kpmg icc indian banking the engine for sustaining indias growth agenda

7/29/2019 KPMG ICC Indian Banking the Engine for Sustaining Indias Growth Agenda

1/52

Indian Banking The engine for

sustainingIndias growth

agenda

5th ICC Banking Summit

Kolkata

18 May 2013


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.



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



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



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

39



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



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

Indian Banking - The engine or sustaining Indias growth agenda | 2


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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.

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


17/52



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


18/52



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


19/52



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


20/52



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.


21/52



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


22/52



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


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.


23/52



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.


24/52



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.


25/52



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

[


26/52



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


27/52



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


28/52



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.


29/52



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.


30/52



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.


31/52



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


32/52



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.


33/52



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.


34/52



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.


35/52



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:


REGULATORY

COMPLIANCE

RISK

MANAGEMENT

CUSTOMER

INSIGHT


36/52



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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