The operating expenses (opex) of banks have risen sharply in recent years as they have spent big on new hires and technology.
“When you embark on the digitisation journey you incur initial costs on on-boarding a digital team, product teams, support team and technology costs,” says Bhavik Hathi, managing director, Alvarez & Marsal.
“While on this journey, you do not phase out your traditional processes, products and employees which results in some overlapping cost for banks,” he added.
In 2022-23(April-March), operating expenses of private banks rose nearly 26% year-on-year(y-o-y), and staff cost rose nearly 21% y-o-y. On the other hand, total income rose nearly 21% y-o-y, data compiled by FE showed.
Similarly, the operating expenses and staff cost of state-owned banks rose nearly 16% y-o-y in 2022-23. Total income rose nearly 17% y-o-y.
The higher spends by private banks can be attributed to the 30-50% attrition rate to these banks, especially among front-end staff.
Specifically, employee cost has risen by around 31-39% q-o-q in the June quarter for top private sector banks. For public sector banks, it has risen by around 23-38%.
“Banks are tackling a huge issue of attrition and are attracting newer talent at a higher cost,” Harshvardhan Bisht, banking and capital markets leader, EY India said, adding, that the cost of acquisition of talent, training new talent and in some cases a handholding period may lead to an overlap of costs.
Most private sector banks are also acquiring technology skills at a significantly higher cost by hiring skilled resources and experienced people in order to compete with financial technology companies.
Further, banks are budgeting significant growth in branch banking, micro, small and medium-sized enterprises (MSME), and rural businesses which are all employee intensive businesses and have budgeted significant employee hiring into their costs.
Private sector banks have added up to 40% additional employees in the second half of 2022-23, and the impact of this additional manpower costs incurred will be reflected in 2023-24.
While employee costs have contributed to the rise in overall expense and spends on branches is also a significant.
Since the onset of COVID-19, the Reserve Bank of India (RBI) pushed lenders to digitise their customer facing and back end processes, and has contributed to the rise in expenses, say experts.
There are other factors also for rise in opex like in case of Axis Bank which acquired Citibank’s consumer business in India, and Housing Development Finance Corporation merger with HDFC Bank. This has led to integration costs for both these banks.
Broadly, banks will likely see a rise in their cost-to-income ratios in the near term as incur spends on capital expenditure and branch expansion. However, these spends are likely to be compensated by rise in current account savings account ratio (CASA) will go up, and this will reduce the cost of funds, say experts.
“Over the medium term, opex should stabilise and taper down as a result of increased productivity and efficiency in the system,” Peeyush Dalmia, senior partner, McKinsey & Company said.