Retail Banking & its (non) importance in the country’s economy

Aniruddha PaulHead – IT Change Delivery, ING Vysya Bank, March 4, 2011

History of Banking in India

1786 The General Bank of India

1806Bank of Calcutta (later, Bank of Bengal and in 1921, SBI)

18601st foreign bank in India: Comptoire d'Escompte de Paris

1906-11

Indian banks inspired by the Swadeshi movement. Dakshina Kannada became the cradle of Indian banking

1948-49RBI Act; Banking Regulation Act

1969 Nationalization

1990s Liberalization

2011 Guidelines on new licenses

External shocks have undermined under capitalized Indian owned banks

GoI direction imposed on banking

Liberalization of the economy and the industry leads to the rapid growth of banking, especially retail banking as we know it. Demise of the 4-6-4 method!

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What is Retail Banking and what makes it different? In a world of parity products, how do you gain leverage?

• Definition - Banking in which banking institutions execute transactions directly with customers

• Typical products: savings and transaction accounts; mortgages; personal loans; debit and credit cards, etc

• Working principle: Law of Large Numbers; probabilistic modeling

• Critical success factors:

• Distribution – Branch, channels

• Branding

• Unit costs – cost per account, cost per transaction

• Pricing

• Risk management

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Retail Banking: What’s been good for Indian banks hasn’t been good enough for the country

• Scorching pace of growth since liberalization: CAGR of around 30% to touch a figure of INR 9700 Billion. Bankable households are growing at a CAGR of 28% (2007-11)

• What’s powering this growth?

• Economic prosperity and growth rate

• Young population (70%<35 years)

• Technology channels: ATM, POS, Web, Mobile• Retail loans constitute 7% of our economy versus 35% in

other Asian countries

• Retail assets are at only 25% of total banking assets

• 41% of India’s adult population is un-banked

• Number of loan accounts: 14% of adult population

• 73% of farm households have no access to institutional credit

• Share of money lenders in rural debt has moved from 17% in 1991 to 30% in 2002

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This imbalance is caused by banks chasing the low hanging fruit that constitutes the urban savvy consumer

• Purely from a profitability perspective, a large portion of the Indian population is perceived to be “unbankable”

• The costs of servicing the remote rural sector using traditional business models (KYC; branch centric model; incremental cost of infrastructure) makes profitable banking unviable

• Therefore, all banks tend to target the upwardly mobile urban salaried class

• Banks are even creating “financial exclusion” barriers by increasing minimum balance requirements and average deposit sizes

• Technology has lowered the cost of servicing this target segment

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Fortunately, the scenario is changing

• Financial Inclusion (FI) is an RBI mandate, government mandate and a social mandate

• There IS a fortune at the base of the pyramid

• Social security payments and NREGA payments are being routed through banks

• MFI’s have shown that it’s possible to run extremely profitable businesses. Most major banks are working on a business-driven FI strategy

• Simplified KYC norms and UID is expected to drive down the cost of customer acquisition

• Innovation in mobile / hand held devices using an uniquely Indian model offers the best potential breakout strategy

Source: Verizone

The banks that will succeed will be those that can deploy business services through the entire eco systems through seamless supply chains

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“Today, if you look at financial systems around the globe, more than half the population of the world - out of six billion people, more than three billion - do not qualify to take out a loan from a bank. This is a shame…. The poor themselves can create a poverty-free world.. all we have to do is to free them from the chains that we have put around them”

- Muhammad Yunus

The Wrap

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Thank you