India’s Public sector bank (PSB) customers have traditionally relied on branch-based channel for banking. However, they are now adopting digital banking rapidly. Recognizing the change, PSBs are taking reformative steps towards digitalization and are driving SMART (Speedy, Multi-channel reach, Accessible and Affordable, Responsive, Technologically enhanced) banking. The Government, on its part, has also sought to drive digital banking by undertaking key initiatives that include the formalization of MSMEs through GST and the creation of digital infrastructure for banking among others. A new BCG-IBA report highlights some of the key transformations sweeping the public sector banks in the country.
The Government has rolled out a number of initiatives over the last five years that have helped in driving SMART banking. Most notable among these are the creation of digital infrastructure to support digital banking and the rollout of the Goods & Services Tax (GST) with GSTN capturing invoice-level data electronically.
The vision behind creating digital infrastructure is primarily to eliminate requirement of physical presence, enabling paperless transactions, driving cashless economy and enabling content-based data sharing.
Three of these elements have already been operationalized such as, facilitating presence-less transactions through digital authentication, paperless transaction through digitally accessible documents and digital payments through interoperable platforms. The development of the fourth element, to facilitate consent-based customer data sharing with banks, is under progress. All these components are leading to a surge in digital transactions.
Unified Payments Interface (UPI)
A global study conducted by Fidelity National Information Services in 2018 rated India’s payment system as the most evolved public digital infrastructure in the world. With the introduction of advanced features in UPI in 2016, India’s score moved up from 4 to 5 (out of 5 point scale). Since its launch, UPI has transformed the digital payments trajectory in India with more than 62 crore transactions on UPI platform as compared to nearly 17 crore transactions in December 2018 alone. It has also facilitated ease of transacting by providing a single identity to users across payment platforms and by creating a single authentication entity (UIDAI).
MSME formalization driven by GST
The Government introduced the Goods and Services Tax (GST) to simplify indirect taxes and increase tax reporting. About 98 lakh entities have registered under GST – a 50 percent increase from the previous tax regime. The GST initiative has formalized millions of MSMEs by bringing them under GST ambit. The shift to online tax reporting has created a rich database of MSMEs. Through the rollout of GSTN, the Government has created a centralized databank, which captures invoice-level data of MSMEs that is verified (invoice matched), granular, current (monthly/quarterly) and electronically accessible based on user consent. This is a big positive for MSMEs as formalization with corresponding digital trail is helping them access formal credit.
These developments have led to the rapid increase in MSME formal credit, especially to micro enterprises.
Emergence of new data sources and big data analytics
Information about the borrower forms the backbone of credit appraisal process in banks. Credit Information Companies (CICs) have been the primary source of independent customer information for Indian banks. The coverage of these credit bureaus is continuing to grow rapidly. With increase in digitalization, alternative data sources have also emerged. This has provided more insights to banks for credit appraisal and customer service.
Alternative data sources
With increasing digitalization, customers are generating unprecedented amount of data through multiple channels. These include, web search, social media, e-commerce, banking, among others. With the rapid strides made in creating digital infrastructure, Application Program Interfaces (APIs) are enabling banks to source multiple alternative data points with the consent of the customer. Some of these data points include invoice information through GSTN, litigation listing, SMS data, geo-location, social profile and so on.
Banks and other financial institutions are using such diverse data points to develop innovative models for customer on boarding, credit appraisal and monitoring. Lenders are already leveraging big data analytics to reduce the cost of customer acquisition, improve underwriting models and establish early warning systems.
PSBs taking firm steps to drive smart banking
These trends are leading to a paradigm shift in banking. PSBs are taking steps to improve customer comfort as well as build in efficiency and reduce costs by adopting digital.
Take for example, banking from the comfort of home and mobile. PSBs have traditionally faced challenges in driving digital adoption because of their customer profile.
Although bank branches continue to be a prominent channel, digital channels are gaining traction. Keeping in accord with the changing customer behavior, banks are steadily moving toward digital. This is enabling ‘Banking from the comfort of home and mobile’ through call centers, mobile banking and Internet banking.
Driving Digital Lending
In spite of the consistent focus on MSME lending by banks in the past decade, the formal financial system was able to reach only a third of the estimated 22 crore credit-eligible customers in India. Some of the reasons contributing to this are unavailability of data for credit appraisal, high cost of customer acquisition and servicing and so on.
Creation of digital infrastructure and digitalization of processes is helping address the problem. As a result ‘digital lending’ is gaining traction. It is helping drive high customer satisfaction through reduced turnaround time (TAT) and minimal documentation. Digitalization of processes is also leading to significant (up to 75%) reduction in the cost of lending.
To drive digital lending and to improve credit reach to MSME, the Government of India has launched, with the help of PSBs, many digital portals in recent times. These include TReDS, UdyamiMitra and psbloansin59minutes. PSBs are also implementing digitalized customer grievance portals. The report shows 21 PSBs have implemented grievance handling system for handling customer grievances. This has led to a reduction of 18% in grievance redressal turnaround time in the last one year.
Besides, PSBs are also rolling out internal digital platforms to digitalize some of the other key processes. All PSBs, for example, are rolling out online OTS platform to track the progress is one example. PSBs have also linked SWIFT platform with CBS for seamless transactions and reduction of operational risk.
Way forward for banks
Digital banking is growing rapidly and is transforming the banking landscape in India. PSBs can tap into the huge opportunity to rapidly adopt digital and get ahead of the curve. Opportunity exists for PSBs to offer more services and improving quality of service provided through digital platforms. This will help in reducing reliance on branch channel for financial and nonfinancial transactions.
PSBs should also continue to leverage digital in their back office operations. Digitalization of the credit appraisal process will help PSBs in making their processes standardized, boosting credit off-take significantly. Strengthening of internal systems like Loan Management System and Performance Management System can lead to greater operational efficiency.
Big data analytics is changing the way banks interact with customers. Banks are able to offer customized products and services, cross-sell and upsell different products using big data analytics. Some PSBs have started using big data analytics in select areas such as lead generation, cross-sell, and retail loan underwriting. PSBs can accentuate the efforts and invest in building dedicated teams for mining and leveraging big data.
Banking on these technologies will help public sector banks to adapt their offerings and operational mechanisms to changing customer needs. With increased thrust on digital initiatives, PSBs are well placed to be the banks of the future, the report concluded.