These days it?s hard to visualise in what state the financial world will be even two years down the line. If we?ve learnt something from the financial crisis, it is that risk lies at every street corner and that scenario building can be tricky. To that extent, it?s not even easy to gauge what the banking landscape in India will look like 10 years ahead. Nevertheless, The Boston Consulting Group (BCG), together with Ficci and IBA, has attempted some crystal gazing and has come up with 10 broad trends that one could watch out for over the next decade. The retail banking business should be brisk, the report says, with mortgages expected to cross Rs 40 trillion by 2020 on the back of the country?s demography. The number may seem large, given that the total loan book of the banking industry today is approximately Rs 30 trillion, but with the economy expected to grow at 8% consistently over the decade, and considering the fact that there will be more young earners as we go along, it doesn?t really seem impossible.
Within the corporate space, banks, says BCG, will tap the SME universe and configure new models to make money from this category of borrowers. This seems probable, because the bigger companies will increasingly have access to alternative sources of funding, making it less profitable for banks to cater to them. To sustain their margins, therefore, banks will need to work with smaller businesses also, given that they can?t overexpose themselves to individual borrowers. That mobile banking will come of age with widespread access to Internet on mobile and play a key role in banking transactions is also not hard to believe; even otherwise, banks will need to consistently upgrade technology to become more efficient and to keep costs down.
This apart, BCG believes that half the nation?s infrastructure assets, which could end up in excess of Rs 45 trillion in another 10 years or so, will be on the books of banks. If this Rs 20 trillion or so doesn?t form a very huge chunk of banks? loan portfolios and is restricted to, say, less than 15% of total assets, then it shouldn?t pose much of a risk. Of course, there?s the problem of an asset-liability mismatch, which currently some banks are vulnerable to, unless banks in the future are able to access long-term money. One solution lies in a deeper debt market and also in banks lending to infrastructure companies in the form of bonds, which are tradable. Currently, banks are the biggest lenders to infrastructure projects; in the five years to 2008-09, lending to this space grew at nearly 50% annually, and about half the infrastructure loans in the system today belong to banks.
The BCG report also talks of the HR challenge in the public sector, which could cripple its ability ?to innovate and stay competitive?. As is known, high natural attrition from 2012 onwards will leave PSU banks short of experienced hands, with 80% of the middle-management retiring in the next 10 years. Also, contrary to perception, the average cost per employee in a PSU bank today is higher at Rs 5.6 lakh per annum compared with the private sector average of Rs 5.3 lakh. Nevertheless, the government will need to be more flexible when it comes to both recruitment and compensation at these banks; at some point, options such as variable pay and lateral hiring will need to be considered.
On Tuesday, the RBI governor Duvvuri Subbarao suggested that compensation to PSU banks be reviewed. The suggestion couldn?t have come at a better time. After all, if the public sector banks lose out to the competition, it?s the government that will lose out in terms of dividend income. Also, it will be hard for the government to keep pumping in capital, and banks will need to make sure they get enough of premium for their stock as and when they tap the stock market, and for that to happen, they need to be profitable. Again, unless the PSU banks have enough surpluses, there?s no way they can work on the goals of financial inclusion. So, it?s essential that there?s enough management bandwidth at the PSU banks. If it means the teams need to be well-compensated, then the government needs to make sure that this happens, no matter what the bureaucracy feels. For their part, PSUs will need to connect with youngsters because that?ll be the catchment area in the future. Without meaning any disrespect, some fresh blood wouldn?t hurt.
The BCG report doesn?t talk of consolidation in the banking space, but while that may not be a predominant trend, there?s likely to be a fair amount of M&A activity going ahead. As competition intensifies, what with new players expected to come in, scale and size will be important. The report, in fact, talks of how margins will be under pressure and it?s the smaller banks that are likely to feel the pinch first.
shobhana.subramanian@expressindia.com