Case Study of the Indian Banking and Financial Services Industry using Strategic Tools
Finance is like Oil to the Engine of the Indian Economy
As finance is the grease and the oil that keeps the engine of any economy running, the BFSI sector assumes importance in this context. While the post independence era witnessed many large private banks that were either family or community run as well as some government owned banks, the nationalization of the banking sector in 1969 and the early 1970s meant that the government was the prime mover as far as banking and finance was concerned.
The situation of government ownership of banks continued well into the 1990s when the first wave of liberalization ensured that banks were now allowed to be privately owned. While multinational banks were always privately owned, most Indian banks were government owned or owned in a quasi governmental manner.
Even after liberalization, the RBI or the Reserve Bank of India proceeded cautiously as far as private ownership of the BFSI sector was concerned. However, this did not deter many firms such as the NBFCs or the Non Banking Financial Companies from operating and indeed, flouting the rules thereby leading to periodic bouts of crises.
Becoming World Class in their Practices and Dealing with Crises
Now, the BFSI sector in India is in a position where it can compete with its peers abroad and elsewhere mainly due to the pioneering efforts of the first wave of post liberalization banks such as HDFC and ICICI. No wonder that the Indian BFSI sector has become a dream job destination for millions of graduates in the technical and managerial institutes.
Having said that, at present, the BFSI sector in India is in crisis due to its profligate lending practices during the boom years of the first decade of the 21st century. Indeed, concomitant with the growth of the Indian Economy and the blistering pace of capacity addition as well as booming industries, the banks and financial institutions threw caution to the winds and engaged in indiscriminate lending without doing their due diligence.
For instance, during the heydays of growth between 2000 and 2008, banks, and financial institutions in India lent to just about anybody and the GFC or the Global Financial Crisis of 2008 resulted in such debts turning bad.
However, it is to the credit of the then ruling dispensation that the 2008 crisis and the global bust did not have major impacts on the Indian BFSI sector due to adequate oversight and regulation by the government in tandem with the RBI.
Having said that, some experts believe that what they did was to merely kick the can down the road without solving the problem and this in turn led to the ballooning of the NPAs or the Non Performing Assets to such an extent that at the moment, absent massive recapitalization, the Indian BFSI sector would be in major trouble soon.
In India, like in most developing countries, politics is inseparable from business and hence, the Indian BFSI Sector is indeed impacted heavily by the policies and the regulations that are passed by the ruling dispensations at the center. Moreover, given the high incidence of governmental and public sector ownership of the so-called State Run Banks, political interference is natural and a major input into the decision making process at the banks. While experts have repeatedly called for lesser political interference in the running of the banks, most people agree that it is routine for lenders in the public sector and even the private sector to pay heed to requests from politicians as far as lending and other aspects are concerned. Moreover, the political masters appoint the chairpersons of the banks and financial institutions and this gives them a major say I the day to business practices at these entities.
Economic forces determine the workings of the BFSI sector and it is but natural that the economic environment plays a major role in the fortunes of the sector. Whether it is liberalization or the GFC or the Demonetization measure, banks and financial institutions are heavily impacted by the macro and the micro economic forces. Indeed, both of them are important unlike in the West where the macro is often the main driver of performance of banks. The reason for this is that the Indian Economy has not yet matured to an extent where micro trends are insignificant. For instance, small changes in consumer loans and personal finance segments is enough to cause major impacts on the workings and business practices of the firms in the BFSI sector. Having said that, the steady development and integration of the Indian Economy into the broader global economy has resulted in the macro gaining traction as the moving force of the BFSI sector.
The changing socio-cultural profiles and the demographic shifts underway among the Indian consumers does impact the Indian BFSI sector to a great extent. For instance, with the increase in the population of the youth, banks and financial institutions are offering ever more lucrative investment options to this segment. In addition, Indians are now more risk prone as far as their investment patterns are concerned. This can be seen in the rising numbers of people taking personal, housing, consumer, and other loans to fund their extravagant lifestyles. Moreover, with the rise in consumerism, there has been a concomitant increase in the numbers of Indians holding credit cards and debit cards that are also in tune with the Indian Government’s Digital India push for payment avenues. Indeed, taken together, what the changing sociocultural dynamics indicates is that the BFSI sector in India is at a stage where it is mimicking the consumer lending practices that are usually associated with the West.
It would be an understatement to say that there is a paradox at the heart of the Indian BFSI sector as far as impacts of technological advances are concerned. For instance, while banking is as old as the Indian Republic, it was only recently that the Indian BFSI sector took to technology in a big way. Once having done so, it ensured that its tech offerings were as good as those of the advanced countries with the added advantage of the Indian IT (Information Technology) industry being at the forefront of the adoption of technology in banking and finance. Having said that, the paradox here is that while a certain percentage (some of would say miniscule) transacts online and the mobile channels with advanced tech, the majority of Indians are simply in the tech wilderness as far as their ability to leverage technology is concerned. Indeed, this is the reason why Demonetization and the concomitant push towards Digital Banking failed to take off as most Indians are not used to using tech enabled banking and payment channels.
Given the fact that the Indian Legal System is cumbersome and long winding, it is natural for banks and financial institutions in India to take the consumers for granted including trying out unconventional and often, legally dubious methods of loan recovery as well as selling of financial products. Indeed, while there are many cases of fraud that are registered annually, the resolution, or the settlement of such cases is lackluster to say the least. In addition, with the country having weak laws as far as cybercrime is concerned, the thousands of Indians who fall prey to phishing, cyber fraud, and online scams keeps growing without any meaningful solution to their woes. Thus, it can be said that there is an urgent need to rectify the situation.
This aspect does not have much of an impact on the Indian BFSI sector since Green Lending and CSR or Corporate Social Responsibility business practices are yet to take off among the banks and financial institutions. Indeed, it is only recently that the banks and financial institutions started a separate department for these aspects and hence, the sector has a long way to go before it catches up in this regard.
The main strength of the Indian BFSI sector lies in its ability to deliver volumes since India being a large and diverse country, offers the benefits of a humungous customer base. In addition, the Indian BFSI sector also relies on high net worth individuals who are a sizable segment of the population considering the number of Millionaires and Billionaires in the country. Apart from this, the Indian BFSI sector is also heavily driven by corporates who use it for their domestic and international operations.
Having said that, the most notable weakness of the Indian BFSI sector is its informal and unstructured lending and banking processes. Indeed, despite attempts by the RBI and the Finance Ministry, they have been unable to rein in the dubious practices followed by the banks and NBFCs. For instance, the recent scandals involving well connected businesspersons and the allegations of misconduct that has been leveled indicates that crony capitalism is very much the case as far as the Indian BFSI sector is concerned. This in turn, raises serious questions about its ability to mature into a world class sector which does not bode well for the country’s aspiration to be a global player and a key pillar of the global economy.
On the other hand, there are humungous opportunities for the Indian BFSI Sector since the majority of the population is unbanked and especially in the rural areas where banks and formal financial sector firms do not have a presence. Indeed, banking for the unbanked offers an unprecedented opportunity for the Indian BFSI sector as can be seen from the success of emerging banks such as Bandhan Bank. Further, there are many options for the latest generation payments banks and other institutions that are cropping up to take advantage of the mobile and Smartphone penetration to leverage their existing banking channels.
However, there are dark clouds on the horizon for the Indian BFSI sector especially in terms of the rising bad loans and the NPAs (Non Performing Assets) which can bring down the banking sector if they are not managed in a structured manner. Indeed, it can be said that the Indian BFSI sector is facing an existential crisis as far as the problem of NPAs are concerned. added to this, someday or the other, the sector has to grow beyond its dubious and wink and nudge informal and personal collusion crony capitalist practices if it has to well and truly emerge as a global player.
The Reserve Bank of India and Demonetization
No discussion on the Indian BFSI sector is complete without examining the role of the RBI, the country’s mandated regulator. Starting in its pre independence and post independences periods of regulating the Indian BFSI sector to the privatization wave where it was tasked with maintaining monetary policy and its preeminent role in safeguarding the Indian Economy from external shocks such as the GFC of 2008, the RBI has indeed done a stellar job of stewarding the Indian BFSI sector.
Having said that, its neutrality and independence have been questioned in recent years especially with the Demonetization measure, and this has worrying trends for the future of the Indian BFSI sector.
Indeed, Demonetization could be counted as the most radical measure as far as the Indian Economy in the post independence era is concerned.
Though there were other notable moves such as nationalization and liberalization as well as devaluation of the Indian Rupee, Demonetization beats the other bold moves hollow with its singular thrust of being disruptive in nature.
It would not be an understatement to say that with this measure, the BFSI sector received such a jolt and a shock that the after effects would continue to be felt for years to come.
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