On account of economic slowdown and policy-level issues, the growth of credit to the corporate sector has declined, whereas credit growth in the retail sector has gone up.
By Subhashish Roy
On account of economic slowdown and policy-level issues, the growth of credit to the corporate sector has declined, whereas credit growth in the retail sector has gone up. As per latest data, credit growth to industry was 4.4% in December 2018; in the same period, credit growth to retail was 17%. It seems the economic slowdown that has affected corporate credit may not hit retail credit. Indian households have borrowed more since the last few years to fund their property, vehicle and credit card purchases. Retail credit, which has shown significant growth in the recent past, is expected to show steady moderate growth.
As per CRISIL, the retail segment is expected to grow by 19% in FY20, led by strong consumer demand and higher penetration by banks. Sectors that will drive growth are housing and consumer durables.
A reason for higher growth in retail credit is that delinquency level in retail is low as compared to corporate. This is because in retail the ticket size is very small, and risk is distributed among a large number of borrowers in retail lending. While many banks have shifted their strategy towards retail lending, still a large number of people are out of reach of retail finance. Major challenges for banks are (1) retention of existing customers and (2) acquiring new customers in a cost-effective way. As per a study in the Harvard Business Review, a 5% increase in customer retention can increase profitability by 35% in banking business.
To address these challenges, technology has to play a greater role. Today, a large number of customers prefer digital modes of transaction rather than branch banking. The future of retail banking, therefore, lies in innovative financial technology. Here, new-generation private and foreign banks appear to have taken the lead. Other banks, too, need to move from branch banking to digital banking, and need to launch more digital applications rather than open new branches. This will not only reduce operational costs, but also help banks reach the target customers in a faster and convenient manner.
Going forward, the major demand for retail transactions, including loan products, cash management, wealth management, insurance services, etc, in both urban and metro areas, will mainly come from younger customers. A recent survey revealed that among all modes of banking channels, the new generation prefers smartphones the most. Thus, in order to succeed, banks need to develop more mobile-based applications for various retail banking operations. In addition, artificial intelligence and big data analytics will play a crucial role towards determining the success of retail banking in the future. To capitalise on this area, banks first need to develop a big data warehouse where they capture potential customers’ various transaction patterns. Then, based on this data, they have to select their target customer. After customer selection, banks need to develop software applications based on AI and robotics, which can be useful for performing complex tasks relating to transactions such as small value loans, appraisal, KYC-related issues, loan monitoring, etc. Considering that most traditional banks lack expertise in this area, they can collaborate with fintech firms, utilising the latter’s innovative ideas and technologies. Such a step can provide a competitive edge to banks to deliver their retail banking products and services through new digital platforms.
While digital banking has its benefits, there are also risks involved, such as cyberfraud and IT-related risks. Banks, thus, need to develop robust risk management tools and techniques. Further, overdependence on innovative technologies may lead to systemic risks across the financial sector, which may affect overall financial stability. To address this issue, we perhaps need a separate regulatory framework and strengthened governance, to ensure integrity of data, algorithms and the stability of the financial system.
The author is general manager, IDBI Bank. Views are personal