Indian Banking in next 5 years:

Supporting credit for a $ 5Tn

Economy while navigating a
complex disruption
Saurabh Tripathi, MD and Senior Partner

FIBAC 2019
 Rising importance of non banks in bank ecosystem

3
Key
Demands on banks for sustainable growth in
credit and implied transformation of landscape

Copyright © 2019 by Boston Consulting Group. All rights reserved.

messages

Implications for policy and regulations

1
NBFC already have dominant reach in retail and small
business credit and are core to market development
Total no. of new loans (FY19) Total no. of loans to NTC1 (FY19)

32%
NBFCs 49% 42%
NBFCs 57% 60% 55%
19%
19%

Copyright © 2019 by Boston Consulting Group. All rights reserved.

Private 30% 19%
42% Private 31% 20%
31%
PSU 14% 18%
14%
PSU 7% 5%
8% 8% 7% 6% 8%
Tier 1&2 Tier 3&4 Tier 5&6 Tier 1&2 Tier 3&4 Tier 5&6

Note: 1. Data for number of new loans sanctioned in FY19 2. NTC means New to Credit 3. NBFCs includes HFCs 4. Products included are Auto Loans, Personal Loans, Housing Loans,
Consumer Loans, Business loans, Loan Against Property, Gold Loan, Credit cards, Agri-Priority, Commercial Vehicle and Construction Equipment Loans 5. Others include Co-operative Banks,
MNCs and Regional Rural Banks
Source: TransUnion CIBIL; BCG Analysis 2
India poster child for disruption
Number of transactions (billions)
19 32 273
UPI 0%
12% 17%
Mobile & internet
18% 13%
POS 59%
11%
NACH 2% 20%

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NEFT 10%
1%
43%
ATM 20%
31%
Cheque
6% 14%
Cash 9% 4% 2%
5% 4%
FY17 FY19 FY22-25
1. Internet transactions include RTGS, ECS, NEFT and IMPS financial transactions 2. ATM/CDM includes withdrawals transactions at ATM and deposit transactions at CDMs. ATM and
Mobile transactions included are financial transactions only 3
Source: RBI data, BCG Analysis
India poster child for disruption
Number of transactions (billions) Share of UPI Transactions
19 32
UPI 0%
12%
17%
Mobile & internet
18% 36%
13%
POS
11%
NACH 2% 20%

Copyright © 2019 by Boston Consulting Group. All rights reserved.

29%
NEFT 10%
1%
43%
ATM
31% 25%
Cheque
6%
Cash 9% 4% 10% All banks, other PSPs
5%
FY17 FY19 FY19
1. Internet transactions include RTGS, ECS, NEFT and IMPS financial transactions 2. ATM/CDM includes withdrawals transactions at ATM and deposit
transactions at CDMs. ATM and Mobile transactions included are financial transactions only
Source: RBI data, BCG Analysis 4
China has already witnessed this rapid transformation

Offline consumption (Tn, RMB)

40 Bank card
44%
& Cash
30
Non banks
share
20

Copyright © 2019 by Boston Consulting Group. All rights reserved.

FY18
Mobile
56% Payment 90%
10

0
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Source: National Bureau of Statistics; iResearch; BCG Analysis 5

 Consent base data sharing – major ecosystem of non
banks to emerge around banks
Personal Finance Ecosystem
Banks Payments NBFC and Wealth mgmt. platform

• Physical
Customer • Digital
interface • Call center

Payments Transaction Data Transaction Data

Products and

Copyright © 2019 by Boston Consulting Group. All rights reserved.

services

• Branches
• ATMs
• Core Banking
Infrastructure
Platform

Banks Payment Bureau Data Authentication

Infrastructure & KYC 6
Source: “Will Industry Stacks Be the New Blueprint for Banking?” BCG Perspectives
Retail Loans: Capabilities of Industry evident; Quality
strengthened as growth slowed
Advances growth slowed … … but quality of book improved Industry tightened standards
Yoy (%) Bureau score of new loans
GNPA (%) FY18 FY19 Inc/Dec
25%
14% 13%
3% 2%
NBFCs 2.3% 2.5%

16% 41% 39%

Private
2.7% 2.5%
Banks

Copyright © 2019 by Boston Consulting Group. All rights reserved.

PSU Banks 4.0% 3.0%
42% 46%

Industry 3.2% 2.8%

FY18 FY19 FY18 FY19

Credit scores
-1 Below 650 650-750 750+

Note: 1. NBFCs includes HFCs 2. Industry includes NBFCs, HFCs, Private banks, Public sector banks, Co-operative Banks, MNCs and Regional Rural Banks
3. Retail Consumer loans include Auto Loans, Credit card, Gold Loan, Personal Loans, Housing Loans and Consumer Durable Loans
Source: TransUnion CIBIL; BCG analysis 7
Inability to manage quality hinders supply of credit in
SME
Industry could not tighten Visible build up of stress- Significant variation in growth dip-
standards NPA (%) Advances growth-YoY (%)
Bureau score of new loans FY18 FY19 Inc/Dec FY18 FY19

17% 15% NBFCs 5.1% 7.3%

31% 23%
7% 7%
Private New 2.5% 2.2% NBFCs
44% 44%
Private Old 5.4% 7.9%

Copyright © 2019 by Boston Consulting Group. All rights reserved.

42%
PSU Large 19.6% 19.1% 27%
33% 33%
Private Banks
PSU Medium 20.4% 24.5%
FY18 FY19
Industry 11.3% 11.3% 17%
Credit scores
-1%
-1 Below 650 650-750 750+ PSU Banks

Note: 1. NBFCs includes HFCs 2. Industry includes NBFCs, HFCs, Private banks, Public sector banks, Co-operative Banks, MNCs and Regional Rural Banks
3. Products included are Retail Business loans, Retail- Loan Against Property, Retail - Commercial Vehicle & Construction Equipment Loans and SME business includes loans < INR 50 crores
Source: TransUnion CIBIL; BCG analysis 8
Major investment needed to upgrade SME credit process
in the industry towards best use of data and digitization

Level of MSME lending digital maturity in surveyed

Banks/NBFC

Copyright © 2019 by Boston Consulting Group. All rights reserved.

Player (#) #1 #2 #3 #4 #5 #1 #2 #3 #1 #2 #3 #4 #1 #2 #3 #4 #5

Public sector banks Private old banks NBFCs New Private Sector banks

High Medium Low

1. Remaining 42% of NTC borrowers are serviced by other lending organizations like RRBs (13%), cooperatives (8%), foreign banks (5%) and others (16%) 2. % of MSME lending book as on Dec
2018 3. 7% of MSME loan book resides with all other lenders (including fintechs)
Source: BCG-Omidyar network Report: “Credit disrupted: Digital MSME Lending in India”, Transunion CIBIL MSME Pulse Apr 2019, Survey conducted on 21 FIs to assess MSME
lending digitization 9
Next gen tech will give humungous edge to adopters
Jobs that will not be needed due Efficiency increase in
to AI applications (%) remaining jobs(%)

Banking
22% 42%

Insurance 25% 29%

Copyright © 2019 by Boston Consulting Group. All rights reserved.

Capital
markets 16% 56%

Sources: BCG Model for the Impact of AI on the Employment Market in the Financial Sector by 2027; WIND; National Bureau of Statistics; China Banking Regulatory Commission; Insurance Association of China; China Securities Industry
10
Association
Gaps in performance are widening
ROA (%) Revenue/employees
Rs. Lacs
2 45 43
PSU-Large
0.6 40 40
39
-0.1 0.0
0 -0.6 34 35
0.3 PSU Large 35 33 33
32 PSU-Medium
-0.4 -0.4 -0.2 30 30
PSU Medium
-1.5
-1.8

Copyright © 2019 by Boston Consulting Group. All rights reserved.

Rs. Lacs
1.8
2 1.6 60 55
50 52
1.4 Private-New
1.1 46
42
1 1.1 Private New 37
40 35
0.4 33 Private-Old
0.8 0.3 28
0.7 0.4 Private Old 27

FY2015 FY2016 FY2017 FY2018 FY2019 FY2015 FY2016 FY2017 FY2018 FY2019

Source: RBI data; Annual reports; Investor Presentations; BCG analysis 11

Encourage banks to adopt differentiated models
1 2 3

Digitised full Specialised Banking as a

service bank vertical play service/open bank

Customer interface
Products and
services

Copyright © 2019 by Boston Consulting Group. All rights reserved.

Infrastructure

Key success factors Scale and capability Focused set of products Account keeping at
across value chain end-to-end lowest possible cost/
product excellence

In-house Partner
Source: BCG analysis 12
Review bank licensing policy to attract new capital

China Taiwan
3 new internet banks licenses 2 new digital bank
license proposed

Hong Kong Australia

8 new virtual bank license Authorized deposit license
for challenger/new bank

Copyright © 2019 by Boston Consulting Group. All rights reserved.

to JV/Tech Companies

Korea Singapore
2 new virtual bank licenses • 2 new digital full bank
• 3 new digital bank wholesale

13
Implications for policy and regulations

Expedite consolidation

Encourage digital transformation

Profitability of banking and non banking sector to attract fresh capital

Copyright © 2019 by Boston Consulting Group. All rights reserved.

Encourage differentiated business models

Support growth of vibrant (and stable) non banks ecosystem

14
Strengthen NBFC business model

Higher transparency in market disclosures — portfolio quality, funding

sources

Differentiate prudential liquidity norms in line with maturity profile of assets

Facilitate flow of long term credit from insurance and pension funds with

Copyright © 2019 by Boston Consulting Group. All rights reserved.

introduction of innovation in debt market instruments like covered bonds

Create a refinance and liquidity support institution for NBFCs engaged in SME
finance

Bank lending to NBFC customized to NBFC requirements

15
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