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Disruption will change banking significantly: Nilekani

By Anup Roy
August 08, 2016 14:44 IST
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A bankThe rapid stride in granting bank licensing is, perhaps, an indication of things to come.

With the emergence of technologies such as automated teller machines, Internet and mobile transactions, banking in India catapulted to a different orbit in the last decade.

But the future will bring even more change.

Banking as we know it will stand on its head in the next 10 years, going by Nandan Nilekani’s prediction, as “disruption is waiting to happen”.

Nilekani, co-founder of Infosys and former chairman of the Unique Identification Authority of India, believes niche banks and financial technology providers mean banking is going to be much more personalised and structured.

The huge untapped banking potential in the country will be harvested and usurious interest rates charged in the informal sector, which can reach as high as 5,000 per cent annually, would be brought at par with the rate structure in the formal sector.

While the Prime Minister’s Jan-Dhan Yojana has ensured all households have a bank account, most still cannot borrow easily.

True banking services remain elusive to 49 per cent of India’s population, with 67 per cent of the bottom 40 per cent finding it tough to access banking.

In the rural areas, 53 per cent have no true access to banking.

That, however, would change in the coming decade, according to a presentation by Nilekani titled ‘Indian Banking’ -- in a time of change.

Much of the change would be led by financial technology-led lenders, and at the heart of their services will be unique identification numbers such as Aadhaar, developed by UIDAI.

The force multiplier will be smartphones, the ubiquitous instrument that has managed to penetrate every nook of the country and will continue to do so due to slashed prices and cheaper and faster data plans.

It is only a matter of time that the lending exercise explodes in the country.

While lending has grown at an impressive 15 per cent compounded annual rate in the past seven years, it could grow '5x in the next 10 years'.

By 2015, India already had 32 fintech lenders, from only three in 2013.

These are heavily reliant on technology and smartphones, which are registering sales of about 25 million per quarter.

This would ensure lenders would be present with their offering in every household, a few touches away on mobile phones.

Smartphones will not only make brick-and-mortar banking redundant. All the ancillary technologies needed for banking will also go out of fashion.

The unified payments infrastructure, floated by the National Payments Corp of India, for which Nilekani is an adviser, is heavily customised around smartphones.

That would ensure cards and point of sales machines (PoS) themselves would not be needed anymore.

Account information would become virtual, eliminating the need for disclosure of accounts, and transactions through mobile phones in a secured and real-time manner would become the norm.

On the savings side, banks will not be able to rely on current and savings accounts for cheap capital, as competition will increase churn.

Alternative low-risk savings products will emerge, providing higher interest rates and liquidity.

India is set to become a data-rich nation in five years and this would mean a different set of business plans.

The bank will, thus, be a platform offering services such as customer profile, ledger, personal finance management and advisory services through own and partners' products.

“Fintech companies will go to free, using the data generated to add value to their operations,” said Nilekani.

These developments would be a mortal blow to traditional banks.

“All banking products will be disrupted,” Nilekani said in his presentation.

Barring cash management and insurance distribution, the new mode of banking will take care of bill payments, remittances, fixed deposits, PoS terminals, mutual funds, savings accounts, current accounts, and credit cards.

And, it’s not existing banks can rest on established credentials. With the Reserve Bank of India making banking licence on-tap, instead of once in a decade, existing banks can hardly be complacent.

The rapid stride in granting bank licensing is, perhaps, an indication of things to come.

Only 14 new licences were awarded between 1993 and 2014 but in 2015 itself, 21 new banks were introduced.

If that was not enough, whoever now thinks it fit to float a bank can apply for a licence.

Nimble-footed private banks are better suited to withstand the onslaught and public sector banks would surely see a rapid slide in their market share.

In many ways, the loss of market shares by government banks is a continuation of how public sector units such as telecom and Air India lost pre-eminence in the past decade.

After mobile phones and smartphones were introduced, telecom PSUs lost 70 per cent of market share in 12 years.

Government banks are already losing market share but the changing landscape could accelerate the decline.

In 2000, PSBs commanded a market share of 80.2 per cent, which came down to 73 per cent in 2013. Nilekani expects the share to fall to 63 per cent by 2025.

The market capitalisation of government banks, too, has already started reflecting what lies ahead.

“Shrinking public sector market share is de facto privatisation.

The government is losing an opportunity to make billions of dollars of market capitalisation,” said Nilekani.

State Bank of India, the country’s largest lender, has a market cap of Rs 1.7 lakh crore and all other PSBs have a combined market cap of Rs 1.8 lakh crore.

However, the top four private-sector banks -- HDFC Bank, Axis, ICICI Bank and Kotak Mahindra Bank -- have a total market cap of Rs 7 lakh crore (Rs 7 trillion), eclipsing 25 PSBs (including the listed SBI associates).

Nilekani also highlighted that non-banking financial company Bajaj Finance had more market capitalisation than all PSU banks except SBI.

Banking per se will continue to grow. From roughly $170 billion worth of market capitalisation in FY16, the banking and related financial services market could grow to as much as $600 billion by FY26, Nilekani said.


1.Transactions: An average transaction varies between Rs 75,000 for cheque clearance to Rs 30 for mobile recharge Electronic clearing surpasses paper clearing, while IMPS volumes higher than debit cards

2.Credentials: The phone will replace the card and PIN as authentication factor

3.Switching costs are going down

4. Lending: Rates will factor in individual pricing of risk based on digital footprints

5. Business: Fintech firms to go to free, using data generated to add value to ops unlike traditional banks which rely on fee income

6. PSU banks -- Shrinking market share

7. Merchant models: Ready for disruption smartphones to replace both PoS (point of sale) and card

8. Cashless changes everything

9. Interest rates will converge

10. Jan Dhan -- Aadhaar -- Mobile (JAM) The Aadhaar system can authenticate 100 mn transactions per day, in real time

11. The emergence of the India Stack, based on JAM, will cut costs, and align market goals and social goals

12. India will be data rich

The image is used for representational purpose only. Photograph: Reuters

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Anup Roy in Mumbai
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