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Transcript of KPMG ICC Indian Banking the Engine for Sustaining Indias Growth Agenda
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7/29/2019 KPMG ICC Indian Banking the Engine for Sustaining Indias Growth Agenda
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Indian Banking The engine for
sustainingIndias growth
agenda
5th ICC Banking Summit
Kolkata
18 May 2013
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7/29/2019 KPMG ICC Indian Banking the Engine for Sustaining Indias Growth Agenda
2/52 2013 KPMG, an Indian Registered Partnership and a member frm o the KPMG network o independent member frms afliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved.
Foreword
Over the past couple of years, the Indian banking sector has
displayed a high level of resilience in the face of high domestic
ination, rupee depreciation and scal uncertainty in the US and
Europe. In order to stimulate the economy and support growth
of the banking sector, the Reserve Bank of India (RBI) adopted
several policy measures.
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7/29/2019 KPMG ICC Indian Banking the Engine for Sustaining Indias Growth Agenda
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Rajiv MundhraPresident
ICC
Asset quality, capital adequacy, nancial
inclusion and talent management are
some of the key issues facing the Indian
banking industry, which despite serving
the second largest populated country
in the world with a total of 87 banks
(including 26 public sector banks, 20
private banks and 41 foreign banks),
as per the RBI, reaches out to only
about half of the countrys households,
scripting a nominal global footprint.
The rising consumerism from the
emerging middle India and the higher
purchasing power in rural India onaccount of rising employment provides
opportunities for banks to look beyond
the traditional customer segments.
However, these segments would
require exible operating models which
would ensure responsiveness at the
last mile and at the same time be viable
for the banks. On the other hand, global
aspirations of Indian corporates calls for
funding of cross-country acquisitions,
greater sophistication in services
and scaling up of resources from theIndian banks. RBIs nal guidelines for
licensing of new private sector banks
towards beeng up competition and
garnering fresh capital for nancial
inclusion would roll in a timely debate
on the need for consolidation vis-a- vis
numerical expansion in the industry.
Capital adequacy will start becoming a
big issue for the commercial banks in
India, as they start gearing for growth
and becoming compliant to Basel III
guidelines.
To meet these requirements and
challenges, industry players are
gradually harnessing technology with
cloud computing and analytics based on
big data becoming a key differentiator.
The budget referendum of allowing
banks as insurance brokers is also a
welcome move for the industry, which
will gradually forge out a nancial
supermarket for the customers. With
tele-density (based on total number
of mobile connections) standing at
74.21, in 2012, according to Telecom
Regulatory Authority of India (TRAI),India can consider the Kenyan model of
ushering in nancial inclusion through
mobile banking services, including
money-transfer systems and savings-
and-loans services, through a simple
SMS network. Leadership and the
right talent would be very critical for
banks over the next 4-5 years as they
work towards achieving their growth
agenda and ward off competition for
talent from the new local and foreign
banks. The future operating model forbanks would force banks to choose their
areas of differentiation and expertise
rather than aspiring to be a single
service provider. This paper discusses
the opportunities and challenges that lie
ahead of the Indian banking industry. It
also touches on some possible avenues
for augmenting banking penetration
in the strategically placed Eastern and
Northeastern states of India.
Ambarish DasguptaHead - Management Consulting
KPMG in India
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Acknowledgements
Ravi Trivedy
Kunal Pande
Neha Punater
Kuntal Sur
Jacob Peter
Aniruddha Marathe
Gaurav Batra
Rohan Padhi
V. Ramakrishnan
Natasha Wig
Ankur Jain
Priya Aggarwal
Bhargava Pingali
Divya Kalari
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Indian Banking Emerging
Opportunities
Infrastructure nancing buildingthe foundation
Big Data as a source of real time
business insights
Funding the aspirations of
emerging modern India
The Aam Aadmi protablyserving the unbanked andunderbanked
Public sector banks Challengedfor growth capital
Micro, Small & Medium Enterprise
The next growth engine for
banking
Innovative and cost effective
operating models
Addressing the leadership vacuum
in the PSBs
01
15
29
05
21
35
11
25
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Indian Banking Emerging
Opportunities
As per KPMG in Indias analysis, capital
requirements of public sector banks
in the future will be based on three
assumptions:
GDP growth rate of 6-7 percentthat will require credit growth of 20
percent
Basel III norms applicable to higher
risk assets that banks will have to
develop in the future (Micro small and
medium enterprises (MSME), retail)
Government ownership in the range
of 50-60 percent.
Assuming an annual credit growth rate
from FY12-FY21 at 20 percent and the
annual risk weighted asset growthrate at 22 percent, we expect the Tier-I
capital requirement for public sector
banks for the same period to be in the
range of INR 9,60,000 crore1. Given
our current scal decit, government
may not be able to infuse additional
capital in public sector banks. Also, the
governments intent to not dilute their
stake leaves them with few options: The Government could consider
creating a holding company (Holdco)
and transfer its stake in the PSBs to
this company. The Holdco can raise
long term debt from domestic and
international markets to infuse equity
in the PSBs and act as an investment
company for the Government of
India.
The Government could consider
diluting its stake in PSBs through
issuance of Differential Voting
Rights (DVR) such that the economic
stake dilution is also kept to the
minimum. The Government could
avoid any dilution in its voting rights
by rst infusing money into the
banks through issuance of normal
shares to itself, which would raise its
stake during the interim period, andfollow this up with DVR issuance to
the extent that its effective (voting
rights) holding remains unchanged.
The money can be infused either
through preferential allotment of
equity shares or through allotment of
warrants.
The Government may consider in
the future on having a Golden share
in each of the PSBs under which
while the Governments economic
and voting stake may fall below 51percent, it will always have the right
to control the respective PSBs due to
the possession of this Golden share.
1 KPMG in India Analysis; Based on a paper developed for a committee on Funding of Capital Requirements of PSU banks by Government of India
Raising capital for public sector banks (PSBs) Yes, it could be aproblem in the future!
1 | Indian Banking - The engine or sustaining Indias growth agenda
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M&A in PSBs will be a reality only when the ReserveBank of India (RBI) intervenes Expect competition fromforeign banks as theyacquire near nationaltreatment
Can two healthy public sector banks
voluntarily merge to create a large bank?
Considering the past record, no!
Most of the mergers in the past have
been either through the acquisition
of a small or regional bank by a large
private bank (such as the acquisition
of Centurion Bank of Punjab by HDFC
Bank2 or the Bank of Madura by ICICI
Bank
3
), or through the RBI managedprocess of a forced amalgamation of
a potentially failing bank into a strong
bank (such as the post-moratorium
amalgamation of GTB Bank with
Oriental Bank of Commerce4 or the
acquisition of Bank of Rajasthan by
ICICI Bank5). The RBI has encouraged
voluntary consolidation in the past but to
no avail.
India critically needs at least 3 to 4 large
banks that are globally competitive and
can meet the growing demands forcross-border acquisitions by the Indian
corporate and take on larger ticket risks
on their balance sheets without hitting
limits ceilings. As per The Banker in
2012, there is no Indian bank in the top
10 amongst the list of top 1000 banks of
the world, whereas China has 4 banks in
the top 10 list. In fact, Chinese banking
giant-ICBC, occupies the third rank on
the top 1000 banks of the world, while
Indian banking giant-State Bank of India
ranks at a low 60.
Given the fact that over 70 percent of
the market is dominated by PSBs, the
Government of India and the RBI will
have to drive consolidation amongst
the large PSBs to create large banks
by mandating the merger of identied
banks. This will be a signicant
departure from the previously statednon-interventionist policy of the nance
ministry and the RBI, and as expected,
will require great political will power
and many levels of dispute resolution
models.
One of the most critical challenges of
any mandated merger will be linked to
the integration of the two teams in the
merged entity. Efciency gains will only
accrue if the branch and skills overlaps
of banks being merged are resolved
amicably both of which will severelytest the relationship with strong trade
unions and the working environment
with bank staff competing to retain their
jobs. Thus to achieve any consolidation,
the Government and the RBI will have
to strengthen their resolve to manage
these tricky and politically sensitive
issues.
The RBI announcement of a roadmap
for seeking the conversion of
systemically important foreign banks to
Wholly-Owned Subsidiary (WOS) was
to have a better regulatory control over
such banks, separation of ownership
and management, clear and simple
resolution in the event of bankruptcyand ring fencing of the capital within the
country. In simple terms, the overall idea
was to protect the tax-payers money
being used as bail-out as was witnessed
post-2008 when some of the foreign
banks withdrew funds from India.
The foreign banks operating in India
with large networks would be keen
to convert to WOS if they get national
treatment in terms of opening branches
in metros and tier-II cities and not just
to expand branch network within thecontext of RBI regulations. Foreign
banks are also circumspect about
adopting this route as the RBI has
insisted that foreign banks should meet
the priority sector lending (PSL) norms
including the sub-targets (not portfolio
buys) in direct agriculture and small
scale enterprises (SSE) lending.
Sr.No. ParticularsTarget (% o Adjusted Net Bank Credit (ANBC) or credit equivalent amount o o-balance sheet exposure
whichever is higher)
Current target (as a branch) Proposed target or WOS Target or domestic banks
1. Total priority sector lending target 32% 40% 40%
2. Export credit 12% 12% no target
3. Agricultural advances no target 10% [2.5% - indirect; 7.5% - direct] 18% [4.5% - indirect]
4. Small enterprise advances 10% 10%Part o overall priority sector target
i.e. 40%
5. Weaker section No target No target 10%
6. DRI scheme (SC/ ST) No target No target 1% o total advances
Source: RBIs notifcation on priority sector lending, KPMG in India analysis
2 http://economictimes.indiatimes.com/features/the-week-that-was/hdfc-bank-and-
centurion-bank-of-punjab-to-merge/articleshow/2808784.cms
3 http://www.icicibank.com/aboutus/history.html
4 http://www.hindu.com/2004/07/27/stories/2004072707340100.htm
5 http://articles.economictimes.indiatimes.com/2010-05-19/news/27574194_1_tayal-bor-
md-private-sector-banks
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However, when the major banks convert
to WOS, they are likely to provide
another level of competition to the
domestic banks.
As on March 2012, there were 41
foreign banks operating in India with
323 branches and 46 foreign banks had
their representative ofces in India.6
Top 5 foreign banks have over 250
branches.
Considering the fact that foreign banks
have been successful in garnering
demand deposit in their overall deposit
mix, once foreign banks acquire
domestic residency and when the major
foreign banks convert to WOS, and willhave more freedom in the licensing
for new branches, the competition
for deposits could heat up resulting
in competitive pressure on domestic
banks.
Composition of Deposits in percent (March, 2012)
Source: RBI trends and Progress 2012
Closing the gap nancial inclusion will
require innovativeoperating models
The Economist in its issue dated
19 October 1929 carried an article
highlighting that there was much truth
in the observation that the small man,living in the provinces, is neglected. The
banking sector has woken to the fact
that there is potential in the unbanked
areas, and to enter uncharted territories
and capture unsaturated segments, the
banking sector will have to come up
with innovative operating models which
will be different from the conventional
ones.
Technology will be essential to access
this market, as extensive branch
networks in remote regions or regions
with poor physical infrastructure may
not be economically viable. Break-even
period for a rural branch could take
upwards three years.
Technology-driven models such as
mobile banking will inevitably change
banks operating models and help banks
in lowering their cost-income ratio.
Usage trends clearly show a signicant
year-on-year increase in the usage of
alternate channels for transactions
(ATM, internet and mobile).
The number of mobile banking
transactions has doubled to 5.6 million
in January 2013 from 2.8 million in
January 2012. The value of thesetransactions increased threefold to INR
625 crore during January 2013 from Rs
191 crore in January 20127. Even the
number of ATMs has increased from
74505 in FY11 to 95686 in FY12.8
6 RBI Trends and Progress 2012
7 http://rbidocs.rbi.org.in/rdocs/NEFT/pdfs/RTD05012013F.pdf
8 RBI trends and progress 2012
CountryNumber o ATMs
(per 0.1 million adults)
India 8.9
Australia 166.92
Brazil 119.63
France 109.8
Russia 152.9
China -
Mexico 45.77
United States -
(-) Data not available. All data pertain to 2011
Source: RBI trends and progress 2012 and IMFs FAS
database
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The internet banking channel has
evolved over the years. In 2011, 60
percent of the times basic transactions
in banks were conducted in North
America through online channels,
whereas internet banking usage in India
increased from 1 percent in 2006 to 7
percent in 20119.
Further, the easing of norms on using
individuals as banking correspondents,
coupled with the proliferation of the
UID enabled account, will enable banks
to bring in a very large percentage of
the currently unbanked, into their folds.
To enable the success of this model,
banks will have to very quickly build
trust by demonstrating better control,
governance and transparency in all parts
of their transaction processes.
9 Infosys report on Consumer Internet Banking
Share of population group in Increment of ATMs (FY12) (%)
Mobile banking transactions for banks (2012)
Source: RBI
Source: RBI
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Funding the aspirations o
emerging modern India
The rising middleclass will account forclose to one third of thepopulation in the next 20years
Middle class consumers are prominent
drivers of growth and consumption in
India due to their increasing disposable
income. A report by National Council for
Applied Economic Researchs (NCAER)
Centre for Macro Consumer Research
indicates that by 2015-16, India will be
a country of 53.3 million middle class
households, translating into 267 million
people.1 NCAER denes Indian middle
class as the one with income levelbetween INR 3.4 lakh-17 lakh at 2009-10
level.
1 Indias middle class population to touch 267 million in 5 yrs dated February 6, 2011 in Economic Times
Rise in middle class
Source: NCAER
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Investment in bankingproducts may not be thedefault choice for the
middle class
While a rise in consumption is a given,
all savings and investments going to
banks is not. Banks would have to
strive hard to attract deposits in the
future as the rising segment opens
up to other avenues for savings and
investments such as mutual funds,
insurance, real-estate and commodities.
Statistics by the Reserve Bank of India
(RBI) indicate that the share of claims
on the government, which largely
reects small savings, that had picked
up over the years, particularly during the
rst half of 2000s, declined during thesecond half largely in response to the
unchanged (administered) interest rates
on small savings since 2003-04. In fact,
households disinvested their holdings
of Small Savings during 2007-08 and
2008-09.
Banks will have to revisit their strategies
for attracting current account, savings
account (CASA) and term-deposits.
Most banks will need to start putting
together strategic plans and identify
teams to focus on deposit raising, and
move from the model of servicing walk-
in customers, to aggressively pursuing
new customers through innovative
bundling, promise of better returns,
higher levels of customer service and
attractive rewards programmes.
Period CurrencyBank
deposits
Non- banking
deposits
Lie insurance
und
Provident and
pension und
Claims on
govt.
Shares and
debenturesUnits o UTI
Trade debt
(Net)
Gross fnancial
assets
1970s 13.9 45.6 3 9 19.6 4.2 1.5 0.5 2.7 100
1980s 11.9 40.3 4.6 7.5 17.5 11.1 3.9 2.2 0.9 100
1990s 10.3 34.7 6.8 10.1 18.8 9.5 7 3.8 -1 100
2000s 9.6 44.7 1.3 17.4 12.4 11.1 4.1 -0.5 0 100
(i) 2000-05 8.9 37.8 2 14.7 15.1 19.5 2.8 -0.9 0 100
(ii) 2005-11 10.7 49.9 1.7 19.9 10.3 3.5 4.3 -0.2 0.4 100
Source: Report o the Working Group on Savings during the Twelth Five-Year Plan (2012-13 to 2016-17)
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Retail credit willbloom not all
banks will be ableto manage the
challenges
Middle class not only wields increasing
purchasing power, but also has an
evolving appetite to take on debt foracquisition of assets and supporting
their aspiring lifestyle. Signicant
growth has been witnessed in the
nancing of automobiles, mortgages,
white goods and consumer durables.
However, India has massive room
for high growth in all these areas, as
the level of retail credit penetration
is extremely low compared to other
developed and developing economies.
From a demand side perspective, rising
incomes, asset ownership aspirations
and low perception of risk is fueling the
rapid growth in demand for retail credit.
The supply side (banks and NBFCs)needs to step up to this signicant
opportunity by leveraging credit data
from the recently setup credit bureaus,
speedier assessment of risk and rapid
processing of credit.
According to CRISIL, aggregate car and
UV loan disbursements will grow at a
CAGR of 18-20 per cent till 2016-17. A
steady growth in underlying vehicle
demand, increase in nance penetration
and higher LTV ratios will drive
disbursements over the next 5 years.
Growth in Car and Utility Vehicle nance disbursements (INR billion)
Source: CRISIL report on retail fnance on Autos
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In terms of housing loans, high
prices and interest rate kept the
buyers on tenterhooks and growth
in disbursements fell from 22.1 per
cent in 2010-11 to 16.1 per cent in2011-12. However, the property prices
are expected to stabilize and CRISIL
forecasts disbursements to grow by
16.0 per cent CAGR to reach Rs 4,269
billion by 2016-17.
A few leading banks are likely to gain
dominant market share through a
focussed approach that identies
the needs of these middle income
customer segments, and aligns
products and operating models, to meet
these needs. New risk assessment
models that consider future cash ows,
ownership of other nancial products
and behavioural data from alternate
sources (such as track record of mobile
bill payments etc.), shall be increasinglydeployed by these banks to assess
credit risk in real-time. Further, these
banks shall also change their operating
model to centralise credit decision
and support it with innovative tools to
analyse behavioural data at an individual
and segment level. A major opportunity
exists for retail lenders to develop and
implement skills and tools that shall
enable them to make credit pricing
decisions at each individuals level,
rather than at a product level.
Growth in Housing Finance Disbursements (INR billion)
Source: CRISIL report on housing fnance
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Gold loan businesswill continue to thrivein the future bankswill have to ght for
their niches
India has among the largest consumers
of gold with an annual consumption
of 900 tonnes2 and the middle class is
waking up to the fact that taking a loan
against gold is relatively easy due to
its high acceptance as a collateral and
liquidity. Organized gold loan market
has grown at a robust CAGR of over
55 percent in India during FY 2008 to
FY 2012. Among the segments of gold
loan market, gold loans from banks have
increased at a CAGR of 57.5 percent and
NBFCs have increased at a CAGR of
98.5 percent during the same period.3
Gold loans disbursed by NBFCs have
witnessed rapid growth in the recent
past. Therefore, it seems that NBFCs
account for the majority of gold loans
disbursed. However, contrary to
the popular belief, share of banks in
total gold loans is the highest. Banks
dominate this market with a share of 72
percent in total gold loans as of March
20123.
Banks will have to identify the niche
customer segments in the middle
income class those seeking higher
value loans, small businesses that
need capital for expansion that
they have the power and model to
address. It is very likely that NBFCs
will continue to dominate the market
for customers seeking small ticket and
high exibility loans. This segment
focus will enable banks to build a
branch led operating model, where the
speed of disbursement and exibility
of repayment terms will be of less
importance when compared to size of
loan and other bundled services.
2 http://www.thesmartceo.in/growth-enterprise/the-golden-eye.html
3 Report of the Working Group to Study the Issues Related to Gold
Imports and Gold Loans by NBFCs, RBI, January 2013
Share of banks and NBFCs in gold loans outstanding (in percent)
Source: Report o the Working Group to Study the Issues Related to Gold Imports and Gold Loans by NBFCs,
RBI, January 2013
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What will theemerging middleclass seek? Willbanks be able to
provide?
The new middle class is likely to be
ckle in its banking relationship given
the very low costs of, and multiple
available options for, switching. The key
to building and proting from a long-
term relationship with this segment will
be the ability to build trust over a series
of transactions. The current trend in
banks of disproportionately rewarding
the aggressive seller of fee based
products and services will thus need to
be replaced with rewarding relationship
sustainers those who balance a
holistic view of customer protability
with equally high customer satisfaction
ratings.
According to a study, about 69 percent
of the customers in the high and upper
middle income group would tend to
remain with their bank when choosing
to buy a nancial product even if the
bank did not quote the best price.5
A key aspect to this challenge will be
the banks ability to build and retain
a team that is trained, not only in the
nuances of the products and services
they sell, but also in the development of
soft skills and trust building skills. The
emerging middle class is likely to value
the relationship higher; if their point of
contact is someone they trust.
5 http://www.iibf.org.in/scripts/monthlycolumn_july.asp
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Micro, Small & Medium
Enterprise The next growthengine or banking
The Micro, Small & Medium Enterprise
(MSME) sector is a major driver of
growth for the Indian economy. In
2009-10, there were around 29.8 million
registered and unregistered enterprises
(as classied by the banking denition ofcompanies with a turnover in the range
of 20 to 200 crores) across various
industries. Out of these, about 60,000
are public or private limited companies,
1.5 million are partnership companies
and the rest are proprietorships. There
are another 30 million micro enterprises
in the unorganised sector.1
Under a broad categorisation,
approximately 77 percent of the total
turnover of the MSME sector is linked to
various industries in the manufacturing
sector (agri and food products,
textiles, metals etc.) and the balance
is contributed by the entities linked to
the services sector (agriculture, trade,
retail, maintenance, IT etc). All together
the MSME segment accounts for 45percent of the countrys industrial
output and 40 percent of exports. The
overall contribution of this segment to
Indias Gross Domestic Product (GDP)
has been holding steady at 11.5 percent
a year2. And yet, the MSME sector faces
a chronic shortage of bank nancing
to aid its growth and improvement
agendas.
Ownership structure o enterprises in the
MSME
Type o structureShare o MSME
enterprises
Proprietorship 94.5%
Partnership, Cooperatives 1.2%
Private Limited, Public Limited 0.8%
Others 3.5%
Source: MSME Census , IFC Report on micro-small
and medium enterprises in November 2012
1 MSME Census, IFC Intellecap Analysis 2 Report of the Working Group on Sick Micro, Small and Medium
Enterprises, Reserve Bank of India (RBI), 2009-10
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Only one third of theMSMEs have access
to organized nancingchannels in India
The slow growth of MSME is broadly
attributable to the lack of nancing or
lack of facilities and skills. Given the
high growth aspiration levels of MSME
promoters, both are debilitating factors.
It is estimated that only 33 to 34 percent
of the MSMEs had any access to bank
or institutional nancing channels and
in the absence of this nance, prefer
to raise nancing through personal
channels (friends, family, informal
nanciers etc).
By any stretch of imagination, this
unmet demand presents a signicant
opportunity for the ow of banking
credit. To encourage greater bank led
nancing, the Reserve Bank of India
(RBI) had increased its focus on this
sector through directed lending policies
such as priority sector lending (PSL)
norms. However, given the signicant
demand-supply constraints, the
nancing chasm has grown.
Small Industries Development Bank of
India (SIDBI) has estimated the overall
debt nance demand of the MSME
sector at INR 32,50,000 crore (USD 650
billion)3. 22 percent of this amount is
the debt nanced through the formal
sector, in which banks have the largest
share (approximately 85 percent). Most
of this debt ows to the registered
enterprises. The risk perception
attached to unregistered or unorganised
enterprises due to a lack of transparent
nancial data, limited immovable
collateral and lack of credit assessment
skills of some sub-segments and the
preference for less hassled, informal
nancing, reduces addressable demand
considerably. Working capital nancing,
and to a lesser degree debt for capital
expenditure are the two key offerings
sought by MSMEs.
MSMEs in Eastern Indian and
particularly North Eastern states have
been lagging behind the other states in
terms of access to nancing from the
banks. Low access to infrastructure and
electricity and roads has signicantly
hindered the growth of the MSME
industries in these regions and
consequently their access to organized
lending from banks. The MSME industry
clusters in these states are varied
and range from the trade and metal
processing centres in Orissa, Jharkhand
and Chattisgarh to forest product and
handloom related centres in the North
Eastern states.
Distribution of enterprises in the MSME sector and prevalent ownership structures
Source: MSME Census, IFC - Intellecap analysis
3 IFC report on MSME
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While challenges fornancing this sector
continue, Reserve Bankof India (RBI) is creatingan impetus for banks to
nance
Source: IBEF, IFC Intellecap Analysis
As awareness of formal nancing
opportunities grows within the
addressable parts of the MSME sector,
banks have an opportunity to grow
their credit exposures, limit risks and
seek better spreads by developing andimplementing MSME sector specic
policies and operating models.
The regulatory framework dened by
the RBI (and recently strengthened
by the Nair Committee report) has
set targets for banks to achieve in
lending to the MSME sector (7 percent
to 15 percent of lending portfolio
to be allocated for nancing micro
enterprises) and an overall 40 percent
of their annual credit to be allocated
to priority sector lending. Further, theNair Committee has also sought to
limit to 5 percent, the indirect lending
portfolio earlier used by banks who lent
to NBFCs to further lend to MSMEs, to
meet PSL norms.
Given the signicant variance in MSME
knowledge, extensive branch network
linked liability relationships and regional
versus centralized credit assessment
skills between public sector banks
(PSBs) on one side and private and
foreign banks on the other, it is no
surprise that PSBs account for over 70
percent of the debt nancing to this
sector, while private and foreign banks
account for 22 percent of credit ow.
However, traditional challenges of bank
nancing of MSMEs remain:
Broad, rather than niche
segmentation of the market
Limited market assessment skills
at branches (and limited ability to
gather and analyse proxy data)
Centralised product design rather
than customised products that
address the needs of specic sub-
segments
Vanilla models of fund based
products and limited creditassessment skills for knowledge
based industries with limited
immovable collateral.
Many banks also treat credit to this
segment as a necessity for meeting
compliance norms, rather than as
an opportunity. Many such banks
tend to narrow the denition of such
enterprises (investment in assets)
rather than seek a broader denition
that could include revenues, order
ows, past cash ows etc.
Arunachal Pradesh
Arts and Crat
Weaving
Cane and Bamboo
Mizoram
Bamboo
Energy
Sericulture
Orissa
Iron and Steel
Aluminum
Handloom
Assam
Tea
Tourism
Traditional Cottage Industry
Tripura
Food Processing
Bamboo
Handloom Handicrats
Manipur
Handlooms Handicrats
Sericulture
Food Processing
Bihar
Food Processing
Rubber and Plastics
Transport Equipment
Meghalaya
Food Processing
Horticulture
Mining
Chhattisgarh
Food Processing
Gems and Jewelry
Iron and Steel
Nagaland
Bamboo
Food processing
Horticulture
Jharkhand
Mining/Iron and Steel
Rubber and Plastic
Handloom
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Banks will need todevelop multiple
operating models and go-to-market strategies for
the MSME market
Banks need to work with SMEs linked
to the supply chains of their large
corporate customers and leverage
this relationship to better manage
and control credit exposures. Many
banks have successfully implemented
supplier and dealer nancing products
and processes and will seek to increase
penetration deeper and across a larger
number of corporate clients. Co-write
credit with a trusted Non Banking
Finance Company (NBFC) partner,
where rst lien on collections remains
with the bank. The advantage of this
model is that both partners leverage
their respective strengths (banks ability
to provide an envelope of services suchas forex hedging, LCs/guarantees and
debt, and NBFCs providing subsidiary
debt, specialised knowledge of the
MSME, local collections capability and
other non-banking services). Given
the recently imposed limits on indirect
nancing, this model shall become
more attractive.
1. Cluster based nancing has already
been demonstrated successfully by
some banks by focussing on small
sub-sectors that are geographicallyconcentrated into specic areas and
have very similar market cycles and
supply chain linkages. By creating
specialist credit capabilities for each
sub-sector, banks have been able to
reduce their credit risks substantially
through the modulation of credit
ows based on knowledge of
business cycles.
2. Linking personal and small business
accounts has enabled many banks to
develop a close link with promoters
and proprietors. The availability of
data linked to personal accounts
provides good insight to support
credit decisions to this group.
3. Strengthening of support
infrastructure
a. Legal and regulatory framework
such as a single consistent
denition of the sector, extending
the Securitisation Asset
Reconstruction and Enforcement
of Security Interests (SARFAESI)
coverage, expanding the coverage
of credit rating agencies,
enhancing credit guarantee
coverage, securitisation of trade
receivables through conducive
legal infrastructure, creating
a single collateral registry for
immovable assets, supporting
Asset Reconstruction Companies
(ARCs) etc.
b. Governmental support such as
providing platforms for market
linkages, skills development,
technology upgradation andpromoting cluster development,
enhancing advisory support,
supporting the growth of venture
funds.
Segmentation of customers
Source: KPMG in India analysis
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Inrastructure fnancing
building the oundation
Given Indias size and relative under-development,there exists an immense need to setup basicinfrastructure across the country
As per the Planning Commissions XIth and XIIth 5-year plan, the investmentrequirement in infrastructure is expected to grow at CAGR of 14.6 percent from
FY 08 to FY 17.
In order to sustain the long term growth momentum, India needs signicant
investment in the infrastructure sector. Planning commission has projected
infrastructure investment of more than INR 40 lakh crore in the XIIth 5-year plan,
which is nearly twice that of the XIth 5-year plan.
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However, private investments which are required to
increase signicantly to INR ~20.5 lakh cr for FY13-FY17,
have not seen the required traction in the rst year of this
plan.
Signicant private sector investments are required for
bridging infrastructure investments gap and meeting
revised targets by the Planning Commission. Considering
the 70:30 debt to equity ratio, the overall debt
requirements (disbursement potential) is expected to be
INR ~14.3 lakh cr.
Infrastructure investment, FY08 - FY17 (at 06-07 prices)
Source: Planning Commission, KPMG in India analysis
Public/ Private investment break-up (at 06-07 prices)
Source: Planning Commission, KPMG in India analysis
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Policy inaction,reluctance of
promoters to investadditional equity, and
specic issues likelack of reliable fuelsupply or issues in
land acquisition haveincreased risk in the
largest infrastructuresectors i.e. power
and roads
Opportunity mapping across sub-sectors within infrastructure shows the current balance of risk and attractiveness as
perceived by lenders in infrastructure nance
Source: KPMG in India analysis
Note:
- Investment in Storage does not include investment requirement in land
- Numbers corresponding to the bubbles indicate fnancing opportunity in INR cr
As of April 2013, several power sector
projects are stalled due to the lack of
assured coal supply leading to unseen
levels of risk averseness amongst
lenders. Contrasting with the scenario
of 2009-10 where lenders would
sanction funding to projects with the
assumption of eventual signing of
Fuel Supply Agreements (FSA), today
they require a signed Power Purchase
Agreement (PPA) as well, in order to
have clear visibility of project cash ows
prior to sanction. The roads sector
has also faced a number of issues on
the regulatory front, primarily land
acquisition, environmental clearances,
right-of-way clearances and occasionalresettlement problems with local
population.
Roads have traditionally been
considered a lower risk sub-sector
within infrastructure, with quicker
commencement of commercial
operations as compared to power
projects. This has led to intensication
of competition amongst road developers
and aggressive bidding to win projects.
However, signicant deviations in toll
revenues in recent times have forced
lenders to restrict disbursements even
to sanctioned projects based on the
increased perception of construction
and operational risks.
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Due to lack of depthin the corporate debtmarket, bank nance
to the sector is ofcritical importance
and the banks havecurrently taken a
cautious approach asthey are experiencing
portfolio stress
Banks had been the mainstay for
infrastructure funding during the
XIth plan period, especially for the
power sector. However the banks
are taking highly cautious approach
towards lending to the infrastructure
sectors. Several key reasons exist for
banks reluctance in further funding.
Most banks have already reached
their internally approved sector-wise
exposure norms. Limited availability
of take-out nance is leading to the
asset being on the banks balance
sheet longer than expected. Difculties
in recovering dues from promoters
due to stalled projects not generating
revenue has increased the overallportfolio stress. Also, the banks have
limited appetite for complex structures,
which are more popular with NBFCs for
smaller deals.
The lack of depth in the corporate
debt market in India restricts the
channelization of capital ows towards
the infrastructure sector. The corporate
bond issuer prole is dominated by
banks and public sector companies,
with minuscule participation from non-
nancial private issuers. Additionally,nearly 100 percent of such issues are
raised through private placement, with
nearly no secondary market in place to
encourage market-making, liquidity and
price efciency of debt issues. Without
this key avenue for diversication
of funding sources away from the
bank dominated nancial system,
infrastructure developers are nding
it difcult to raise long term money
efciently from the capital markets.
The takeout nancing schemeintroduced in 2010 by the government
through Indian Infrastructure Finance
Company Limited (IIFCL) sought to
assist banks in avoiding an asset-liability
mismatch and also free up funds to
nance new projects. However, the
scheme experienced limited success
since the government restricted IIFCL
from continuing to fund the project
after the lead bank exits. In April 2013, a
committee comprising nance ministry
ofcials was setup to make takeout
nancing work better. The government
is considering relaxing these rules
which could help the state-owned IIFCL
provide longer-term funding to such
projects at economical terms.
Insurance companies, who have access
to long term funds, are restricted by
regulator-imposed sector investment
limits which further restricts the ow
towards infrastructure projects.
The current supply constraint has led
to the rise of External CommercialBorrowings (ECBs) as a competitive
alternate source of supply. Infrastructure
developers have raised money in foreign
currency at a signicant cost advantage;
however they continue to remain wary
of global group policies of the lending
banks which had created issues in the
sector in 2008.
Developers are willing to accept a higher
cost for structured products. Nearing
the end of their equity investment
capacity, increasing number ofdevelopers are looking for options such
as quasi equity, mezzanine debt, holding
company debt, viability gap funding, etc.
Indian banks are wary about innovative
structures as is evident from long cycle
time for sanctions, primarily a result
of strict regulatory capital standards
for products deemed riskier by RBI.
Smaller NBFCs and foreign banks active
in this space have demonstrated a
more nimble and fast-moving approach
towards closing deals of this nature.These products remain signicantly
higher yielding than standard project
loans or corporate term loans.
Approximate total supply XIIth Plan Period
IFCs 450,000
Banks und based (Direct to
clients)350,000
Primary debt unding 750,000
Source: KPMG in India anaysis INR Cr.
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Owing to inherentbenets and
signicant potential,the governmentis taking several
initiatives to drivegrowth of renewable
energy sources
Installed capacity - renewable energy*
Renewable energy capacity mix - FY12**
Source: Central Electrical Authority (*) As on 31 December 2011
Source: Central Electrical Authority (**) As on 30 June 2011
The evolving process maturity amongst developers in solar, and increasingly in wind
energy generation has created a niche space for nanciers who have cultivated
technical expertise amongst their personnel.
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Several nancialinstitutions areocking to the
opportunityrepresented by
renewable energydue to the overall
cautious stance onthermal sources of
generation
Conclusion
A signicant proportion of the infrastructure investment is expected to come from
the private sector. Banks have been the mainstay of the infrastructure funding
through direct and indirect routes however they have taken a highly cautious
approach in the recent times as they are experiencing signicant stress on their
portfolio due to underlying business issues. Unless government takes strong policy
measures addressing the supply constraints, approval delays and creates enablers
for infrastructure growth, infrastructure nance would remain a tough propositionfor the nancers. Infrastructure nancers are keenly pursuing funding opportunities
in the emerging segments and are bringing in product structure innovations which
may prove to be key growth drivers in this challenging environment.
At a per MW cost of INR 13 cr based on negative movement in currencies, deal
sizes are still small compared to conventional power sources. Despite this fact;
starved of opportunity due to management reluctance to fund conventional energy,renewables are expected to be a crucial focus area for banks and Infrastructure
Finance Companies (IFCs) alike.
Energy source
Total capacity to
be added during
XIIth Plan (MW)
Benchmark cost
(INR Cr/MW)
Total investment
requirement
(INR Cr)
Debt requirement
(INR Cr)
Wind 11,000 6 66,000 46,200
Solar 4,000 13 52,000 36,400
Other RES (Biomass
+ Small hydro
[
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The Aam Aadmi proftably
serving the unbanked andunderbanked
Rural opportunity is large and growing
Rural India constitutes 69 percent of the total population and drives about half the
GDP of the country, a ratio which has mostly remained unchanged over the past
ten years. However, it has been observed that its per capita GDP has grown faster
than its urban counterparts, growing at ~ 6.2 percent since 2001 as against 4.7
percent for urban India, signaling higher productivity growth. The proportion of the
rural households earning an income of INR 90,000 and above has increased to 37
percent in 2011 as compared to ~18 percent in 2001 with maximum growth being
seen in the higher income brackets.1
1 How India earns and spends, NCAER; KPMG in India analysis
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The prole of rural economy is also
changing fast and is getting increasingly
diversied and moving beyond
agriculture. The share of agriculture in
rural GDP has reduced from 42 percent
in 2001 to 27 percent in 20112. A holistic
approach to rural India would therefore
require understanding the non-agro
space as well which includes activities
such as manufacturing, trading,
transportation, construction etc.
In addition to rising rural incomes,
improved rural infrastructure like roads,
power and telecom has also contributed
to growth of the rural economy.
Access to bankingservices is stillconstrained despite thesize of the pieIn the backdrop of this growth in
rural India, however, there is still a
huge demand supply gap for banking
services. Rural India accounted for only
9 percent of the total deposits and ~10
percent of the total credit of the banking
sector in 2011 with a large number of
rural households having no access to
formal sources of credit.3
Various challenges inherent in rural
nance have led to inadequate access
to nancial services for the rural
population. Some of these are as below:
Lack of adequate credit
information: Credit information for
rural customers is usually constrained
as the penetration of credit bureaus
is not strong and the borrowerspossess limited documentation in
terms of proof of income.
Limited collateral: Assets
ownership is limited and generally
restricted to farm land with lack of
clear title and documentation. As a
result of which, this sector becomes
a high risk segment for banks to
nance.
High operational costs and
complexity: Operational costs are
higher on account of low ticket sizes,
low population density and higher
cost of due diligence. In addition,
the rural economy is largely a cash
economy, which leads to increased
complexity and risk of operations.
Diverse prole: The sheer diversity
of the Indian rural landscape poses
signicant challenges as thecustomer prole and banking needs
vary across regions.2 Credit Suisse Report on India Market Strategy, 2012
3 RBI Basic Statistical Returns; KPMG in India analysis
Income pyramid - Rural households (mn)
Source: How India earns and spends, NCAER - CMCR analysis, KPMG in India analysis
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Tapping the ruralbanking opportunity
requires an innovativeapproach
The traditional banking model has clearly
not worked in rural India due to its high
cost structures and ineffectiveness in
adapting to the requirements of rural
customer. Tapping the rural opportunity
would require banks to focus on the
following few things:
Developing simple products
Rural customers would typically
have basic needs which can be met
with simple plain vanilla products
with minimal additional features and
options. The product terms need to
be communicated clearly and in a
transparent manner.
A gold loan is a good example of a highlysimple and effective product to meet
the credit needs of the rural customers.
The product can be delivered quickly in
a decentralised environment, requires
very limited documentation and
provides the security of collateral like
gold.
Low cost innovative delivery models
Several new alternative channels are
emerging as against the traditional
branch-led model. BusinessCorrespondent (BC) channel has a
strong potential to deliver technology
enabled low cost solutions. However,
the BC channel is only a means of
delivering service and the banks would
still need to work on product and
market development to make the BC
model sustainable and effective. There
are several instances of BCs opening
a large number of accounts which
continue to stay inactive and ultimately
become dormant. Banks need to work
on developing a comprehensive product
suite including credit that can help BCs
engage the customer all year round.
Another low cost delivery model is
supply chain linked nancing. Several
commodities and agricultural produce
have a strong well developed value
chain, wherein the linkage of the farmer
to the end buyer can be tapped to
create a nancing opportunity. A case
in point is sugarcane, where the farmer
is obligated to sell his produce to asugar mill in the vicinity. The farmers
cash ows are dependent on the sugar
mill, and the repayments for any loan to
the farmer can be collected out of the
money that the sugar mill owes to the
farmer at the time of harvest. The model
helps banks leverage the long standing
relationship of sugar mill with the
farmers to do appraisal, disbursement
and collections in a cost effective and
efcient manner. The same model can
be extended to other commodities
that have strong value chain linkages
e.g. tobacco, milk and other crops
where contract farming model is being
adopted.
Harnessing and developing local
talent
A key challenge in rural markets isinformation asymmetry due to lack of
documented information. A good way
to overcome this challenge is to tap the
local talent which brings in immense
local knowledge and relationships which
can otherwise not be accessed. Local
talent is also likely to be much more
stable against talent brought in from
larger cities. Banks therefore need to
actively develop the local talent base
and use it as a hiring ground.
Leveraging technology
Technology enabled solutions can go
a long way in developing low cost and
efcient delivery channels for rural
India. There are several technologies
which have already come up in the
market low cost ATMs, point-of-sale
terminals, mobile-based technologies
etc. and are being experimented with.
Mobile- based technologies are likely to
lead the way as mobile consolidates its
position as an ubiquitous connectivity
device. The key to success lies in early
adoption by the customers and banks
need to work extensively towards
customer education and awareness.
Experiential marketing is a good
way to encourage the usage of new
technologies and banks should focus
on making customers comfortable with
new technologies with a sustained
campaign. Targeting youngsters is
also a good idea as they are likely to
be the future customers and are also
strong inuencers in adoption of newtechnologies in the household.
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Banks need to bridgethe gap between
regulatory obligationand commercial
opportunity
Rural India presents a signicantly large opportunity that is still at a nascent stage
of being tapped by the banking industry. Recent regulatory interventions have
required banks to penetrate deeper in rural markets with ultra small branches in
villages with population as low as 2000. With substantial investments going into
rural markets, developing a sustainable business model has therefore become a key
imperative. We have witnessed similar waves of transformation in other industries
like telecom where a deep market penetration has been achieved driven by industry
efforts rather than a push for universal service obligation. It is time now for the
banks to change their outlook towards rural banking from a regulatory obligation to a
commercial opportunity.
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Innovative and cost eective
operating models
With increasing competition, emerging
customer demands, regulatory
interventions, technology led
disruptions and higher shareholder
expectations, Indian banks are being
forced to constantly review and revisittheir operating models. The resulting
changes are making Indian banks
nimbler, more cost efcient, better
focussed on customer services and
witnessing better returns through fee
based services and products.
A responsive target operating model
will be the need of the hour. The
determination of whether the business
model can be modied to increase
its adaptability to market and client
needs is one that has to be made at thetop of the house. Based on the rms
business strategy and changing market
dynamics, a banks target operating
model should encompass the following
guiding principles:
Operation and technology should be
highly automated, low cost, robust
and scalable.
Operations and technology should
be extendable to other parts of the
business.
Redesigned business operating
models should separate generic
products from higher margin
products in order to leverage scale
and cost efciency for generic
products and to focus on revenue and
margin for complex products.
Combining functions (as in factory
and or utility models) and costs
across multiple products/ services
and territories can eliminate
products/ service and geographic
silos.
A joint venture or consortia structure
that combines in-house capabilities,
processes and functions with other
processing leading capabilities, scale,
and/or cost structures can deliver big
benetsbut is not easy to achieve.
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Can operational functionsbe standardised orcombined?
The virtues of product-centric models
are clear: faster time to market
(especially for products such as
derivatives), strong product domain
specialization, and high single-product
throughput are obvious benets. The
drawbacks are the cost of excess
capacity when volume trends down
and duplicative functions and systems.
Excess capacity, in terms of technology
assets and operations, consist of
systems and staff.
In contrast, process-centric models
offers greater processing efciency
that can more effectively leverage
straight-through processing (STP) to
conduct the entire capital markets trade
and payment process electronically (
the industrial methodology many are
moving to). These are risks, however.
Some domain knowledge may be lost,
or the rm may appear unresponsive if
a poor service level agreement (SLA) is
in place, and single product throughput
may be limited.
Alternate Partnership Models
Alternate partnership models are sparking interest.
Outsourcing relationships are moving towards partnership models with key service
providers. These may include two or more banks in partnership with a service
provider in order to develop a key product capability using technology as an enabler.
This is certainly true in emerging markets, where collaborative models (joint
ventures, consortia) are being considered as a way to lower transaction costs in
Asian, European, and Middle Eastern markets.
+ Faster time-to-market for product
+ Strong product domain knowledge
+ High single product throughput possible
- wastedexcesscapacityasvolumesuctuate
- High cost: extensive duplication of functions and systems
+ Greaterprocessingefciency
+ Any single product throughput may be limited
+ Can more effectively leverage STP
- Can appear unresponsive if a poor SLA is in place
- Can lose domain knowldege
Source: KPMGs Rethinking operations - A closer look at operational transormation, 2012 and KPMG in India analysis
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Optimizing the useof technology as the
change agent
Enhanced focus on
digital banking andself-service channelusage to reduce the
cost of operations
Straight ThroughProcessing (STP) willbe a key determinant
for process
efciencies
While many banks have invested
in core systems and horizontally
integrated operations centres, most
face challenges in extracting value from
investments in technology. Leading
banks will be able to take a holistic view
of implementing new technologies, by
simultaneously changing processes
and organisation structures, and thus
will be able to measure the benets of
the effective use of new technology for
improving customer-facing as well as
internal processes.
Leading global banks have focused
on providing customers with more
self-service options for carrying out
all banking activities. In India, the
success of the ATM channel and
increasing usage of internet and mobile
banking is clearly evident. However,
it is highly imperative to undertake
a comprehensive risk assessment
exercise and plan carefully before
shifting processes to digital/self-service
mode. Many banks have struggled in
this effort as they tried to replicate a
branch based or paper based process
onto the internet channel. Only a fewbanks have successfully transitioned
a customer service to the internet,
by redening the underlying process,
the customer interface and all support
systems.
Lack of end-to-end automation of
transaction and service processes,
some of which can be conveniently
automated from start to nish, is a key
contributing factor to high costs and
inefciencies of banking operations.
Disparate technology platforms andprocessing systems within a bank
make it difcult to achieve this in a
seamless manner. Banks need to drive
STP through the adoption of technology
enablers such as imaging and workow
systems and reconguring processes.
STP can be extended to customers
as well with most banks integrating
their online platforms with the nancial
systems of customers such as SAP,
Oracle Financials, Tally etc.
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Branch will continueto play a core role in
the operating model;although in a different
avatar
Customer as the focalpoint of the operating
model
Leading banks have realized that branches will continue to be highly relevant,
albeit with a signicant role change. The branch will remain a signicant channel
of choice not only for older and less technology-savvy customer segments, but
surprisingly also for a number of younger urban and semi-urban consumers, many
of whom value face-to-face interaction and personal touch while availing complex
or investment-led nancial products for the rst time. Leading banks are already
experimenting with the formats, roles and operations scope of their branches by
making available multiple channels inside branch premises, focusing on customer
awareness and on complex transactions which require a very high degree of
customer advice and interaction.
The banks rated high on customer service satisfaction levels will have adopted
an operating model that would have processes organised by relevant customer
segments, and deliver a comprehensive, integrated service package to each
customer segment with clearly dened ownership and accountability. A First-Time-
Resolution (FTR) approach will need to be adopted across the bank to help ensureservicing of customer requests and handling of customer requirements at the rst
node of contact, without the need for request routing and multiple iterations and
interactions. Customer centric operational realignment with requisite technological
support is imperative for this to work effectively.
Globally, banks are trying to model their operations around customer centricity
taking a cue from the fast-moving consumer goods industry. To provide an
example, leading banks in Australia have adopted an owner/entity end-to-end total
responsibility model similar to the role of a brand manager in the FMCG context.
Leading Indian banks are expected to recongure their service delivery model
and processes and institutionalize new customer centric behaviours through the
management of new skills in employees.
The target operating model hence developed should be exible enough to
handle the complexities and uncertainties, cope with the heightened business
and regulatory demands, highly uid market environment, changing customer
expectations and preferences.
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Big Data as a source o real time
business insights
Big Data is now widely applicable,
becoming useful to users of digital
technology and is relevant from an
economy, sector, and an organisation
view point. Today an online search on
Big Data throws up a result of morethan two billion pages which clearly
indicates that big data itself unwittingly,
has become part of the big data
phenomenon.
This data come from posts to social
media websites, digital pictures and
videos, transaction records, call data
records, global positioning system
(GPS) etc. Industry leaders are showing
keen interest in harnessing the
potential of big data to enhance value
creation by offering specially designedproducts for their customers. This can
be lucidly explained in the social media
environment, where data is created by
the consumer which provides insights
on the needs of the consumers and
thus allows businesses to offer targeted
services for the consumers. The
combined effects of Moores law, cloudcomputing and a rapidly increasing
digital presence have provided
businesses an opportunity to aggregate,
store, manipulate, integrate, analyse
and interpret The Big Data to provide
real time business insights.
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The multitude increase in the number
of people, devices and nodes being
connected by digital networks is further
revolutionising the ability to generate,
communicate, share, and access data.
In 2012, close to 5 billion people, or
60 percent of the worlds population,
were using mobile phones, and about
15 percent of those people had smart
phones, whose penetration is growing
at more than 20 percent a year.
We believe that the transformational
changes that Big Data is bringing about
are at an inection point and are in the
process of being unleashed.
Financial services and Big Data
Wal-Mart handlesmore than 1mcustomertransactions everyhour, feeding databases
estimated at more than 2.5petabytes.
SAS whitepaper - Big Data Meets Big Data Analytics
The nancial services industry is highly data intensive. The following depicts a
snapshot of the volume of data that a typical bank can be exposed to.
Hence Big Data analytics will have an important role to play in the performance of
this sector. The industry drivers that accelerate the need for big data in nancial
services industry are:
Source: KPMG in India analysis
REGULATORY
COMPLIANCE
RISK
MANAGEMENT
CUSTOMER
INSIGHT
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Understanding thecustomer
Banking for the afuent
There exists a set of customers whohave access to a variety of nancial
products across institutions. These
customers have transient relationships
with multiple banks - a current account
at one bank that charges no fees, a
savings account with a bank that offers
high interest, a mortgage with a one
offering the best rate, and a brokerage
account at a discount brokerage. Banks
no longer have a complete view of
their customers preferences, buying
patterns and behaviors. This problemis compounded by the fact that social
networks now capture very valuable
psychographic information the
consumers interests, activities and
opinions.
Even if banks manage to integrate
information from their own disparate
systems, which in itself is a huge task,
a fully customer-centric view may not
be attained. It is imperative to obtain
a full understanding of customers
preferences and interests. Onlythen, banks can address customer
satisfaction and build more extensive
and competent models. Banks must
therefore bring in external sources of
information, information that is often
unstructured. With a large population
of consumers adopting smartphones
today, we see a growth in the use
of mobile applications that allow us
to carry out transactions related to
managing personal nances. This will
lead to even more unstructured data
ows from a wide variety of sources
that banks will have to manage.
Valuable customer insight may also be
culled out from customer call records,
customer emails and claims data and
other documents, all of which are in
textual format. New data integration
and business intelligence technologies
are needed to gather transactional data
residing in CRM systems and payments
systems, and unstructured data owing
from within and outside the bank.
This shall augment the traditional data
warehousing and analytics approach.Big data technologies therefore play
a pivotal role in enabling customer
centricity in this new reality. It will
not only bring in more operational
efciencies in nancial decision making
processes but will also see more and
more consumer tools and applications
that will leverage the same Big Data
technology to alter how consumers
manage their nances.
Banking for the unbankedOn the other hand, a vast proportion
of the population in India is excluded
from formal banking services. The
Government as well as the Reserve
Bank of India (RBI) has placed a
signicant thrust in driving nancial
inclusion across the country.
Traditionally nancial institutions have
struggled to provide banking services
since they lacked quality data in
authenticating this segment as bonade
customers. However with the Aadhar
initiative, this is likely to change as there
will be a single database capturing the
attributes of every citizen in the country.
The regulator has issued guidelines
advising banks on accepting Aadhar as
an identity for opening of bank accounts.
Some institutions have already taken
the lead in understanding the needs
of this segment and coming up with
tailor made solutions. Remittance
solutions, no frills banking account and
microinsurance products are in various
stages of rollout for this segment. This
is a clear example of how big data can
be leveraged in designing customized
products and solutions.
Only 1 in 6 villages in India haveaccess to banking services.RBI Vision Documents on Payment Systems for 2012 2015
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Being on the right side of the regulator
Dealing with increasing fraud and risk
The most obvious driver for Big Data
adoption is that nancial transaction
volumes are growing multifold which
is resulting in explosive data growth in
banks.
Considering the sudden surge in the
number of devices that customers canuse to initiate core transactions, we can
also expect to see a surge in the number
of transactions they make. Not only is
the transaction volume increasing, the
data points stored for each transaction
are also expanding.
In order to limit fraud and to detect
security breaches, data logs from banks
internet channels, geospatial data from
smart phone applications, have to be
stored and analyzed along with core
operations data. In the recent past,fraud analysis was usually performed
over a small sample of transactions,
but increasingly, banks are considering
analyzing entire transaction history data
sets. Similary, in order to accommodate
better predictive modelling, the number
of data points used by banks for loan
portfolio evaluation is also increasing.
A number of public sector banks in
India have came together to construct
a collaborative fraud detection program
through the usage of sophisticated
analytics techniques. This initiative aims
to scan transactions real time to identify
patterns which can help prevent fraud.
The Financial sector is a highly
regulated sector in India with norms and
guidelines set for every transaction and
every process.
For instance, the RBI has directed all
banks to standardize their regulatory
reporting by following an automated
data ow (ADF) approach to ensure
100 percent accuracy and zero human
intervention in every stage of reporting
- right from data extraction from source
systems till the actual submission of
returns (reports) on to RBIs Central
Data Repository. Banks that cannot
utilize complete information (probably
due to storage challenges) and rms
that believed reporting didnt really
require management attention, are now
warming up to the new big data reality.
The Basel regulations around risk
management alone have added a
signicant number of theorems around
liquidity planning and overall asset and
liability management functions. Point-
in-time liquidity positions currently
provided by static analysis of relevant
nancial ratios are no longer sufcient,
and a more near real time view is being
required. Efcient allocation of capital
is now seen as a major competitive
advantage, and risk-adjusted
performance calculations require new
points of integration between risk and
nance subject areas. Additionally,
complex stress tests, which put
enormous pressure on the underlying
IT architecture, are required with
increasing frequency and complexity.
Similarly on the capital markets side,
regulatory efforts are focussed on
getting a more accurate view of risk
exposures across asset classes,
lines of business and rms in order to
better predict and manage systemic
interplays. Many rms are also moving
to a real-time monitoring of counterparty
exposure, limits and other risk controls.
From the front ofce all the way to
the boardroom, everyone is keen on
getting holistic views of exposures
and positions and of risk-adjusted
performance.
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