The future of banking in India

A NEW REPORT by the Boston Consultancy Group, Hidden Treasure, claims that while major capital infusion by the government of India is likely to provide the public sector banks with the necessary “breathing space” that they so critically need, it may still not be enough to restore banks to proper health; instead, banks need to fundamentally reorient their business and adopt new strategies.

It is true that, as Chart 1 shows, banks dominate the revenue pool. This dominance is more pronounced in the traditional segments and reduces as one looks at the nonconventional segments such as the distribution of insurance & mutual fund products or corporate advisory (for access debt & equity markets).

As Chart 2 underlines, the revenue pool in the financial services sector is expected to see material shifts over the next few years. For instance, advances to the retail and MSME sectors will likely grow at the cost of advances to corporates. Similarly, the share of fee income is expected to continue expanding.

Chart 3 presents a more detailed picture of how revenue from advances is likely to pan out. Between FY17 and FY22, retail advances are expected to grow at a compound annual growth rate of 16 per cent while the MSME segment is expected to grow at 15 per cent. The flip side is evident in the muted performance of corporate advances in immediate future as delinquency levels peak over the next two financial years.

Chart 4 maps the revenue from deposits. The reports claims that the drive towards a cashless economy and a greater push towards digital transactions are expected to enable faster savings deposit growth over the next 5 years. Term deposits, on the other hand, are likely to observe a slowdown as consumers shift to alternative modes of investments such as mutual funds.