Banking in 2021 --Winning beyond Covid

The year 2020 will forever be etched in our memory as the year of Covid-19. The pandemic has had a deep impact globally on the way we live and work, our economy and of course, the banking sector. India’s GDP is likely to contract by 7-7.5 per cent in FY21. Yet, even as I write this article, there are signs of recovery. Daily average power consumption was up by 4 per cent year-on-year (YoY) in November 2020, the IIP is up 3.6 per cent YoY, deposits are up by 11 per cent YoY and credit is up by 6 per cent YoY. The manufacturing PMI index is at a 12-year high. More importantly, there is a sense of renewed optimism and confidence.

Initially, the challenge for the banking sector was to support customers and ensure that viable businesses survive. The Reserve Bank of India (RBI) facilitated this in multiple ways — moratoriums, liquidity, refinancing, etc. Banks disbursed over Rs 1.58 trillion in emergency loans to micro, small and medium enterprises (MSMEs). The strong, dynamic, innovative and proactive policy response of the RBI and the government went a long way to stabilise the system. During the last few months, the emphasis has shifted to the role of banks in facilitating sustained and robust growth. 

The evolving ecosystem will present several tailwinds to the banking sector. In the near term, a demand recovery and revival of stalled capex programmes will provide business opportunities. Optimised costs and better operating practices in corporates will result in contained slippages. Additionally, many banks have raised significant amounts of capital and increased their provisioning to ensure robust balance sheets. The growth in underlying business opportunities will enable high-performing banks to improve their return on equity with focus on fee income, lower credit costs, move the needle on operating expenses using digital, and optimise branch networks. 

One big change is the increased ability to reach previously underserved credit segments, particularly MSMEs and retail. Banks have also been increasingly pro-active in reaching out to unbanked customers in remote and unserved areas. 

Another significant area is consolidation across all sectors of the economy. Mergers and acquisitions (M&A) in the financial sector are likely be around the sale of weaker financial institutions, fintech and insurance. Banks will also look to quickly plug their new-age tech-related capability gaps by partnering with or acquiring fintechs, and will also increasingly like to establish stakes in the highly underpenetrated insurance market. While there are regulations on banks’ ability to participate in M&As, I believe those will be duly considered to pave the way for the next frontier of Indian banking.

A black swan, far-reaching, even traumatic disruption like this pandemic will have many implications — surprisingly, some beneficial, and leading up to great opportunities. Capturing it will be a different ballgame. While most banks will get the basics right, there will be two important factors that will make a difference — as they say, “separate the men from the boys”. First, banks which can leverage digital technologies, data, artificial intelligence and machine learning across products, services, processes and underwriting will create a clear edge for themselves. Second, in the increasingly commoditised banking space, a bank’s ability to differentiate itself by creating a clear proposition will determine how much it will stand out in the consumer’s mind. 

In the history of mankind, every disruption to normal life has brought in some kind of revolution. Our capability to transform into a more agile, future-ready, smart organisation that not just aligns to customer needs prevalent today, but can predict future trends, will be the true differentiator.

The writer is Managing Director & Chief Executive Officer of Axis Bank. This column has been edited for space