'Innovation will drive financial inclusion'

Ajay Srinivasan quit a cushy job at Prudential Plc to join the Aditya Birla Group and drive its financial services business. Today, the division, which has a presence in insurance, mutual funds, private equity, wealth management and lending, among other businesses, is also gearing up to apply for a banking licence. Anand Adhikari quizzed Srinivasan about the company's plans on this front.
 
Q: What are your plans if the RBI invites applications for banking licences?
A: The Aditya Birla Group has a significant presence in the financial services sector. The group is present across the length and breadth of the country, and in several under-banked areas. With a base of customers who have dealt with us over many decades and a track record of building strong businesses, the group is well positioned to reach mass India. In financial services, we have over 1,700 points of presence and an AUM (assets under management) base of over Rs 1,00,000 crore with around six million investors. We believe banking is a natural fit with our business. However, we will have to take a decision once we have had an opportunity to review the final guidelines expected to be issued by the RBI.
 
Q: When the first set of licences were issued to new-generation private banks in the 90s, we saw a marked improvement in customer service, adoption of better technology, aggressive deployment of ATMs, and also product innovation, especially on the retail side. What will be the differentiating factor now?
A: India remains an underpenetrated market when it comes to financial services. I believe one of the big changes that we may see with the new wave of banking licences is the focus on innovation to drive financial inclusion. The new banks will look at under-penetrated segments of the market, where existing competition is low, in order to service customers who are currently excluded. The new banks will probably have to develop new, low-cost distribution models. Technology will also play an important role here and I believe we will see the next level of use of technology, especially for analytics. This will result in efficient customer acquisition, better risk management, better customer service and reduce the cost to serve.
 
While all of these are essential to serve customers currently excluded from the banking sector, there is no reason why the same principles of technology-led analytics, better risk management, better customer service and lower distribution costs cannot be applied to sophisticated customers currently availing products and services from existing banks.
 
Q: Today, we broadly have three kinds of NBFCs: geography focused (in semi-urban and rural areas), asset focused (single product) and financial supermarkets (with a presence in all banking products). Which one is the best suited to convert into a bank and why?
A: I think the essential pieces for any company to succeed as a bank are customer trust, a good understanding of customer needs and the ability to develop products and services that are relevant for the consumer. It actually does not really matter if an NBFC is focused in a particular geography or if the product range is limited. If you look at it, the demand for financial services today exceeds supply in almost all geographies in India. In addition, the product range of most NBFCs is currently restricted. This is due to business-model constraints or conscious decisions on account of the inability to acquire customers at a low cost or compete with the inherently lower cost of funds banks enjoy. This could change if NBFCs can convert into banks. I firmly believe that the success of any NBFC to convert itself into a bank would therefore not depend on its current state or business model but its ability to build on the factors stated above.
 
Q: There are some who say that the NBFC model is not transportable to a bank because of the kind of customers they deal with (non-salaried, risky assets, etc). What are your views?
A: On the lending side, I am sure there are many NBFCs that have robust risk models in place. The choice of customer base may be a conscious decision based on certain factors. These may change once a level playing field is provided to these NBFCs. What will be really important for NBFCs looking to convert into banks is the ability to create a strong liability franchise. Those financial services companies that have experience in managing customer funds and have therefore earned the trust of the consumer hold a distinct advantage on this front.