Indian Banking in next 5 years:
Supporting credit for a $ 5Tn
Economy while navigating a
complex disruption
Saurabh Tripathi, MD and Senior Partner
FIBAC 2019
Rising importance of non banks in bank ecosystem
3
Key
Demands on banks for sustainable growth in
credit and implied transformation of landscape
Copyright © 2019 by Boston Consulting Group. All rights reserved.
messages
Implications for policy and regulations
1
NBFC already have dominant reach in retail and small
business credit and are core to market development
Total no. of new loans (FY19) Total no. of loans to NTC1 (FY19)
32%
NBFCs 49% 42%
NBFCs 57% 60% 55%
19%
19%
Copyright © 2019 by Boston Consulting Group. All rights reserved.
Private 30% 19%
42% Private 31% 20%
31%
PSU 14% 18%
14%
PSU 7% 5%
8% 8% 7% 6% 8%
Tier 1&2 Tier 3&4 Tier 5&6 Tier 1&2 Tier 3&4 Tier 5&6
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 Banks
Source: TransUnion CIBIL; BCG Analysis 2
India poster child for disruption
Number of transactions (billions)
19 32 273
UPI 0%
12% 17%
Mobile & internet
18% 13%
POS 59%
11%
NACH 2% 20%
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NEFT 10%
1%
43%
ATM 20%
31%
Cheque
6% 14%
Cash 9% 4% 2%
5% 4%
FY17 FY19 FY22-25
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 only 3
Source: RBI data, BCG Analysis
India poster child for disruption
Number of transactions (billions) Share of UPI Transactions
19 32
UPI 0%
12%
17%
Mobile & internet
18% 36%
13%
POS
11%
NACH 2% 20%
Copyright © 2019 by Boston Consulting Group. All rights reserved.
29%
NEFT 10%
1%
43%
ATM
31% 25%
Cheque
6%
Cash 9% 4% 10% All banks, other PSPs
5%
FY17 FY19 FY19
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 only
Source: RBI data, BCG Analysis 4
China has already witnessed this rapid transformation
Offline consumption (Tn, RMB)
40 Bank card
44%
& Cash
30
Non banks
share
20
Copyright © 2019 by Boston Consulting Group. All rights reserved.
FY18
Mobile
56% Payment 90%
10
0
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Source: National Bureau of Statistics; iResearch; BCG Analysis 5
Consent base data sharing – major ecosystem of non
banks to emerge around banks
Personal Finance Ecosystem
Banks Payments NBFC and Wealth mgmt. platform
• Physical
Customer • Digital
interface • Call center
Payments Transaction Data Transaction Data
Products and
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services
• Branches
• ATMs
• Core Banking
Infrastructure
Platform
Banks Payment Bureau Data Authentication
Infrastructure & KYC 6
Source: “Will Industry Stacks Be the New Blueprint for Banking?” BCG Perspectives
Retail Loans: Capabilities of Industry evident; Quality
strengthened as growth slowed
Advances growth slowed … … but quality of book improved Industry tightened standards
Yoy (%) Bureau score of new loans
GNPA (%) FY18 FY19 Inc/Dec
25%
14% 13%
3% 2%
NBFCs 2.3% 2.5%
16% 41% 39%
Private
2.7% 2.5%
Banks
Copyright © 2019 by Boston Consulting Group. All rights reserved.
PSU Banks 4.0% 3.0%
42% 46%
Industry 3.2% 2.8%
FY18 FY19 FY18 FY19
Credit scores
-1 Below 650 650-750 750+
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 Loans
Source: TransUnion CIBIL; BCG analysis 7
Inability to manage quality hinders supply of credit in
SME
Industry could not tighten Visible build up of stress- Significant variation in growth dip-
standards NPA (%) Advances growth-YoY (%)
Bureau score of new loans FY18 FY19 Inc/Dec FY18 FY19
17% 15% NBFCs 5.1% 7.3%
31% 23%
7% 7%
Private New 2.5% 2.2% NBFCs
44% 44%
Private Old 5.4% 7.9%
Copyright © 2019 by Boston Consulting Group. All rights reserved.
42%
PSU Large 19.6% 19.1% 27%
33% 33%
Private Banks
PSU Medium 20.4% 24.5%
FY18 FY19
Industry 11.3% 11.3% 17%
Credit scores
-1%
-1 Below 650 650-750 750+ PSU Banks
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 crores
Source: TransUnion CIBIL; BCG analysis 8
Major investment needed to upgrade SME credit process
in the industry towards best use of data and digitization
Level of MSME lending digital maturity in surveyed
Banks/NBFC
Copyright © 2019 by Boston Consulting Group. All rights reserved.
Player (#) #1 #2 #3 #4 #5 #1 #2 #3 #1 #2 #3 #4 #1 #2 #3 #4 #5
Public sector banks Private old banks NBFCs New Private Sector banks
High Medium Low
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 MSME
lending digitization 9
Next gen tech will give humungous edge to adopters
Jobs that will not be needed due Efficiency increase in
to AI applications (%) remaining jobs(%)
Banking
22% 42%
Insurance 25% 29%
Copyright © 2019 by Boston Consulting Group. All rights reserved.
Capital
markets 16% 56%
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
10
Association
Gaps in performance are widening
ROA (%) Revenue/employees
Rs. Lacs
2 45 43
PSU-Large
0.6 40 40
39
-0.1 0.0
0 -0.6 34 35
0.3 PSU Large 35 33 33
32 PSU-Medium
-0.4 -0.4 -0.2 30 30
PSU Medium
-1.5
-1.8
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Rs. Lacs
1.8
2 1.6 60 55
50 52
1.4 Private-New
1.1 46
42
1 1.1 Private New 37
40 35
0.4 33 Private-Old
0.8 0.3 28
0.7 0.4 Private Old 27
FY2015 FY2016 FY2017 FY2018 FY2019 FY2015 FY2016 FY2017 FY2018 FY2019
Source: RBI data; Annual reports; Investor Presentations; BCG analysis 11
Encourage banks to adopt differentiated models
1 2 3
Digitised full Specialised Banking as a
service bank vertical play service/open bank
Customer interface
Products and
services
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Infrastructure
Key success factors Scale and capability Focused set of products Account keeping at
across value chain end-to-end lowest possible cost/
product excellence
In-house Partner
Source: BCG analysis 12
Review bank licensing policy to attract new capital
China Taiwan
3 new internet banks licenses 2 new digital bank
license proposed
Hong Kong Australia
8 new virtual bank license Authorized deposit license
for challenger/new bank
Copyright © 2019 by Boston Consulting Group. All rights reserved.
to JV/Tech Companies
Korea Singapore
2 new virtual bank licenses • 2 new digital full bank
• 3 new digital bank wholesale
13
Implications for policy and regulations
Expedite consolidation
Encourage digital transformation
Profitability of banking and non banking sector to attract fresh capital
Copyright © 2019 by Boston Consulting Group. All rights reserved.
Encourage differentiated business models
Support growth of vibrant (and stable) non banks ecosystem
14
Strengthen NBFC business model
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
Copyright © 2019 by Boston Consulting Group. All rights reserved.
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
15
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