Indian banks have been looking to diversify their sources of income away from interest rates due to economic fluctuations. Fees from services like asset management, wealth management, and treasury have become more significant sources of revenue. Supply chain financing is also growing in importance as a way to provide better liquidity to corporations. Indian banks have adopted technologies like mobile, analytics and cloud computing to improve customer experience and gain competitive advantages. While bank deposits continued growing in 2013-14 due to rising incomes, financial inclusion remains a challenge as only 35% of Indians are banked compared to 50% globally. The Reserve Bank of India is focusing on improving inclusion through initiatives like PMJDY.

1. Current Trends in Indian
Banking Sector
Part 2
Indian Banking
Moving towards a new landscape

2. Tapping into new revenue sources
Given the fluctuating interest rate cycle and underlying macro-economic
factors, banks have been looking to diversify their sources of income. This has
led to emergence of new products under asset management, wealth
management and treasury. For instance, fee income has gained significance
as a source of revenue in the past decade. As per a KPMG analysis, the fee
income in FY 13 for 67 banks in a selected sample set was INR Bn 644.18;
clocking a three year CAGR of 12 percent and five year CAGR of 15 percent.
PSBs have been dominant here since the beginning, given their access and
absolute size.

3. Tapping into new revenue sources
Supply Chain Financing (SCF) is also gaining significance in international
markets. It includes factoring, invoice discounting/reverse factoring, purchase
order/ invoice data management -broadly all products aiming at providing
better liquidity to the corporates and their entire value chain at lower
financing rates. The future growth on this platform is expected to come from
emerging markets like India and China, and the banking industry has started
to take notice of the opportunity.

4. Leveraging SMAC (Social Media,
Mobile, Analytics and Cloud)
Indian banking sector has adopted technology to keep pace with the
international developments and gaining competitive advantage by offering
enhanced consumer experience. Herein, internet and mobile banking are gaining
rapid foothold. Other areas where technology has seen strong adoption include
Customer Relationship Management (CRM) and data warehousing. The overall
financial services industry is keenly exploring the transformation potential of the
new generation of technologies available like Social Media, Mobile, Analytics
and Cloud (SMAC). Social media has potential in areas of customer query and
complaint redressal with strong brand management backing.

5. Key Performance statistics
Current Banking Status
The banking sector continued to see growth in deposits, mainly led by growth
in savings, rising disposable income and concerted government efforts
towards inclusion. The banking deposits for 2013-14 grew about 14.9% over
the previous year at INR Bn 85,331. The growth rate was broadly in line with
previous year growth rate of 15.1%. As per an Equity Master Research report,
the growth in deposits of scheduled commercial banks (SCBs) at 14.6% in
FY14 was marginally better than the growth at 14.2% in the previous financial
year. However, this growth came on the back of the liberal policy adopted by
the RBI towards non-resident Indian deposits.

6. Leveraging SMAC (Social Media,
Mobile, Analytics and Cloud)
Mobiles become critical to reduce the gap on financial inclusion. While only
about a quarter of all Indians have a bank account, more than 60 odd percent
own a mobile phone. There is potential to leverage mobile technology at
transforming payments and inclusion at large.
Cloud computing will have a strong bearing on rapid prototyping and
innovations by enhancing agility and reducing cost structures. In a cloud
model, the bank pays for what it needs when it needs it. Cloud also allows a
bank to scale its business operations.

7. Banking the Un-banked
As per a World Bank report, an average Indians over 15 years is considerably
under-banked as compared to their global peers. Against the global number
of almost 50 percent of population (over 15 years) which is 'banked', the
corresponding India number is only 35 percent. Looking at the same metric
for the bottom 40 percent of the population by income, 41 percent
population globally has an account as compared with 27 percent in case of
India

8. Banking the Un-banked
Acknowledging the task, RBI has off-late upped the focus on bringing the un-
banked population under banking purview. It defines financial inclusion with
two fold objectives:
(a) To connect the excluded with the formal banking system in order to help
them gain an understanding of the financial services available and
equipping them with the confidence to make informed financial
decisions.
(b) Providing door step banking services to all the six lakh villages and
meeting their life cycle financial needs through appropriate savings,
credit, remittance and insurance products.

9. Banking the Un-banked
There has been a debate on the right approach towards achieving Financial
Inclusion - bank led vs technology led. The former approach has seen success
in some countries as it allows leveraging existing branch base and is more
suited for situations of low literacy.
Under the new regime, PMJDY is a step towards ensuring financial inclusion.
The program has started on the right note, however the detailed
implementation and final success is a continuous process.

10. Improved measures at managing
Risks
Banking industry has forever been challenged from undesirable market
movements. This requires access and understanding of the best possible
approaches to manage market risk. This also requires keeping adequate
provisions and reserves in the capital to provide as buffer against their market
exposures. Indian banks are increasingly focusing on adopting integrated
approach to risk management
To keep pace, Indian Banks have already embraced the international banking
supervision accord of Basel II. According to RBI, majority of the banks already
meet capital requirements of Basel III, which has a deadline of 31 March
2019. Most of the banks have put in place the framework for asset-liability
management„ credit and derivatives risk management

11. Growth of Derivatives Market
The growth of the commodity derivatives market in India since inception in
early 2000s is reflective of the large and growing unmet demand for a risk
management platform amongst heaps of stakeholders exposed to commodity
price volatility. This growth has created enormous demand for risk
management solutions apart from support services such as storage, logistics,
inputs and extension services, much of which has been created through bank
financing.
Banks are developing Innovative financial products and advanced risk
management methods to capture the market share, however the complete
potential remains uncaptured.

12. Scaling up of Businesses
The banking industry is largely fragmented in India with over 45 commercial
banks, nearly half of which are state-run entities, but only two of them figure
among the world's 100 largest banks. Financing country's future finance
needs, calls for scale and thus the need for consolidation. The entry of foreign
banks will also increase competition in the industry, pushing the need for cost
and operational efficiencies to survive and deliver public good. A recent
example of consolidation will include Kotak Mahindra Bank and ING Vysya
Bank.

13. Scaling up of Businesses
New Banking Licenses - emergence of "on tap" licensing
Since April 2014, the Reserve Bank of India (RBI) has granted 23 banking
licenses to new players - two were given universal banking licenses (April 2,
2014), 11 were issued payments banks licenses (August 19, 2015) and 10
were given licenses for small finance banks (September 16, 2015). The niche
banks - small finance and payments banks -have been set up to further the
regulator's objective of deepening financial inclusion. Going ahead, RBI is
planning to come up with "on tap" licenses which means there will not be any
cut-off date for applying for the licenses

14. Mandatory Client Disclosures
RBI mandated the Know Your Customer (KYC) Standards, wherein all banks
are required to put in place a comprehensive policy framework in order to
avoid money laundering activities. The KYC policy is now mandatory for
opening an account or making any investment such as mutual funds

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