The Indian banking sector has been one of the key drivers of the country’s economic growth and development. With a large and diverse customer base, a robust regulatory framework, and a strong presence in both domestic and international markets, Indian banks have shown resilience and innovation in the face of various challenges and opportunities. However, as the banking landscape evolves rapidly due to changing customer expectations, technological disruptions, regulatory reforms, and competitive pressures, Indian banks need to adopt new strategies and business models to unlock growth and create value for their stakeholders. Here are some of the ways in which Indian banks can grow in future:
Cautious optimism will prevail:
The current outlook for the Indian banking sector may seem idyllic, with well-capitalized balance sheets, low delinquency levels, and an optimistic corporate lending outlook. However, banks need to be prepared for potential headwinds such as rising inflation and interest rates, slowing GDP growth, and increasing competition from non-bank players. Banks will need to closely monitor leading indicators to keep fresh slippages in check and continue to seek risk-calibrated new growth opportunities. They will also need to balance their portfolio mix between retail and corporate segments, and between secured and unsecured loans, to optimize their risk-return profile.
New business models will gain ground:
The ongoing disruption in various industries such as automobiles, retail, healthcare, and pharma, along with India Stack innovations and improved data access, will create new opportunities for banks to offer differentiated products and services to their customers. For example, digital commerce has spurred digital payments and buy-now-pay-later (BNPL) lending models, which offer convenience and affordability to customers. The emergence of open banking frameworks such as Account Aggregator and Open Credit Enablement Network will enable banks to expand their ecosystems, launch new offerings, and promote financial inclusion among credit-under-served segments such as MSMEs. The creation of digital public infrastructure for agriculture, as articulated in the Union Budget 2023-24, will improve access to agri-credit and drive new banking models aided by better credit discovery and risk management.
Digital architecture will be revamped:
The pandemic has accelerated the adoption of digital banking by customers across segments and geographies. Banks need to ensure that they offer secure, uninterrupted, and resilient digital services that meet the evolving needs and preferences of their customers. They also need to leverage data analytics, artificial intelligence (AI), machine learning (ML), cloud computing, blockchain, etc., to enhance their operational efficiency, customer experience, product innovation, fraud prevention, and compliance. Banks will need to invest in upgrading their legacy systems and processes, adopting agile methodologies, fostering a culture of innovation, and partnering with fintechs and other players to build a future-ready digital architecture.
Customer-centricity will be paramount:
As customers become more aware, demanding, and empowered by digital technologies, They expect personalized, seamless, and omnichannel banking experiences from their service providers. Banks need to adopt a customer-centric approach that focuses on understanding their needs, preferences, behaviors, and feedback across various touchpoints. They also need to segment their customers based on their value proposition, profitability potential, and loyalty drivers. Banks will need to design products and services that cater to the specific needs of different customer segments, and offer them through the most convenient and preferred channels. They will also need to enhance their customer engagement and retention strategies by offering value-added services such as financial advisory, wealth management, loyalty programs, etc.
ESG adoption will increase:
Environmental, Social, and Governance (ESG) factors have become increasingly important for banks, as they impact their reputation, performance, and sustainability. Banks need to incorporate ESG approaches into their operations, strategies, and culture to mitigate risks and leverage opportunities. They need to align their lending and investment policies with ESG principles, and support green and social initiatives such as renewable energy, affordable housing, financial inclusion, etc. They also need to disclose their ESG performance and impact to their stakeholders and adhere to the relevant standards and regulations. Banks that adopt ESG practices will gain a competitive edge over their peers, and attract more customers, investors, and talent .
Cost optimization will be essential:
As banks face margin pressures due to low interest rates, high competition, and rising operating costs, they need to optimize their cost structure and improve their efficiency ratios. Banks need to rationalize their branch network and ATM footprint, and leverage digital channels and alternative delivery models such as business correspondents, banking outlets, etc., to reduce their physical infrastructure costs. They also need to automate and digitize their processes and workflows, and outsource non-core functions such as IT, HR, etc., to reduce their operational costs. Banks will need to adopt zero-based budgeting and activity-based costing techniques to identify and eliminate wasteful expenditures, and allocate resources based on strategic priorities.
Talent management will be critical:
As banks undergo digital transformation and business model innovation, they need to ensure that they have the right talent and skills to execute their vision and strategy. Banks need to attract and retain talent that is agile, adaptable, collaborative, and customer-oriented. They also need to reskill and upskill their existing workforce to equip them with the relevant competencies such as data analytics, AI/MML cybersecurity, etc. Banks will need to foster a culture of learning, innovation, and diversity among their employees, and provide them with adequate training, mentoring, and career development opportunities.
In a nutshell
Indian banks have a huge potential to grow in future, given the favorable macroeconomic conditions, large and untapped customer segments, and supportive regulatory environment. However, they also face significant challenges and uncertainties that require them to rethink and reinvent their strategies and business models. By adopting the above-mentioned ways, Indian banks can enhance their competitiveness, profitability, and sustainability, and create value for their customers, shareholders, and society at large.
Read more: The Global Banking Crisis of 2023 and Its Impact on India