Adaptive integration is the key to success of banks

This edition of India's Best Financiers by Fortune India and Grant Thornton Bharat comes at a time when the Indian banking sector is experiencing a remarkable upward trajectory. This trend is characterised by robust credit and deposit growth, as well as a significant reduction in non-performing assets (NPAs). The impressive performance of the sector, fuelled by the maturity in digital transformation, dynamic shifts in the economy and regulatory revamps, instils a sense of optimism about its future.

The decade began with banks facing the formidable challenge of managing asset quality and navigating the economic fallout due to the pandemic. However, they also played a pivotal role in extending relief measures, facilitating loan restructuring, providing liquidity and actively supporting the overall economic recovery of the nation. Overall credit grew by an impressive 15% in FY23, the highest in 10 years. Retail emerged as the fastest-growing sector in credit, experiencing a remarkable growth of 20.6%. Moreover, gross non-performing assets (GNPA) of scheduled commercial banks (SCBs) dropped to a 7-year low of 5%, while net non-performing assets (NNPAs) reached a 10-year low of 1.3% in September 2022. Private sector banks have continued to outpace their public sector counterparts in terms of growth, although the gap is narrowing with the implementation of Enhanced Access and Service Excellence (EASE) reforms. Overall branch and ATM growth has slowed down post FY21, except for small finance banks, indicating the growth is now led by alternate channels.

The digital transformation in the Indian banking sector has reached a level of maturity, with over 90% of transactions becoming digitised. The resulting increase in volume, velocity and variety of transactions gives immense opportunity to banks to harness the power of data and provide a differentiated experience to customers. India has more than a billion smartphones and a young population, leading to customers prioritising mobile-first experiences. For many leading banks, the number of active customers on mobile banking apps is almost twice or more than that on internet banking. The competition landscape is transforming to newer dimensions, with banking apps competing with other apps for screen and mind space. Personalised experiences, hyper-personalised product recommendations, straight-through processing, omnichannel journeys and enhanced security measures are becoming the new benchmarks for success in the banking industry. The demand is further fuelled by the emergence of the first generation of digital natives, whose expectations and preferences are shaping the banking landscape. They are already at the door, with 43% of the retail credit demand by volume coming from the 18-30 age group.

As digital journeys get ingrained in customers’ lives, banks are increasingly realising that collaboration and cooperation are essential to keep up with the pace of change and embed themselves in the lives of customers. Leading banks have already built their application programming interface (API) catalogue to create their banking as a service (BaaS) portfolio and partner ecosystems. While partners create tailored, embedded journeys for customers, banks establish new distributor channels. This, along with account aggregation, will bring in new revenue streams and avenues for customer acquisition for banks.

This year’s study also placed a special focus on financial inclusion, examining the initiatives taken by banks in India. The evolution and adoption of technology have significantly improved the deepening of financial services. Banks are increasingly recognising that deep penetration at an affordable cost is only possible with effective use of technology. While initiatives like Jan Dhan Yojana have reduced the number of unbanked individuals, the government, regulators and the banking sector must now concentrate on fully onboarding the underbanked segment, thereby achieving true financial inclusion. It is essential to adopt a tailored approach, including the introduction of vernacular capabilities and lighter versions of services, to effectively cater to the mobile-first rural customer segment. Establishing a robust tech-enabled correspondent network business is imperative to provide the necessary support, as some customers may encounter difficulties navigating self-service options.

In addition to scheduled commercial banks (SCBs), the regional rural banks, cooperatives and the non-banking financial companies (NBFCs) play a vital role in enabling a deeper financial inclusion in India. Recognising their importance in the Indian banking system, this year’s study includes regional rural banks (RRBs). The gap in operational efficiencies between RRBs and domestic SCBs is evident, with the former having a 30-40% higher cost-to-income ratio, highlighting the need to accelerate their digital transformation. Strengthening RRBs and the cooperative sector through digitisation and better governance will further augment the ongoing initiatives by SCBs to promote financial inclusion.

The first positions across categories in this year’s study remain largely unchanged as compared to the previous year, indicating that the winners have invested in creating robust business models over the last many years, which has allowed them to stay ahead of the competition. However, future winners will be determined by banks’ ability to adapt to changing customer needs. This makes it important for banks to identify ecosystem plays and align their capabilities accordingly. With entire commerce moving to integrated platforms, banks will have to figure out how to secure their positions. Considering metaverse, generative AI, wearables, blockchain and other integrated technology, innovations as part of strategy will be important. As fraudsters become more creative and pervasive, banks will also need to invest in robust cyber security options to detect, predict and mitigate fraudulent transactions on a real-time basis. Embracing these innovations and keeping up with the pace of change will be crucial for banks to stay ahead of the curve and meet the ever-evolving expectations of their tech-savvy customers.

This article was originally published in Fortune India.