Road to India@100: Banking can spur India's great leap forward
India has had a relentless journey since it became an independent republic 75 years ago. Despite myriad challenges on the economic and social fronts, the country has managed to carve a path that has brought it to the threshold of a new economic golden age. One need not look too far into the past for proof on how resilient the country is. The ‘Black Swan’ event of the Covid-19 pandemic was a test of resilience for all the economies of the world, but India stood out. Through its journey of trials and errors, hard decisions and visionary policies, India has emerged with a renewed sense of purpose, stability and devotion to inclusive progress.
From where we stand today, India is set to become a nation of around 1.64 billion people, and perhaps, the world’s second-largest economy by 2050. Its GDP is estimated to touch $20 trillion in the next 25 years from $3.1 trillion currently with an annual per capita income of around $10,000 at an average economic growth rate of 7-7.5 per cent. Nearly half of India’s population will be living in urban areas, and use of technologies such as augmented reality, blockchain, and artificial intelligence (AI), would have become normal. India can only move forward from here.
However, for India to achieve long-term growth, it will need to prioritise striking a balance between consumption and investment. A healthy mix of domestic and global savings and capital to optimise debt utilisation is an imperative. The country will also be required to improve its sovereign credit ratings. Although, its current BBB- rating is lower than what its macro fundamentals would warrant (since sovereign external debt is negligible), an improved rating would lower interest rates and the cost of capital for all enterprises.
Besides, states will have to be incentivised to carry out deeper reforms in agriculture, labour and electricity distribution. Also, access to anonymised but granular data will be immensely useful for private enterprises as well.
Over the next 25 years, policies formulated by the government will play a crucial role in getting the well-oiled Indian economic machinery running. Since infrastructure and finance are major enablers of economic growth, policymakers will need to build new institutions, create new markets and products with the purpose of raising long-term funds for infrastructure project finance. Domestic and offshore pension and insurance funds can also be tapped to finance infrastructure projects.
Also, one cannot lose sight of projects related to Environment, Social, and Governance (ESG), and Sustainable Development Goals. Currently, the regulatory frameworks, standards, and definitions around ESG are at a nascent stage, but as time progresses, these will be extremely important for investors.
One of the most watched developments in the finance space is the impending roll-out of Central Bank Digital Currency (CBDC), which is likely to change the contours of transactions in the future. As and when it happens, clear protocols will need to be developed to govern cross-border transactions using CBDC.
The banking system will continue to be the backbone of the economy. This time, technological and product innovations will determine its role as financers to an economy running a marathon defined by new realities.
On its part, banks have the responsibility to drive financial inclusion by extending credit to many more people. As of December 2021, around half of the banking customers in the country remained unserved. In contrast, in developed countries, customers without credit history are in single digits. It is expected that the India Open Credit Enablement Network construct will speed up models for fintech credit, standardising the flow of information between all stakeholders in the credit system.
In the current integrated environment, partnerships among financial institutions will play a critical role. They will continue to invest in digitisation as it has a direct impact on their cost of services and their ability to acquire or cater to customers irrespective of where they are. While digitisation is being built at various stages of the customer journey, a true end-to-end digital experience will need to be built for customers across the spectrum.
Meanwhile, AI will continue to drive value for the global economy. Contemporary research pegs the potential contribution from AI to global GDP at around $15 trillion by the end of this decade. A big proportion of this value generation is likely to be for the global banking industry. Rather than using AI for specific use-cases, the transformation of operations by strategically using AI across the digital lifecycle will become an increasingly popular theme across banks.
In addition to boosting the national growth rate, effective use of AI can address some of the major challenges in India such as access to quality healthcare, education and financial inclusion.
Going forward, reliance on cloud technology by banks will also increase. The next generation of core banking transformations in India will be fuelled by application programming interfaces (API) and micro-services architecture, allowing granular services to be deployed and scaled independently.
Blockchain and Distributed Ledger Technology (DLT) that allows the storage and synchronisation of financial transactions in multiple locations of a distributed network of participants at the same time, is on a path to disrupt established banking protocols. Cross-chain technology will facilitate blockchain interoperability across payments processing, supply chains and other areas. The DLT will increasingly make an impact on government policymaking and regulation, as CBDC initiatives come to fruition.
For the banking sector, though, no work will be complete unless it is able to meaningfully serve the semi-urban and rural markets. This market is going through a transformation of its own, backed by the improvement in physical and digital infrastructure, launch of various government schemes to improve livelihoods, diversification of income, greater agriculture productivity, and the growing aspirations of people. Such changes offer a significant growth and market share opportunity for financial institutions. We have already witnessed this growth within our bank and that makes us all the more bullish on the ‘Bharat’ story.
The writer is MD & CEO of Axis Bank
