For international banks, the Indian story can too often be boiled down to one of opportunity and frustration in equal measure. The potential of the country’s vast unbanked population is well documented, but how to generate business from it is not clear or easy.
The incentive for banks to find a way is beyond dispute. Margins in emerging markets for banks tend to be higher than those from the decidedly ordinary-looking developed markets for a number of reasons. Foremost among them is the lack of commoditisation of products; less of a need for expensive customisation of products is another.
Additionally, the size of the market means banks do not necessarily have to stand on each others’ toes when establishing market share, said Sachin Khandelwal, senior general manager at ICICI Bank.
“If banks are really worrying whether they can fight for existing space with foreign banks and Indian banks that are already strong there, the answer is that the market is much larger,” he said. “The 100 million domestic workers sending remittances to their parents and to their rural villages [has created] the land of opportunity all over again.”
However, banks typically run into two major problems when accessing this market: technology and regulations. But, according to Khandelwal, mobile technology is fast changing the banking landscape. It is already possible, for example, to transfer funds from person to person in India via six banks using a very simple process. And the number of banks is set to increase to 11 soon. “All you need to know is the other person’s mobile number and a six-digit code,” he said.
For their part, Indian regulators are encouraging innovation. It is now possible for a non-customer of a bank to withdraw cash from an ATM, or from a bank’s business correspondents and agents – the latter no longer the rarity they once were.
“Just about anybody can become an agent or a business correspondent and, on behalf of a bank, can enable banking transactions, loans, deposits and insurance. And that is the large opportunity to be tapped,” said Khandelwal. Developments such as these are rapidly bringing the country’s unbanked population within reach of financial services, he said.
The banks will fervently hope he is right. India will soon boast 68 cities with populations of more than 10 million and, of the country’s more than 1 billion people, 65% are below 35 years of age.
“India has a stable government, very strong regulators in insurance, financing and money markets. Plus, consumption is driven by the 70% of the masses that will stay in the rural markets,” added Khandelwal.
The race for convenience and accessible banking looks set to drive new technology take-up in India, particularly mobile banking. And that in turn will draw more currently unbanked Indians into banking. When an Indian moves from a village to an urban environment, his earning capacity goes up 2.4 times. Should that individual become one of the 25 million to 30 million non-resident Indians (NRIs) working overseas, that income level could double, triple or even quadruple. It will be up to the banks to work out the best way to marry their traditional structures with new access technologies to crack this market.