K C Chakrabarty: GenNext Banking - issues and perspectives
Address by Dr K C Chakrabarty, Deputy Governor of the Reserve Bank of India, at the Panel
Discussion on GenNext Banking at the 4th International Finance and Banking Conference,
organised by the Indian Merchant's Chamber, Mumbai, 25 November 2009.
The assistance provided by Dr Deba Prasad Rath and Mr Tarun K Singh in preparation of the address is
gratefully acknowledged.
* * *
Introduction
At the outset, let me thank the Indian Merchant's Chamber for inviting me to chair this
session on GenNext Banking of the 4th International Banking and Finance Conference 2009.
I congratulate the organizers on having chosen such topical and germane topics as "Banking
- Crisis and Beyond", "Credit Instruments - Beyond Vanilla Lending" for the earlier sessions.
I particularly congratulate the organizers for selecting the topic "GenNext Banking" for this
session, which is both timely and contextual, and merits serious deliberation.
As you all may be aware, India is in the midst of a demographic transition. The demographic
transition that India is going through will result in addition of millions of youth, who are
potentially a bankable population and present a unique opportunity for banking system to
expand their customer base. It has been estimated that the population in the 15-24 age
group grew from around 175 million in 1995 to 190 million in 2000 and 210 million in 2005,
increasing by an average of 3.1 million a year between 1995 and 2000 and 5 million between
2000 and 2005. In 2020, the average Indian will be only 29 years old, compared with 37 in
China and the US, 45 in West Europe and 48 in Japan.
In addition to the demographic transition, other drivers of GenNext Banking are inadequate
penetration, GDP growth and availability of information and communication technology. The
issue is how the banking system will gear up and tune itself with this new generation across
the length and breadth of the country. As India is poised to be a global power in the 21st
century, GenNext banks will be a catalytic agent in making India a global power. The
GenNext society/economy will essentially be a knowledge society/economy and the
challenge is to see how we can facilitate banking in a knowledge economy. There are also
going to be challenges of dealing with knowledge workers.
In the above perspective, I organize the rest of my presentation under the following sections.
First, in Section 1, I propose to cover the macro setting for GenNext banking by way of
discussing the demographic composition of India's population and the nexus between low
dependency ratio and saving. Section 2 provides a projection of Housing and Education
Loan requirement in the economy in the next few years. Section 3 discusses how banks
need to emerge GenNext with suitable new schemes and reorientation of their banking
activities. It also contains a discussion on how to facilitate banking in the context of
knowledge economy/society. Section 4 concludes highlighting certain implications and
challenges arising from GenNext banking which need further deliberation.
Section 1: Demographic composition of India's population
According to the Technical Group on Population Projections constituted by the National
Commission on Population, May 2006, annual population growth is expected to gradually
decelerate from 1.6 per cent in the five years ending in 2006 to 0.9 per cent in the five years
ending in 2026. India's population, which is estimated to have gone up from the Census 2001
figure of 1,029 million to 1,112 million in 2006, is projected to increase to 1,400 million by
2026 (Table 1).
The age structure of a population affects a nation's key socioeconomic issues. The
proportion of population in the working age group of 15-64 years will increase steadily from
62.9 per cent in 2006 to 68.4 per cent in 2026. This demographic transition actually to yield a
demographic dividend would depend a lot on ensuring proper healthcare and other human
resource development such as education, etc. as also their employability into the productive
workforce of the economy.
Penetration levels suggest healthy potential and target market still expanding
Despite the aggressive growth in most financial segments over the past decade, there is still
the under-penetration of most financial products/services. Even though Indian banking credit
has enjoyed a significant growth during the period 2003-08, credit penetration remains well
below regional benchmarks, which is suggestive of healthy growth potential in the medium
term. Indian financial sector offers structural growth opportunities and an expanding target
market. In India, it is the household sector which generates largest savings in relation to the
private corporate and public sectors, in that order. A significant proportion of household
financial savings is routed through the banking system. As of 2008-09, while the household
deposits accounted for around 54 per cent of the gross financial assets, bank credit
accounted for around 94 per cent of household financial liabilities.
While the credit growth during the high growth phase has encompassed all sectors - both
retail and industrial - and incremental lending has been much diversified compared to in the
mid - and late 1990s, the retail credit as a proportion of GDP has remained quite low (Table
2).
With the low existing penetration levels and the fact that more than 30 per cent of Indians
who are below 15 years of age, will enter in the age group of 15-64 years over the next 5 to
10 years, the structural opportunity for banks is evident. The younger generation is far more
open to consumer loans, financial products like insurance, mutual funds and wealth
management and thereby offers a much bigger revenue base for financial-service providers.
Although significant financial deepening has been taking place in Indian economy over the
years as seen from the deposit-GDP ratio, bank assets-GDP ratio and credit-GDP ratio, the
low levels of penetration in India can provide a medium term structural growth driver for
banks. A noteworthy feature discernible in the Indian context is that the rise in indicators of
financial deepening takes place along with a noticeable rise in the domestic savings rate.
This has to be seen in the backdrop of financial sector reforms, rise in total factor productivity
and investment boom which has led to acceleration in the growth performance.
Low dependency ratio and saving nexus
In the recent years, a virtuous cycle of growth, saving and investment has been in operation
(Table 3) and is likely to continue in the near to longer-term being contributed by
demographic dividends and decline in dependency ratio. These factors will facilitate both rise
in saving and capital formation and are expected to further reinforce the virtuous cycle of
growth in future. The existing studies on India suggest a near one-for-one relationship
between the dependency ratio and national savings. According to recent studies (Goldman
Sachs 2007), 1 percentage point decrease in the dependency ratio adds 0.8 per cent to the
national saving ratio. Rodrik and Subramanian (2004) used estimation results by Mulheisen
(1997) on India's consumption behaviour, which shows a one-to-one relationship between
the dependency and saving ratios. Accordingly in India, a fall in dependency ratio from
37.1 per cent in 2006 to 34.6 in 2011 and 31.7 per cent in 2026 will result in rise in saving
from the present level of 37.7 per cent in 2007-08.
Section 2: A projection of housing and education loan requirement
The vast business potential for banking can be ascertained from a brief empirical exercise
and a projection on the housing loan in India. The housing loan is an important component of
the loans and advances portfolio of the SCBs (Table 2). As at end-March 2009, the housing
loans constituted 44 per cent of the retail loan portfolio of SCBs and 9 per cent of the total
loans and advances of SCBs. The growth rate of housing loans, which witnessed very high
growth during 2004-05 and 2005-06, has however been witnessing a deceleration since
then.
A statistical analysis of the data on GDP, housing loan and educational loan for the period
March 2004 to March 2009 suggests that a 1 per cent increase in GDP growth is associated
with 3 per cent increase in housing loan and 5 per cent increase in education loan. Assuming
a real GDP growth rate of 6.25 per cent in 2009-10 and 8 per cent each in 2010-11 and
2011-12, and 9 per cent each during 2012-13 to 2014-2015, the housing loan is expected
to grow at 20.3 per cent in 2009-10, 25.0 per cent each in 2010-11 and
2011-12 and at 28.1 per cent during the period 2012-13 to 2014-05. The education loan is
expected to grow at a rate of 32.3 per cent in 2009-10 and at 39.8 per cent each in 2010-11
and 2011-12 and 44.8 per cent during the period 2012-13 to 2014-15.
It may be mentioned here that these estimates are indicative and based on historical data. In
reality as the country moves towards the high growth trajectory, given the strong income
effect and complex interplay of factors affecting the demand for housing, the demand for
housing loans may grow manifold. According to some estimates, presently there is a
shortage of about 19.4 million housing units in India. In addition, the Indian population is
projected to grow at a rate of 1.6 per cent per annum while GDP is expected to grow at a rate
of 8-9 per cent per annum. As a result, the per capita income is expected to quadruple by
2020. The Indian middle class is also expected to expand by more than 10 times from its
current size of 50 million to 583 million people in next 18 years. Given this rise in per capita
income, swelling middle class and rapid urbanization, it is estimated that additional 45 million
housing units would be required by the year 2012. These estimates suggest that the housing
loan to GDP ratio would grow sharply in the coming years.
Size of housing financial systems as a share of GDP in a cross-country perspective
[Warnock, Veronica Cacdac and Francis E. Warnock (2008)] suggest that the emerging
market economies generally have a smaller housing financial system averaging to 10 per
cent of GDP with the largest being between 20-30 per cent of GDP and developed countries
accounting for around 55 per cent of GDP. During 2001-05, mortgage debt (housing finance)
to GDP ratio for India was lower at 4.9 per cent than other developed countries USA (67.4
per cent), UK (66.6 per cent), Japan (35.7 per cent), France (24.1 per cent) and Korea (20.8
per cent), and Asian emerging economies like China (10.0 per cent), Malaysia (28.3 per
cent), Philippines (6.8 per cent), Taiwan (26.0 per cent) and Thailand (15.5 per cent).
17. An educated young population gives a head start in today's knowledge economy. In
India, they form the backbone of the country's booming service sector. According to a
NASSCOM study, the number of students enrolled for tertiary education in India is close to
10 million. While banks are now regularly extending education loan for courses in India and
some banks are also contemplating extending education loans for courses aboard, this is
indicative of the growth potential of education loans in India.
Section 3: GenNext Banking
Life cycle wise products and services available under one roof
The Indian banks have identified the growth potential of the Gen Next and are already
providing schemes especially keeping in mind the requirements and preferences of the
younger generation. As mentioned in the earlier section, the banking sector can help in
reaping the "population dividend" by providing life cycle wise products and services under
one roof. Let me elaborate on this. The GenNext banks would be offering products and
services right from birth till death. The relationship would start with birth when a savings
account could be opened. I recall PNB's scheme where soon after birth when devotees
visited Golden Temple, an account was opened for the newly born. Then as the child grows,
appropriate products and services would be offered at the right time. During infancy, small
health and life insurance services could be offered. Other features could include recurring
deposit and fund transfer from parents to kids account. As the child reaches educational
stage, educational loans, debit card and two-wheeler/scooter loans could be offered. After
education, as the youth enters job, then products like housing loans, credit cards, etc could
be offered. Equity and mutual fund products could be offered. Once he gets a job, savings,
demat and e-broking accounts could all be offered. At later stages, the composition of
investments in equity oriented schemes would shift in favour of debt oriented as the age
advances. For entrepreneurs, loans and insurance could be offered for entrepreneurial
ventures. For people in different professions, offering products suited to their profession
would present a challenge and opportunity. If a loan is given, then non-life insurance like that
for house, education and car loans could be made available. At stage of marriage, marriage
loans could be offered. Once, he becomes old, loans for refurbishment of house etc. would
be offered and this cycle continues till funeral insurance products. Thus, the essential idea is
that a relationship once built at birth carries on till death and all the products and services are
made available under one roof. Every person will have a customized web-page where they
can simply select and avail of the various products and services required by them.
The GenNext banking would thus not just be to attract the youth but to attract them at infancy
itself so that in future the bank can become the preferred source for other requirements of
the growing customer. The saving accounts for youngsters are intended to inculcate habits of
thrift. They will have to be educated and financial education initiatives would be important.
The banks would have to envisage the changing environment by gauging the dreams and
aspirations of the youth brigade and launch/provide services accordingly.
The banks are also providing facilities like internet banking, tele-banking etc. recognizing that
the younger generation is much more tech-savvy and believe in saving time and energy by
using technology. Banks are also opening exclusive branches for GenNext, which cater to all
the aspects of banking for the young population. But, in my opinion, for GenNext banking to
be a success, staff at all branches would have to be youth-oriented otherwise it is naturally
not possible to reach the vast majority of our youth. To sum up, the various dimensions of
GenNext banking which will have a profound impact are information requirement, number,
volume, diversity, density and delivery model among others.
Knowledge economy and reorientation in Indian banking
It is now commonplace to say that the 21st Century will be the "Knowledge Century" and we
are transiting from product-based to knowledge-based economy. The knowledge economy -
an economy in which wealth is based upon the ownership of knowledge and the ability to use
that knowledge to create or improve goods and services - presents significant challenges. All
the more so due to the demographic transition underway now in our country, since
knowledge resources such as know-how and expertise are as critical as other economic
resources in this economy. India will probably have the world's largest set of young people.
Even as other countries begin to age, India will remain a country of young people, potentially
to our great advantage.
The transformation of banking caused by the rapid development of information and
communication technologies has provided banking entities with new ways of bringing their
products to the customers. The banks would now have to increasingly deal with knowledge
workers i.e. one who works primarily with information and uses knowledge in the work place.
Traditional banking has thus changed into electronic banking, and therefore the standard
form of contact - personal contact - is taking a back seat to new, faster, more conformable,
and cheaper means of communication.
The introduction of electronic banking services also creates new tasks to be faced, such as
the optimization of distribution channels and the security of data transfer. The customer will
not purchase a service that fails to meet his requirements or a service that does not
guarantee the required privacy and security. That is why banks are trying to devote enough
attention to all aspects of the modernization of traditional banking.
Basic electronic banking includes services provided through self-service zones, Internet
Banking, E-mail Banking and Phone Banking etc. A new product is the electronic purse,
sometimes called a "multipurpose payment card", which is a payment instrument for making
non-cash payments. The e-shop represents a specific form of electronic banking. Electronic
commerce comes in three basic forms: the e-shop, e-store, and e-exchange.
India's banking industry must strengthen itself significantly if it has to support the modern and
vibrant economy which India aspires to be. Focusing on enriching human capital will help the
banking sector competitive. The banking sector needs to fundamentally strengthen
institutional skill levels especially in sales and marketing, service operations, risk
management and the overall organisational performance ethic. The last, i.e., strengthening
human capital will be the single biggest challenge. Old private sector banks also have the
need to fundamentally strengthen skill levels. However, even more imperative is their need to
examine their participation in the Indian banking sector and their ability to remain
independent in the light of the discontinuities in the sector.
In the field of the knowledge economy, the re-orientation in banking is required at two levels.
The first is the field of banking management, the continuous improvement of which relates
mainly to expanding the use of information technologies and knowledge systems. This will
involve, above all, support for financial system management, internal quality management
systems in banks, interactive payment systems, and management information systems.
The field of banking management is closely connected with the second field - banking
products along with the services and operations directly related with them. On the one hand,
there are products directly connected with progressive information technologies - electronic
banking and electronic commerce. A second group comprises products and services which
in terms of formation and quality of provision are directly related to the quality, reliability and
speed of information technologies. One of the most important components of the knowledge
economy is the people who use the information and communication technologies.
Section 4: Issues and challenges
The expansion of banking services for the millions of new customers would imply that there
would be tremendous growth in the volume of such services. While this presents tremendous
business opportunities for the banking sector, it also raises new issues and challenges for
the players, regulators and policy makers.
As the banking sector takes initiatives to cater to the evolving needs of the economy, we
need to deliberate on the following issues:
i) What are the appropriate systems and structure to generate information for future
generation banks? Let us not do GenNext banking without information.
ii) Will the existing players be able to meet the required volume, number, density and
diversity of services? If not, would new players, such as MFIs, NBFCs, Corporates,
telecom companies and foreign players be authorized to perform these services?
iii) What should be the Delivery Structure for the entire financial system for seamless
delivery of all products under one roof? Should the model be based on universal
banking, subsidiary or collaborative route?
iv) What should be the delivery model at grass root level? Should it be by way of direct
or indirect approach? Given the dimensions of business involved, a multichannel
delivery system utilizing a combination of branches, smart cards and mobile
services appears to be the most appropriate model.
v) What are the policy changes necessary to meet these challenges and to facilitate
growth and transition?
vi) What should be regulatory framework for meeting these challenges? Does it not
require a 180° change? Since there are a large number and variety of financial
products involved, what appropriate regulatory framework needs to be in place for
effective regulation? The question that may need to be examined would be the
appropriateness of single versus multiple regulators. Whether the existing regulatory
co-ordination mechanism, as followed through HLCCFM, continue in the same
form? Is there a need to separate regulation from supervision?
vii) What should be Business Model in terms of pricing, marketing, product
development? Transparency in pricing is the key in the context of the huge volumes
involved and banks may need to examine the level of their margins. Treating
Customers Fairly will be a crucial issue for GenNext banking as the customers will
be more educated and aware of their rights.
viii) What should be the approach to Risk Management Framework? In view of the large
volume, products and customers involved and the exponential growth taking place in
banking services, how risk management will evolve to mitigate the emerging risks?
ix) What are the institutions and supporting requirements and challenges in the
Technology, Communication and Network Connectivity which will enable seamless
services in a secured and cost-effective environment?
x) HR issues will assume prominence as the banks may have to assess the skill
requirement for providing such services and accordingly create the workforce.
To sum up, I have attempted to outline the scope for increasing the banking industry's
operations and competitiveness through information and communication technologies in the
context of demographic trends of India and the knowledge economy that we are embarking
upon. I hope that this conference will further deliberate on these issues and come out with
the appropriate framework to be developed through which all players will work together to
establish the system to cater to the requirements of the future. It is important that all the
banking products be made available under one roof and provided in a seamless manner;
otherwise, we would lose this opportunity. I am sure that 21st century will be our century and
the banking sector will rise to these challenges and more. I wish the deliberations a success.
Thank you.
Select reference
1. Goldman Sachs (2007), India's Rising Growth Potential, January 2007.
2. Government of India (2007), Economic Survey 2006-07.
3. Mühleisen, Martin (1997), Improving India's Saving Performance, IMF Working
Paper No. 97/4, International Monetary Fund, January.
Subramanian
4. Rodrik, Dani and Arvind (2004), Why India Can Grow at 7 Percent a
Year or More: Projections and Reflections, IMF Working Papers 04/118,
International Monetary Fund.
5. Warnock, Veronica Cacdac and Francis E. Warnock (2008), Markets and housing
finance, Journal of Housing Economics.