With substantial growth in the service sector & the advent of digital innovations, Retail Banking in India has undergone substantial change over the last decade and a half. Evolving customer expectations, rapid changes in technology, increasing competition and even regulatory changes have revolutionized the time-tested business models.
To give some perspective about where we stand and the potential of Retail Banking India, let us delve into some data. The Credit to GDP ratio stands at around 54% in India as against that of 216% in the USA, 182% in China, 125% in Canada and 146% in the UK. One can imagine the immense potential India has in retail lending, backed by rapid growth in the economy. Within overall loans, the percentage of outstanding retail loans stands at 15% of GDP as of December 2022 against 7% in March 2005. However, there has been a significant shift in the composition of bank loans, with retail loans now accounting for a higher proportion than wholesale lending. This has been led by double-digit growth in retail loans in the recent years. The Reserve Bank of India data up to January 2023 shows that while non-food credit has grown by around 16%, retail loan has grown by over 20%, in FY 2023. Retail lending inherently exhibits diversification of risk across the product segments and the borrower profile segment. Therefore, the proportion of retail loans is expected to surge in the years to come, given the demographic dividend India enjoys.
Apart from the diversification of risk for banks, three factors are expected to drive the retail banking in India in the next decade. First, “Digital / technological adoption by the banks”. Advances in artificial Intelligence (AI) and Machine Learning (ML) are increasingly shaping the future that we perhaps could not have imagined. AI/ML is increasingly being used in retail banking to improve operational efficiency, risk mitigation and customer delight. Today, Chatbots can perform basic and repetitive activities such as account enquiries, statement of account, cheque book request, Re-KYC and so on, in an efficient and cost effective manner. So, the banks can utilize staff productivity for more complex tasks. As humans take up new challenges in customer interaction, machines engage and produce valuable data resources. One can expect a dramatic change in customer service over the next few years.
With the usage of AI/ML, customer data can be analyzed to understand their needs and preferences, thereby rendering personalized offers and recommendations to the customers. With every transaction, banks can learn more about the customer and gradually automate the loan underwriting process. Banks need to make more data-oriented decisions about lending and reduce the time it takes to approve retail loans. Overall, the usage of AI/ ML in retail banking can improve efficiency, accuracy, compliance and customer satisfaction while reducing costs.
Dy. Managing Director,
IDBI Bank Ltd
The second factor that will drive retail banking is “collaboration with Fintech Companies”. The emergence of the need for digitization during Covid has showcased the importance and contribution by Fintech players in the financial ecosystem in India. These symbiotic partnerships are expected to be the game changer, as they will encompass utilization of each other’s strengths. The Fintech players could be from the technology, telecoms, media and entertainment sectors, capable of creating an improved user experience and hyper-personalized offerings to aggressively control more of the customer relationship. Besides onboarding the target clientele & providing efficient services, some of the Fintech companies have already started getting into lending space, wherein banks are either short of geographical reach or focus on a particular target clientele. With all possible enablers from the Government starting from Aadhar Stack, UPI payment system, GST, Account Aggregator and the recent initiative- Open Network Digital Commerce (ONDC), one can imagine the potential banks can harness in Retail banking through collaborative models.
The third factor that will drive retail banking is off-shoot technology, i.e. “Customized products to suit the customer needs”. Though this is not new, it will gain importance in the arena of digitization. One cannot write off the need for personal engagement with the customer. Especially when banks are adopting more and more digitization, customers need assurance about taking care of their complex needs and ultimately the safety of depositors’ money. How efficiently the banks AI/ML can customize the products to suit the needs of the customers, identify suspicious transactions, detect and prevent fraud- will determine the efficiency & effectiveness of the technological revolutions in banking.
The writing on the wall is clear: Technological Innovations, Collaborative models and customized product offerings to millennial customers will drive retail banking.
