement of these anticipated changes will not only put Indian banks in the global league, they will also help in pushing up the Indian economy to the Top 4 slot in the world in the next five years.