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FIBAC 2019
Saurabh Tripathi, MD and Senior Partner
Indian Banking in next 5 years: Supporting credit for a $ 5Tn Economy while navigating a complex disruption
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To attract capital to support credit for a USD 5 Tn
economy, policy needs to proactively reinforce
non bank ecosystem, encourage faster bank
consolidation, and push rapid digitization of
legacy banks and introduction of new banks
India poised to be world's poster child for
disruption in banking in coming years – non bank
ecosystem to become very prominent
Key
messages
3High demand on banks to invest in capabilities
across the board – weaker banks set to be
rapidly marginalized creating disruption in flow
of credit, especially to commercial sector
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NBFC already have dominant reach in retail and small business credit and are core to market development
14%
31%42%
30%
19%
19%
42%32%
49%
8%
Tier 3&4Tier 1&2
8% 7%
Tier 5&6
NBFCs
Private
PSU
Note: 1. Data for number of new loans sanctioned in FY19 2. NTC means New to Credit 3. NBFCs includes HFCs 4. Products included are Auto Loans, Personal Loans, Housing Loans, Consumer Loans, Business loans, Loan Against Property, Gold Loan, Credit cards, Agri-Priority, Commercial Vehicle and Construction Equipment Loans 5. Others include Co-operative Banks, MNCs and Regional Rural BanksSource: TransUnion CIBIL; BCG Analysis
Total no. of new loans (FY19)
14%18%
31% 20%19%
60% 55%
Tier 3&4
8%
57%
7%5%
Tier 1&2
6%
Tier 5&6
NBFCs
PSU
Private
Total no. of loans to NTC1 (FY19)
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Indian banking poised for significant disruption
1. Internet transactions include RTGS, ECS, NEFT and IMPS financial transactions 2. ATM/CDM includes withdrawals transactions at ATM and deposit transactions at CDMs. ATM and Mobile transactions included are financial transactions onlySource: RBI data, BCG Analysis
Number of transactions (billions)
14%
20%
59%
273
2%4%
FY22-25
31%
20%
12% 17%
9%
0%
FY17
18%
11%
6%
2%
43%
13%
10%1%
19
4%5%
FY19
32
UPI
Mobile & internet
POS
NACH
NEFT
ATM
Cheque
Cash
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Indian banking poised for significant disruption
1. Internet transactions include RTGS, ECS, NEFT and IMPS financial transactions 2. ATM/CDM includes withdrawals transactions at ATM and deposit transactions at CDMs. ATM and Mobile transactions included are financial transactions onlySource: RBI data, BCG Analysis
Number of transactions (billions)
UPI
Mobile & internet
POS
NACH
NEFT
ATM
Cheque
Cash
31%
20%
17%
18%
9%
12%0%
11%2%
43%
6%
FY17
13%
10%1%
4%
32
5%
FY19
19
29%
36%
25%
10%
FY19
Share of UPI Transactions
All banks, other PSPs
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10
0
40
20
30
2010
Offline consumption (Tn, RMB)
20132009 2011 2012 2014 2015 2016 2017 2018
China has already witnessed such rapid transformation
Source: National Bureau of Statistics; iResearch; BCG Analysis
44% Bank card
& Cash
56%Mobile
Payment
Non banks
share
FY18
90%
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What does the future hold?
Transaction costs will dramatically reduce, as digital
infrastructure becomes even more robust
Customer experience will rule, as cashbacks/offers
phase out—fintech and bigtech will have edge vs banks
Current merchant model will be disrupted—smartphones
on both sides (using QR code) will replace cards
Market will consolidate around a few winners—ability to
monetize customer base will be key
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Industry will move further towards horizontal stacks
Source: “Will Industry Stacks Be the New Blueprint for Banking?” BCG Perspectives
Integrated Players
Customer
Interface
Products and
services
Infrastructure
Horizontal Stacks
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Customer
interface
Products and
services
Infrastructure
Source: “Will Industry Stacks Be the New Blueprint for Banking?” BCG Perspectives
Consent base data sharing – major ecosystem of non banks to emerge around banks
Authentication
& KYC
DataBureauPayment
Infrastructure
Banks
Banks
• Physical
• Digital
• Call center
• Branches
• ATMs
• Core Banking
Platform
Payments
Payments
NBFC
Transaction Data
Personal Finance
and Wealth mgmt.
Transaction Data
Ecosystem
platform
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Retail Loans: Capabilities of Industry evident; Quality strengthened as growth slowed
Note: 1. NBFCs includes HFCs 2. Industry includes NBFCs, HFCs, Private banks, Public sector banks, Co-operative Banks, MNCs and Regional Rural Banks 3. Retail Consumer loans include Auto Loans, Credit card, Gold Loan, Personal Loans, Housing Loans and Consumer Durable LoansSource: TransUnion CIBIL; BCG analysis
Advances growth slowed … Industry tightened standards
Inc/Dec25%
FY19FY18
Yoy (%)
16%
42% 46%
41% 39%
14% 13%
3% 2%
FY18 FY19
-1 650-750Below 650 750+
Credit scores
GNPA (%) FY18 FY19
NBFCs 2.3% 2.5%
Private
Banks2.7% 2.5%
PSU Banks 4.0% 3.0%
Industry 3.2% 2.8%
… but quality of book improved
Bureau score of new loans
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Inability to manage quality hinders supply of credit in SME
Note: 1. NBFCs includes HFCs 2. Industry includes NBFCs, HFCs, Private banks, Public sector banks, Co-operative Banks, MNCs and Regional Rural Banks 3. Products included are Retail Business loans, Retail- Loan Against Property, Retail - Commercial Vehicle & Construction Equipment Loans and SME business includes loans < INR 50 croresSource: TransUnion CIBIL; BCG analysis
Industry could not tighten
standards
Significant variation in growth dip-
Advances growth-YoY (%)
FY18 FY19
31% 23%
27%42%
17%
-1%
33% 33%
44% 44%
17% 15%
7%
FY18
7%
FY19
-1 Below 650 650-750 750+
Credit scores
Bureau score of new loans
NBFCs
Private Banks
PSU Banks
Visible build up of stress-
NPA (%)
NBFCs
Private New
Private Old
PSU Large
PSU Medium
Industry
FY18 FY19
5.1% 7.3%
2.5% 2.2%
5.4% 7.9%
19.6% 19.1%
20.4% 24.5%
11.3% 11.3%
Inc/Dec
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Major investment needed to upgrade SME credit process in the industry towards best use of data and digitization
#1 #5#2 #4#3
Level of MSME lending digital maturity in surveyed
Banks/NBFC
1. Remaining 42% of NTC borrowers are serviced by other lending organizations like RRBs (13%), cooperatives (8%), foreign banks (5%) and others (16%) 2. % of MSME lending book as on Dec 2018 3. 7% of MSME loan book resides with all other lenders (including fintechs)Source: BCG-Omidyar network Report: “Credit disrupted: Digital MSME Lending in India”, Transunion CIBIL MSME Pulse Apr 2019, Survey conducted on 21 FIs to assess MSMElending digitization
Player (#) #1 #2 #3 #4#1 #2 #3 #5#3#2#1 #4
Public sector banks Private old banks NBFCs New Private Sector banks
High Medium Low
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We conducted an exhaustive study of the MSME lending process value chain in a sample of FI
MSME lending journey for each FI assessed across—
Extent of digitization across the journey(e.g., manual steps vs automated steps)
Extent of credit bureau data usage across the value
chain (e.g., sourcing, underwriting, monitoring)
Extent of use of analytics/analytical models(e.g., Early warning signals)
Extent of use of alternate data in underwriting(e.g., surrogate data such as legal data, social media data)
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Next gen tech will give humungous edge to adoptersJobs that will not be needed due
to AI applications (%)Efficiency increase in
remaining jobs(%)
Insurance
Capital
markets
Sources: BCG Model for the Impact of AI on the Employment Market in the Financial Sector by 2027; WIND; National Bureau of Statistics; China Banking Regulatory Commission; Insurance Association of China; China Securities Industry Association
Banking 22% 42%
25% 29%
16% 56%
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Digital leaders enjoy stronger financials—Example: SA growth driven by debit at POS transactions
Note: 1. Data of 6 PSU—Large banks, 13 PSU—Medium banks, 4 Private—New banks and 8 Private—Old banks included for the purpose of this analysisSource: RBI data; Capitaline data; BCG analysis
500 3010 20 40 1000
5
10
15
20
Accounts that use debit cards at POS (%)
SA Deposit growth (%)
PSU Private
R2 =0. 51
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Market shares are shifting faster - Banks with better digital capabilities at advantage
10%18% 16%
19%
25% 25%
22%
55%47%55%
2%0%2%
FY05-09
2%2%
FY09-14 FY14-19
PSU-Large
PSU-Medium
Private New-Large
Private New-Small
Private Old
Note: For the purpose of analysis we have considered 6 PSU—Large, 16 PSU—Medium, 3 Private New—Large, 5 Private New-Small and 6 Private old banksSource: IBA data
Market share for additional Savings Account Deposit (%)
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Indian Banks need significant investment to up their game on digital capabilities—Example digital sales
Source: BCG India Digital Capability Diagnostic; BCG Global Diagnostic
5048
3025
23 2320 19
1714 13 13 12 10
8 7 6 6 6 4 3
Bank 4Global
Best
Banks
Bank 7 Bank 18Bank 5 Bank 9Bank 1 Bank 2 Bank 6 Bank 15Bank 12Bank 3 Bank 8 Bank 10 Bank 11 Bank 20Bank 13 Bank 19Bank 14 Bank 16 Bank 17 Bank 21
70-75
Mobile Banking—Digital Sales Capability Score
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Gaps in performance are widening
-1.5-1.8
0
2
-0.4
0.6
-0.1
0.3
-0.4
0.0
-0.6
-0.2PSU Large
PSU Medium
1
2
0.7
1.61.8
0.8
FY2016
0.4
FY2015
1.4
0.3
FY2017
1.1
FY2018
1.1
0.4
FY2019
Private New
Private Old
ROA (%)
Source: RBI data; Annual reports; Investor Presentations; BCG analysis
40
40
60
46
Rs. Lacs
42
27
FY2018FY2015
Private-Old28
FY2016
50
3733
FY2017
52
35
55
FY2019
Private-New
Revenue/employees
35
45 43
40
PSU-Medium
Rs. Lacs
33
30
34
30
39
3233
35
PSU-Large
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Further marginalization of weaker institutions imminent
Compete with
BigTech/FinTech
1
Erosion of
Franchise
Weaker Institutions
Scale
Disadvantage
Low investment in
technology and poor talent
2
33
4
5
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Encourage banks to adopt differentiated models
Source: BCG analysisIn-house Partner
Customer interface
Products and
services
Infrastructure
Key success factors
Digitised full
service bank
1
Scale and capability
across value chain
Specialised
vertical play
2
Focused set of products
end-to-end
Banking as a
service/open bank
3
Account keeping at
lowest possible cost/
product excellence
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Review bank licensing policy to attract new capital
China
3 new internet banks licenses
2 new virtual bank licenses
Korea
Australia
Authorized deposit license
for challenger/new bank
Hong Kong
8 new virtual bank license
to JV/Tech Companies
Taiwan
2 new digital bank
license proposed
Singapore
• 2 new digital full bank
• 3 new digital bank wholesale
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Implications for policy and regulations
Expedite consolidation
Encourage digital transformation
Profitability of banking and non banking sector to attract fresh capital
Encourage differentiated business models
Support growth of vibrant (and stable) non banks ecosystem
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Strengthen non bank ecosystem – especially the NBFC
Higher transparency in market disclosures — portfolio quality, funding
sources
Differentiate prudential liquidity norms in line with maturity profile of assets
Facilitate flow of long term credit from insurance and pension funds with
introduction of innovation in debt market instruments like covered bonds
Create a refinance and liquidity support institution for NBFCs engaged in SME
finance
Bank lending to NBFC customized to NBFC requirements
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