Digital Loans, UPI To Create World's Largest Retail Banking Profit Pool: Bernstein

India's universal bank account coverage, along with UPI-led activity across accounts, could increase digital consumer credit penetration, creating one of the largest retail banking profit pools in the world, according to Bernstein.

"The Indian financial services sector has seen one of the greatest financial inclusion drives in history and has achieved near-universal penetration of transaction banking services, viz. deposit accounts and digital payments," the brokerage said in a Sept. 5 note.

"This has laid the foundation for a surge in credit penetration. And the provision of credit, unlike deposits and payments, could lead to a sizable expansion of the banking profit pools."

Bernstein said that in the digital consumer credit space, it expects a combination of UPI and digital loans to evolve as a superior proposition to the existing mediums, such as credit cards. 

It said UPI and digital loans enjoy:

• Low cost of acquisition as customers adopt UPI payment apps for non-credit payments.

• Wider acceptance due to the reliance on QR code-based payments.

• Better ability to personalise product pricing for both merchants and consumers.

• Lower starting ticket sizes due to lower acquisition costs

On the demand side too, Bernstein said the lack of a significant expansion in consumer credit to GDP ratio in the recent past, coupled with low credit penetration, offers a potentially long growth runway. 

"The large population of the country and the healthy profit per customer from lending businesses create the potential for the Indian banking sector to enjoy one of the largest retail banking profit pools in the world," it said.

India's financial services sector has seen several new lending models, such as microfinance and consumer durable lending, and the winners in many of these segments have grown to become a significant part of the Indian financial services sector. 

"We see the digital credit model as one such new lending model and see it growing into a sizable lending segment with one or two winners emerging from this segment."