Don your ex-banker’s hat. How do you think the shape of Indian banking is going to be five years from now?
Dinesh Kumar Khara: Well, that is a very interesting question, particularly in the context of the way the ecosystem is changing rapidly. There are two ways. One, of course, is to look at the kind of challenges being thrown up. The second is more important – how best the ecosystem can benefit the players in this ecosystem. In that context, I would like to mention that eventually what is going to matter is how fast and how relevant the banking system will be for the last mile in this economy.
What we are talking about is it is not merely the growth in terms of the absolute number in terms of GDP, but the per capita income improvement as well, and that becomes a very relevant context. Herein, the banks, if at all, have to really tap the liabilities and come out with the solutions which are being sought by the customers. So, customer centricity will hold the key for the banks irrespective of their size, big or small, and it is not merely in terms of product but it will also be in terms of the distribution channels which the customers would like to use.
Maybe it is physical, maybe it is digital, and that is going to be the defining area going forward. Of course, with the help of analytics, it is going to be a different game altogether because when it comes to the hyperpersonalization, that is possible now because banks have a huge amount of data relating to their customers. They can profile their customers and after profiling, can reach out to the customers which will increase customer centricity and customer experience will go up significantly.
Going forward, in the next five years, this is how the trajectory will be defined I think and apart from that, on the asset side also, we have seen of late that corporates are actually depending upon the liquidity which is there in their own balance sheet or on the alternate sources of capital be the equity capital or debt capital for financing their long-term investments.
But at the same time, banks have got a very relevant space when it comes to supporting the ecosystem of the corporates – be it employees or be it their supply chain. That is something which will hold the key for the banks to really scale up their asset size also. So, broadly I would say that this is how it is going to evolve and, of course, leveraging technology, cutting on the cost is going to be another focus area for the banks because of late, margins are getting squeezed. But when it comes to raising capital and cost of capital, it is very essential that you cut your operating costs somewhere. Therein perhaps one can sweat the AI and the new technologies so that they can cut on their cost also.
As far as the banking landscape is concerned, we actually define pre-COVID and post Covid and that is a very relevant context because during Covid, the adoption of the digital went up significantly and also the other very relevant aspect is that during covid people had lot of liquidity which was left out with them and that actually showed up in the subsequent years in terms of increasing spending and also the GDP the way it went up.
So, that was a defining moment and of course, at the same time, adoption of digital went up significantly and by virtue of that, when it comes to payment systems, etc, it really got evolved and also from the regulatory perspective also there was enough guidance on the payment system as well. So, that is the real defining moment and when it comes to the growth of retail, which we have seen in the economy, even that was seen soon after Covid.
So, I would say that soon after Covid, maybe a couple of years were simply an aberration. We should not really get bogged down by the fact that when it comes to credit growth, etc, there are challenges. The way I look at it is that we have to see that the banking system’s credit growth should be at least 2% more than that of the GDP growth in nominal terms. So, in nominal terms, GDP growth is around 9.8 or around 10%. That being said, now 12% credit growth is a decent growth, but a very important aspect is that in the ecosystem in the intervening period, there is a lot of responsible borrowing which has started happening. Thanks to the credit bureaus, this is something which has happened, thanks to the IBC which has come into play. People have understood that if at all they have to grow, they have to move up in their life, and cannot afford to cheat the banking system. They have to follow the discipline which is required there. This is a very important change which we have seen and this is something which is going to define how the banks will really move up and how the economy will also really conduct itself with the financial sector.
Now, when it comes to financialization of savings, part of it is attributed to the same because when the customers were looking at in terms of how can they improve the yield on their savings they started trying out with the various products from the financial sector, now they have come to the maturity level where thanks to the SIP movement which was introduced by AMFI, saying that Mutual Fund Sahi Hai concept got really deep into the system.
Today, mutual fund AUM stands at about Rs 72 trillion. When it comes to banking system deposits, it is around Rs 250 trillion. Going forward, in this particular space when it comes to investing, there is going to be a significant improvement because the AIF market is also evolving, which is leading to investment into the unlisted space. Now that is one area which has started growing because mutual funds had always had a limitation in terms of only identifying from the listed space.
The listed space has got the limitation by itself, about Rs 400 trillion would be the market capitalization of the economy. So about Rs 72 trillion comes from the mutual fund and also when it comes to direct investing, that would be contributing, and this is the way forward when we look at the pension fund industry. Even that is also evolving significantly.
So, I would say that these are the early days, and I would say that this is the foundation for any developed economy because when the market starts moving fast, when the banking system simultaneously offers fixed coupon returns, for different segments of customers there are various options available. That is going to go forward in terms of supporting this economy in the days to come.
With size and growth come challenges. In the very near term, and you rightfully talked about one of the aspects – a fight for margins – is getting tough out there. There is fierce competition. How do banks handle challenges and what are the challenges really to begin with to try and garner more market share.
Dinesh Kumar Khara: I would split both sides’ questions into two. One is, of course, the kind of risk which is there and the second, of course, is how can the larger organisations adapt to the changes which are there. What I would say is that when it comes to risk, every day unfolds into something new.
One, is credit risk. It used to be a significant risk and to a greater extent, there is adequate appreciation in terms of the credit risk and for that, of course, there is enough investment in terms of identifying the macro level risk and also now further distilling into the micro level risk as well. So, on that basis, the structure has been all tailored to address the risk in good time and at the same time the control and follow-up piece on the credit risk has been strengthened significantly of late.
At the same time, we continue to experience the operational risk on an ongoing basis particularly for the larger entities and that is a major risk. From that point of view, unless there is a strong control mechanism and for that, leveraging technology becomes very important. If at all, that can be put in place, even the operational risk gets addressed to a larger extent.
Of late, the compliance risk is another area which is evolving into a very significant risk and particularly when we look around, various kinds of players in the global economy. Particularly when the banks are becoming large, they have to deal with the risk which are emanating from such geographies also. On that particular piece there is a need to be a little vigilant, and to really sense the environment and identify the risk and at the same time put in place the mitigants which can help in terms of addressing this.
Of course, the last but not the least is the cyber risk which is assuming greater significance which at times even go to the extent of shaking the confidence of some of the customers also and on that lot of efforts have been put in both from the organisational endpoint also and also from the point of view of educating the customers as well in terms of what all precautions they must take.
So, the environment is always changing. The risk environment is particularly changing. One has to have very effective sensors in place so that one can identify the risk in good time and mitigate it. It is not merely reactive. It has to be proactive also in terms of how risks are really evolving and what shape it will take, the bank should have the capability to really plan it out also.
The second question is how the larger entities adapt itself to the changing environment. I would say that, it actually emanates from what I mentioned from the risk point of view, one should be in a position to identify the trends in good time and also start tweaking the structures in good time.
I would also like to mention that very often there is a need for process redesign, there is a need for even the product redesign also because when it comes to the ecosystem, around the time when we started banking, we used to have a simple system of introduction when it comes to opening of account. Today somebody who used to have an account used to introduce and the accounts used to get opened, but today, there is enough credible information available in the ecosystem. How can we sweat that information before opening the account and ensuring their KYC?
Over a period of time, we have seen how the changing environment can bring in lifestyle change with the customers and also because even these are the public facing entities, so customer facing entities how they also need to change. So, it is very essential to keep very close tabs on what is happening around and accordingly should identify the opportunities and how we can deal with that.
The second question relates to mutual funds. At a point of time, because 2013-2016 was quite an exciting moment for me and I was given a chance to lead SBI Mutual Fund, when I went there, it was just about Rs 60,000 crore worth of AUM and it was static for 10 years and the industry AUM used to be about Rs 12 lakh crore; it was Rs 12 trillion around the time when I left. So, in three years’ time, I had an opportunity of more than doubling the AUM, but yes, of course, it was not an easy game.
Of course, as I mentioned, my focus has always been on the customer and how best we can serve the customer. On the mutual fund side, there were two aspects, one to ensure that we should be in a position to generate decent returns which also means that our selection process should be very robust. So, we gave a lot of emphasis on in-house research, which eventually helped in terms of generating better returns over the period of time, reviewing the returns in three months, six months, one year, etc, etc, So that is something which helped and then based on the returns when we could reach out to the customers, they also started believing.
On the top of it, the parent was confident and started distributing the product. Eventually, we had gone for the blue ocean strategy. We went to places where nobody had thought of, nobody had heard of mutual funds. So, these were the foundation stones which were laid and eventually it paid off over a period of time when it became the leading mutual fund of the country.
The elephant in the room is the huge debate over PSU banks versus private banks. There are large PSUs in the country, but there is the fleet-footedness of the private side and also the digital aspect. What is your view?
Dinesh Kumar Khara: My belief is that it is agnostic to ownership. If at all an entity is geared up for change, if the entity is in a position to appreciate what the customers need, irrespective of the ownership, they will do well and irrespective of the size also they will do well. So, on that particular count, as far as nimble footedness is concerned, as far as public sector banks are concerned, they can also have adequate nimble footedness to deal with the competition.
It is more in the mind that they cannot be nimble footed, but my sense is that they can be equally nimble footed also. Having said that, I must also mention that one has to identify the customers well and one has to ensure that they lend properly and that is something that is one of the reasons that in the previous quarter we have seen that there were some challenges in the private sector banks in terms of asset quality, whereas public sector banks did much better.
One has to really address the issue on the fundamentals irrespective of the ownership. I mean, there is no challenge in terms of capital for the public sector banks, there is only, what I mentioned that, if at all they can spot the opportunities in good time, that is something and also ensure that the organization keeps on manoeuvring the challenges effectively, that is something which will help the entity irrespective of their ownership.
