Indian banks can reimagine global financial services

Indian banks ready to take on the world
From local heroes to global players, Indian banks are getting ready to collaborate, innovate, and shape the future of finance on a global stage.

Indian banks have undergone profound changes in the last two decades. They have gained global significance, and are charting a course for continued success. Indian banking had remarkable resilience since 2006, especially during the 2008 financial crisis and the subsequent tightening of regulations. There has been a significant recovery in return on equity (ROE) and return on assets (ROA) since 2018, almost reaching the levels seen before the financial crisis. This places Indian banking as a global exemplar of stability and recovery.

While traditional metrics paint a picture of recovery, a nuanced analysis of the price-to-book value reveals a complex narrative. Globally, there has been a downturn in this metric, with Indian banks witnessing an 18% drop from the pre-crisis levels. Despite this, Indian banks outperformed their global counterparts, reinforcing their position in the banking universe.

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Indian banks energised by fintechs

The Indian banking sector is no longer a monolith dominated by traditional players. The rise of nimble fintech startups has injected a wave of innovation and challenged established norms. While these disruptors may pose competitive threats, they also present valuable opportunities for collaboration. Banks must embrace open innovation and forge partnerships with fintechs to leverage their agility and technological expertise. By integrating AI-powered solutions, streamlining processes, and developing customer-centric products, banks can stay ahead of the curve and thrive in this dynamic ecosystem.

Moving beyond conventional metrics, economic profit emerges as a pivotal indicator of a bank’s true health and its value to shareholders. The returns over the cost of equity, is a more comprehensive yardstick of a bank’s performance. Our research indicates that EP explains 41% of a bank’s Price to Book value, surpassing both RoA and RoE in predicting market valuation. This insight is crucial, urging banks and regulators to focus on EP for more effective strategic decision-making.

Five imperatives for future-proofing banks

Beyond urban centers lies a vast network of rural communities, often excluded from the mainstream banking system. Bridging this gap is not just a moral imperative, but also a strategic one. Indian banks have a unique opportunity to drive financial inclusion by expanding their reach into rural areas. Microfinance initiatives, mobile banking solutions, and financial literacy programs can empower these communities, unlock their economic potential, and contribute to India’s broader development goals. By ensuring equitable access to financial services, banks can foster inclusive growth and create a more resilient and prosperous nation.

As we look to the future, five key areas emerge as essential for the Indian banking sector to thrive:

Revolutionising distribution: The banking sector has seen a shift from traditional branch banking to more digital and low-cost distribution models. The evolution is marked by a significant investment in both physical and digital channels, capitalising on India’s strong digital infrastructure. The future demands a balanced approach, ensuring that innovative products and digital solutions are accessible across diverse channels.

Embracing digital transformation: The digital revolution offers unprecedented opportunities for customer engagement and service improvement. From the adoption of account aggregator systems to digital underwriting, banks are poised to leverage technology for greater efficiency and reach. The digital shift is not just about enhancing existing services but reimagining banking in a digital age.

Adapting to Generative AI: The emergence of generative AI technologies is set to redefine banking operations. From personalising customer interactions to streamlining risk management, AI holds the key to a new era of banking efficiency and innovation. Banks must prepare for this wave of disruption, rethinking traditional roles and embracing new talent that can harness AI’s potential.

The integration of AI into banking operations is not just about adopting new technologies; it also demands a significant shift in the talent landscape. Banks must invest in upskilling and reskilling their existing workforce to equip them for the AI-powered future. This includes training programs on data analysis, machine learning, and responsible AI development. Additionally, attracting and retaining top AI talent will be crucial. By fostering a culture of continuous learning, innovation, and collaboration, banks can ensure they have the human capital necessary to navigate the transformative power of AI and unlock its full potential.

Confronting climate change: The risks and opportunities presented by climate change are significant. Banks must develop robust strategies for transition finance, aiding businesses in adopting more sustainable practices. This involves not just financing but also advisory services, helping clients navigate the complexities of a changing environmental landscape.

Advancing risk management: In an era where digital threats loom large, enhancing risk management frameworks is critical. Banks must evolve to address emerging risks, from cyber threats to the challenges posed by generative AI. This calls for a comprehensive approach, integrating advanced risk models and governance structures to safeguard the sector’s integrity.

The Indian banking sector stands at a crossroads. Its current trajectory, though promising, requires sustained effort and strategic foresight. Embracing these imperatives collectively, the industry can not only maintain its global stature but also drive India’s broader economic ambitions. The path ahead is one of innovation, sustainability, and inclusion, ensuring the banking sector remains a pillar of stability and growth in the rapidly evolving global economy.

The Indian banks are on the cusp of exciting possibilities. Its robust fundamentals, innovative spirit, and vast domestic market position it as a major player in the global financial ecosystem. To fully capitalise on this potential, Indian banks must look beyond national borders and forge strategic partnerships with leading global institutions.

Collaborations in areas like cross-border lending, knowledge sharing, and co-developing financial products can accelerate growth and expand market reach. By embracing a global outlook and actively engaging with the international financial community, Indian banks can not only solidify their position as a leader but also contribute to shaping a more inclusive and resilient global financial system.

(Hardik Shah is MD and Partner, BCG Mumbai. This article is the edited transcript of Mr Shah’s presentation at an online discussion organised by EGROW Foundation, a Noida-based think tank.)