We recently had the pleasure of hosting P.S. Jayakumar, (MD and CEO – Bank of Baroda) and Shikha Sharma (MD and CEO of Axis Bank) at the Kstart Summit – “A Billion Aspirations”. Given all that is happening in India in the financial services space, it was fantastic to hear from two of India’s preeminent bankers and how they see future unfolding.
Here is a slightly truncated version of the panel discussion on “Leapfrogging to a cashless economy”.
Bala Srinivasa: Given the changes we are beginning to see in terms of both digital finance infrastructure and consumer behaviour in India how do you see your business ten years out? Is the opportunity to gain new to bank customers and expand the market a lot larger than before?
Shikha Sharma: The point that I would like to emphasise is that while there is a lot of worry pertaining to what the current innovation is going to do the incumbents, we are really very excited about the whole scenario. The shift from informal to formal transactions has been massive if we look at the quarter end numbers, it is the highest in a decade. If we look at two markets which are not accessible to banks- they are rural markets and small businesses. Since they do not have accounted balance sheets it was always very difficult to extend loans to them, but more that they digitize, the more access we have to digital information and the situation will change dramatically and new markets will open. We are also trying to work with couple of fin-tech companies at this juncture as the model required to succeed in such a scenario is slightly different but it is still very early days.
P.S Jayakumar: I want to take a slightly different view. We also have to focus on the real sector and the government. There is a data which suggests that out of every 100 people in Andhra Pradesh, 75 people interact with government digitally. The same is very low for other states which needs to improve. When I once went to Korea in 2006, it was interesting to see that everything was so structured and digitised. The bank could check the salaries of the customers through the National Insurance Bureau in milliseconds and property title could be checked with government records. In our case it would take a long time to do all this. There is a lot of work to be done to make things cheaper, affordable and faster.
Shikha Sharma: One piece of info that I would like to share relating to the microfinance sector. 2 years ago we used to lend to microfinance companies but then we decided to go directly to the customer. A year ago we decided to go paperless for the whole process, and we have around 1.3 million customers in this small ticket size space of 12-30k. Infrastructure indeed has come to play. Most of them used Aadhar as identity. It is so heartwarming to see what this has enabled people to do with incredible stories from micro businesses.
Bala Srinivasa: With this new market opportunity how do you actually make money? For example we have seen a surge in bank accounts with 250M or so added in the past three years. However traditional banking products are aimed at the top 20% of the population. So to access hundreds of millions of new consumers are you looking at new products and new cost structures or just extend what you have today?
Shikha Sharma: Maybe our strategy is an incumbent strategy and a new player strategy might be totally different. The way we have done this so far is that we have primarily taken existing products and have digitised them. We have not come up with brand new products but we are looking at new delivery methods.In the paperless micro lending that we spoke of, what we do is the geo mapping of the village and run an education exercise of a templated mobile led delivery method. We are delivering the product digitally which is reducing the cost to service dramatically. Is the product really different, no but the way we are delivering and promoting it is radically different. We are building on this experience to develop new products. One of the products that we have is short term lending to merchants looking at their digital panel of transactions. Once you can do paperless, one big thing we can do is make money out of an 18 month loan but how can we make money of a 10 day loan or an one month loan that is what we are trying to figure out with the current transaction and service costs
Bala Srinivasa: Jaya, on a slightly different topic, lot of our companies in the non financial sector like industrial supplies, furniture, groceries all fundamentally have a credit crunch to resolve to scale their business. Can you talk about Lending in India in the context of the changing environment? How are banks catering to the gap between demand and lack of supply for small businesses?
P.S Jayakumar: One of the things that we are saying is that more information is needed when we lend to small businesses where you know that there is inventory, and where debtors exist. Now on top of GST and automation one can establish that. And thus there is greater level of confidence to do the transaction and a more automated monitoring process as opposed to being on the ground which has a large amount of failure. The second thing that we are looking forward to is the market itself expanding in the ability to sell down loans in various formats through an electronic exchange which would bring in new players to the funding side This in turn brings down cost of borrowing and enables customers to optimise. I would ask fintech companies to look on both the sides for opportunities.
Bala Srinivasa: Just to switch gears, I had a question on demonetisation for you as leaders in your company. If someone wanted an example of a Black Swan event this was one. How did you as a leader deal with an event you did not expect? What was the initial reaction and anything that young leaders and entrepreneurs can learn from?
Shikha Sharma: I certainly think it was a big Black Swan event for me in my career. We got to hear about the announcement with everyone else at 8pm and 48 hours later banks were required to open doors for business with new currency and new business rules. After that there were more than 100 policy changes in 28 days and our IT systems were expected to make changes and make them live. The way banks are set up, it is difficult to do that so swiftly and we had to do the business a whole new way. What we focussed on was customer service, how we could make the customer experience better by taking various steps catering to queue management, senior citizens, talking to local police about measures to be taken etc. Customers were very understanding and since our ethos has always been customer centric there weren’t many issues. But were we ready with the automation and systems, not really, it did crack through and I do not know if we would have done anything different going back because it is about the pulse of the organisation where customer comes first and everything else later.
Bala Srinivasa: What does the bank of the future look like in India. Is it a combination of a bank with an internet platform or a digital only bank or a fin-tech startup having 100 million users which acquires a bank?
Shikha Sharma: Some of the incumbents will benefit and grow whereas some of the new players would win too. So, who exactly will succeed in ten years from here is hard to predict. What is clear is we would have massive amount of digitisation and customers would do stuff on digital which they are not doing now. But, I would not rule out the relevance of a branch because when something goes wrong a customer would want someone physical to address their concerns to. One thing we do not want to do is place a robot in the branch because that does not make sense! I think it is going to be a mix of digital and branches and whoever does that best and delivers the promise of convenience to the customer will win. Who knows fintech takes over a branch or it could be a bank who adopts digital smartly.
PS Jayakumar: As we think about technology, it is not about providing de-personalised services but it is about giving the customer choices in whatever medium they choose to interact with. The branches, mobile phones, call centres are all there, kiosks are there, let the customer choose what they want. Coming down to the vulnerability aspect, public sector banks except SBI will face severe vulnerability issues. In the next 2 years our ability to digitise ourselves, reduce the competitive gap and provide similar options to the customer will be very critical and that is what I worry about.
Bala Srinivasa : Let me ask the last question for the day. Since lot of startups are here, if you had to pick one or two areas where you are willing to use external innovation and actively welcome a fin-tech startup what would those be?
Shikha Sharma: Cyber-security is at the top of the mind so whoever can give most forward looking cyber-security technology we would love to partner with. Second is whoever gives us new information comprehensively as the economy and government goes digital there would be so much data available which we may or may not be able to process. Today most of our underwriting is based on our own transaction data, till today it is the biggest differentiator as far as client quality is concerned. But there is going to be a lot of data out there which would help us take smart decisions.
PS Jayakumar: I think for us it is people whom we can work with to make smarter decisions. When there are so many opportunities and gaps, one tends to think let us make a thousand flowers bloom. For us the important thing would be a strong analytics platform which would help us utilise the current customer base which is under-utilised. Anyone working on that would be very interesting. The second thing for is partnering with someone within the fin-tech space who would help us increase the value of customer proposition we offer.
Bala Srinivasa: Thank you Shikha and Jaya for taking time to be with us here today and sharing your perspective.
Thanks to Bhavik Mehta, Kstart Fellow, for his help with the panel summary