At a time when the pace of digital transactions has risen rapidly in India, lenders must focus on usage of both human touch and artificial intelligence (AI) to grow their businesses in a sustainable manner, experts say.
A report by BCG, IBA and FICCI released during the FIBAC 2023 event held here this week said that for a diverse nation like India, with pronounced digital divides, the relevance of physical branches in fostering customer trust remains crucial. It said banks must focus on transforming branches into advisory-led centres rather than product pushers and adopting a ‘phygital’ approach, among others.
Speaking to FE, Hardik Shah, MD and Partner at BCG, said while globally branch networks have started receding, India is a unique place where branch network is still critical and expanding and at the same time also seeing different distribution networks like business correspondent (BC) and embedded finance. As per the report, India’s bank branches increased from 60,000 in 1991 to over 150,000 in 2021, whereas BCs have increase from less than 10,000 to over 1.8 million during the same period.
“Our report says that primacy of human touch and physical network is really critical. In fact, digital incumbents across globe have not been able to garner deposits that legacy banks have been able to,” he said. Global digital only banks like Rakuten, NU Bank and We Bank, among others, have been able to garner less than half of overall deposits digitally as against their local peers who have large physical presence, the report said.
While in India human primacy is needed to provide customer trust, newer technology like Artificial Intelligence (AI) and Generative AI (Gen AI) can also play an important role in banks’ different services.
For example, Shah said the wealth management business in India is extremely costly, with most lenders having to assign a relationship manager for a client. Gen AI could be roped in this segment which could lower cost for lenders and they can also start serving bottom of pyramid segment. “You can open up almost a new segment of mass wealth advisory through the help of Gen AI,” Shah said.
A few lenders in India are already focusing on usage of AI in their operations. Speaking at FIBAC, Bank of Baroda MD, CEO Debadatta Chand said the bank today has multiple use cases of AI including optimisation of cash in branches and ATMs, cross-sale, rationalising branches, predicting customer default probability, behavioral pattern of deposits, among others.
The lender is also focusing on Gen AI and implementing its proof concept now. Overall, Chand said the lender would continue investment in AI and ensure it is compliant with the data protection bill. “If you say that data is the new oil, then banks are the store house of data. To leverage data, you need to have a tool like AI. As far as BoB is concerned, we have been an early starter in terms of implementing AI across different business line,” Chand said.
Private sector lender Axis Bank, too, is using Cloud and Gen AI to offer differentiated service to partners at scale and is focused on building in-house products to gain competitive advantage, its management told analysts earlier this week.
The lender has over 3,000 data points on more than 40 million customers to generate insights, give personalised offers and improve customer engagement and is also utilising alternate data to improve underwriting process, the management said.
While using AI and other advanced forms of technology for banking business is essential, lenders should also not become over-reliant on algorithms for underwriting loans, Reserve Bank of India Governor Shaktikanta Das said in his speech at FIBAC.
Shah agreed with Das, saying Indian lenders’ risk management framework needs to be more robust. “Our report says only 10% of Indian banks are leaders when it comes to better risk management practices. This needs to improve, wherein banks decide for which product and ticket size do we need to fully algorithmic lending or a mix of algorithm and human underwriter,” he said.
Simultaneously, lenders must also upskill their in-house talent to ensure healthy risk management practices. ENDS
For box:
1- India’s bank branches increased from 60,000 in 1991 to over 150,000 in 2021
2- AI, Gen AI could help lenders discover newer business models
3- Axis Bank, Bank of Baroda using AI for different use-cases
