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Better Banking: Driving innovation through technology

May 06, 2015

India’s banking, financial services and insurance (BFSI) industry has been on a rapid growth path for the past few years, largely driven by the increasing disposable incomes of consumers. According to a report by KPMG and the Confederation of Indian Industry, India’s banking industry has the potential to become the fifth largest in the world by 2020 and the third largest by 2025.

Current industry landscape

At present, India’s banking sector is fragmented, with as many as 46 commercial banks, along with a large number of foreign banks and rural and cooperative lenders, competing for the consumer’s pocket and mind share. However, despite the growing presence of foreign banks, state banks control 80 per cent of the market, leaving relatively smaller shares for private players. According to the Ministry of Finance, banks have opened 77.3 million accounts under the Pradhan Mantri Jan Dhan Yojana up to November 19, 2014. Of this, the number of accounts opened by public sector banks is 62.1 million, with a total balance of Rs 49.46 billion. These banks have also distributed RuPay debit cards for about 43 million accounts.

As per industry estimates, the total credit of the banking sector is expected to grow at a compound annual growth rate (CAGR) of 18.1 per cent to reach $2.4 trillion by 2017. India’s total banking assets, which were $1.8 trillion in 2013, are expected to surpass $28.5 trillion in 2015.

Over the years, the Indian banking sector has witnessed exponential growth in core banking functions like lendings and deposits. According to the Indian Brand Equity Foundation, the total lendings and deposits in the country increased at a CAGR of 20.7 per cent and 19.7 per cent, respectively, from 2007-08 to 2013-14, and are poised for further growth due to the strong demand for housing and personal finance. Meanwhile, the credit offtake for banks and financial institutions has also grown over the past decade, aided by strong economic growth, rising disposable incomes, increasing consumerism, and easier access to credit. Between 2007-08 and 2013-14, the credit offtake expanded at a CAGR of 20.7 per cent to an estimated $1.03 trillion, while deposits grew at a CAGR of 19.7 per cent during 2007-14 to reach an estimated $1.31 trillion.

The BFSI industry is also being driven by the increasing demand for insurance products and services. As per data by research firm BRIC, the Indian life insurance industry is estimated to grow from $66.5 billion in 2011 to $111.9 billion in 2015 at a CAGR of 14.1 per cent. Meanwhile, the number of policies sold in the country is expected to increase from 53.23 million in 2010 to 85.21 million in 2015.

In the non-life insurance industry, health insurance is the second largest segment in India. The Indian health insurance industry has seen major growth over the past few years and is expected to grow at a CAGR of 37.2 from 2011 to 2016 on account of increasing medical costs, rising population and increased awareness among consumers.

Growth drivers

The growth in India’s BFSI industry is being driven by the strong policy initiatives of the Reserve Bank of India (RBI), which acts as the regulator, and the Government of India. For example, from time to time, the regulator has emphasised the need to focus on extending the reach of banking services to India’s unbanked population. On a related note, the granting of in-principle banking licences to IDFC and Bandhan Financial Services by RBI in April 2014 is a positive move. It also mandated the Know Your Customer standards, wherein all banks have to put in place a comprehensive policy framework in order to avoid money laundering activities.

In addition, to help micro, small and medium enterprises, RBI has allowed the setting up of an exchange-based trading platform to facilitate the financing of bills raised by such small entities to corporate and other buyers, including government departments and PSUs. In another significant move, as part of its focus on restructuring and promoting growth in the BFSI sector, RBI has mandated four of its deputy governors to individually lead the four verticals: financial markets and infrastructure; monetary policy and research; regulation and risk management; and supervision and inclusion. Meanwhile, in a bid to revive some loss-making public sector banks and increase competition in the industry, the Government of India intends to reduce its stake in such banks to 52 per cent. This move is expected to fetch it $14.46 billion on the basis of share prices on November 21, 2014.

In a recent move, the government approved a proposal by leading private bank HDFC Bank Limited to increase its foreign investment limit, while considering the stake held by its parent company, Housing Development Finance Corporation Limited (HDFC), as overseas investment. Accordingly, the Foreign Investment Promotion Board approved HDFC Bank’s proposal to increase foreign investment in the bank to 74 per cent. Apart from this, in order to provide an impetus to manufacturing, particularly shipbuilding, the government has extended financial support to the Export-Import Bank of India, which plans to set up a dedicated fund worth $243.37 million in this regard.

Adoption of technology

With the growing demand for banking and financial services, the country has witnessed a significant growth in transactions via ATMs, as well as internet and mobile banking. To meet the operational challenges that come with catering to an increasing consumer base and the rising demand for innovative products and services, the BFSI sector is increasingly turning to the adoption of telecom and IT services. According to industry sources, the IT spend in the Indian BFSI sector reached about $3.5 billion in 2014. These days, BFSI players are looking at technology as a key growth driver.

As per a report by consultancy firm Zinnov on the growing IT adoption in India’s BFSI sector, increased business requirements have been cited as a key reason in this regard. According to the study, the main growth drivers for the higher adoption of technology by BFSI players include adherence to regulatory compliances, improvement of internal/operational efficiencies for better alignment of business processes, support for growth strategies with a greater focus on internet and mobile banking, ensuring enhanced customer experience by competitive differentiation, and the creation of new business opportunities by extending services to the unbanked population. The findings of the report also indicate that large firms are moving from core banking applications to mobility/electronic payment solutions and targeted business-focused solutions.

Meanwhile, regional or smaller organisations in the BFSI sector are increasing investments in core banking solutions and showing a rising interest in cloud computing. Realising the advantages offered by the integration of technology in day-to-day operations, BFSI players are taking initiatives in providing IT-enabled banking services like electronic fund transfers, electronic clearance services, internet banking, mobile banking, point-of-sale terminals (kiosk banking), and electronic data exchange. According to KPMG, banks are increasingly harnessing technology for creating innovative and cost efficient operating models to sustain profitability and viability. A large number of players are considering the adoption of social media initiatives to reach out to the urban and emerging classes. The industry is looking at the adoption of SMAC (social, mobile, analytics and cloud) for improving operational efficiencies and enhancing internal as well as external communication.

BFSI players are particularly focused on adopting cloud to bring down their capex as this technology allows organisations to move from a high-cost fixed operational model to a variable model. Traditionally, software licences, servers, networking equipment and storage devices are typically considered to be key capex components. However, by adopting a cloud-based business model, BFSI players have to pay only for the infrastructure they are using actively. An additional benefit of cloud systems is that they allow the easy scale-up or scale-down of business operations. Apart from this, a number of BFSI players are exploring the option of using near field communication technology for launching contactless credit and debit cards in the market. Such products will allow customers to carry out transactions without inserting or swiping cards.

Over the next few years, the BFSI industry in India is expected to grow at a fast pace and result in the creation of multiple job opportunities. Its workforce requirement between 2008 and 2022 is expected to be about 4.2 million, and the sector could create up to 2 million new jobs over the next five to 10 years. According to a report entitled “Human Resource and Skill Requirements in the Banking, Financial Services & Insurance Sector (2022)”, apart from on-roll employment opportunities, there are significant contractual employment oppor-tunities across all the above segments through various financial positions like direct selling agents, insurance agents, and mutual fund advisers.

Going forward, the ever-increasing customer expectations, coupled with growing compliance regulations after the introduction of the Basel III banking norms, are expected to drive BFSI players to make significant investments in emerging technol-ogies like business analytics, business intelligence, application management, security, hybrid cloud, and private cloud. The adoption of cutting-edge technology by BFSI players is undoubtedly going to be the medium of differentiation for achieving increased operational efficiencies and enhanced customer experience.


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