Indian banking during the past decade

The founder, executive vice-chairman and managing director of Kotak Mahindra Bank, formed by converting Kotak Mahindra Finance into a commercial bank in 2003, discusses banking in India over the past decade.
Uday Kotak
Uday Kotak

The last decade was a tumultuous one, punctuated by two asset bubbles -- the first related to the stock markets (and NBFCs [non banking finance companies] in India), the second to real estate. Both shared familiar characteristics: rampant speculation and greed, leading to risky bets, be it backing internet start-ups with no chance of profitability, or paper assets backed by low-income families who had no way of redeeming their mortgages, resulting in big failures in the banking sector as well as global recession. The Indian banking system has largely been insulated from the global credit contamination and banks have grown steadily, thanks to our conservative policies and tight regulatory frameworks.

I feel that the decade radically changed lives and the way business is done, on account of internet, mass communications and the emergence of China and India as global economic powers. The structural reforms initiated in the 1990s helped Indian businesses leverage their ability for low cost production, and Indian banking structure fuelled continued growth. Indian banks which earlier focused on a 'revenue' (cost plus profit) model shifted to a 'profit' model.

Bank lending has been a significant driver of GDP growth and employment, making India the world's fourth largest economy (in PPP terms) at an average growth of 6.5% over the past decade. Even as global financial markets face growth and asset-quality issues, Indian banks continue to offer a healthy growth trajectory with minimal balance sheet risks. In the past decade, deposits have seen healthy growth, driven by a host of factors: acceleration in nominal GDP growth; rising savings rate; increasing proportion of bank deposits in total financial savings; and inflow of non-retail deposits. The decade has also demonstrated that the Indian economy requires a broad range of banking services as well as wider and deeper distribution. If our economy has to grow at 10%, the banking sector needs to grow twice as fast.

But what had led us to where we are today? The answer lies in many developments -- policy initiatives; deepening reach of banks; and technology-led innovations making access easier and faster. 

Regulations as well as the lure of the 'fortune at the bottom at the pyramid' have made more banks reach out to 400 million unbanked Indians. Financial inclusion has two aspects; giving people a safe and convenient avenue to save, transact, and remit as well as an efficient delivery mechanism that makes micro-lending viable. The Indian banking system has initiated steps to reach out to this excluded populace using technology and microfinance institutions to drive down costs.

Customers are shifting their transactions to electronic channels such as ATMs, telephone, internet and  mobile phones. Banks have replaced long benches for their token-bearing customers with private seating to discuss investment products. Information technology helped banks in low-cost, multi-channel, real-time transaction processing, thus increasing operational efficiency, productivity and profitability. The decade also saw the entry of new age Indian private-sector banks, which brought world class technology, products and customer service to the Indian markets. 

With banking fast turning into a commodity, the growth strategies of most banks in India revolve around customer relationships. This created a need for excellent people skills and technology which could deliver. Another implication of competition is that a host of new products are available to customers. Auto and personal loans and overdrafts have allowed individuals to attain a standard of living that was only aspirational in the past, and credit cards have helped stoke a retail boom.

Today we are heading towards a consolidation phase, and I expect to see mergers among public sector banks or public sector banks with private banks. The credit card and insurance industries are probably the next arenas where alliances might be formed. The level of banking penetration in India is presently low by global standards, and this is clearly a medium-term structural growth opportunity for banks in India.

A facilitating factor in this context is our favourable demographic; more than 30 per cent of Indians are below 15 years of age and over the next decade these youngsters will enter the "bankable population" category. The younger generation is more open to consumer loans, financial products like insurance, mutual funds and wealth management and is expected to offer a much bigger revenue base for financial service providers. India is thus the place to be for any banking entity in the next decade.

Uday Kotak is the founder, executive vice-chairman and managing director of Kotak Mahindra Bank.

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