Indian Banks Need To Spend $5 Billion A Year To Keep Pace With Digital Ecosystem

Banks in India will need to spend at least $5 billion a year and make complex organisational changes to keep pace with the evolving digital ecosystem, according to the Boston Consulting Group.

These investments will help banks improve productivity and cut infrastructure expenses, helping them potentially bring down cost-to-income ratio to around 41% from around 48% currently, it said in a report on Wednesday.

To have a successful transformation, companies must spend 14% or more of their revenue on it, BCG said in its report.

Among the organisational changes, banks need to employ strategic designers, have persistent teams and have individual business leading their respective businesses, rather than a single digital department.

The report was released at the annual banking conclave, organised by the Federation of Indian Chambers of Commerce and Industry and the Indian Banks' Association.

Indian banks are grappling with a host of challenges such as:

• High and rising branch costs, which are 1.5 times higher than those in China. India had 14.7 branches per one lakh adults in 2021, compared with 8.8 branches in China.

• Exponentially rising transaction loads, which are set to increase by six times in the next five years.

• Sub-optimal digital journeys where more than 85% of customers drop off.

• Rising compliance cost.

Unless lenders step up their digital capabilities, they stand to lose customer relationships significantly, BCG said in its report.

Currently, less than 15% of individual and micro, small and medium enterprises customers surveyed are satisfied with the existing journey. Most unsatisfied customers mentioned that a lengthy process and too much data made their digital journeys with banks more complicated.

The findings are based on a survey of over 2,000 customers.

Apart from unhappy customers, the emerging challenge from new-age non-bank firms is also rising. Fintech firms, which challenge banks in their business, tend to get the lion's share of the equity from investors, compared to those who complement banks.

As per data collated by BCG, 87% of the $8 billion worth of investments in fintechs in 2021 went toward disruptors who compete with banks for wallet share. Globally, only 56% of total fintech investments go to such disruptors.

Among measures that can be taken to improve digitisation, banks and the government need to expand video banking services, develop Bharatpass—along the lines of Singpass of Singapore—which can ensure that Aadhaar can be used for facial recognition and tokenisation of physical assets to improve collateralised lending.

While an innovation like Bharatpass could bring down know-your-customer cost by five times, tokenisation of assets can help double the growth in the secured loan portfolio for banks.

Banks should also be provided with tax incentives for investments in innovation, like other industries, the BCG report said.

Watch the full conversation with Saurabh Tripathi of BCG here: