1. Indian Banking 2020 Making the Decade’s Promise Come True Indian Banking 2020 Making the Decade’s Promise Come True

2. 1 Indian Banking 2020 Next decade bodes well for the banks Sustained economic growth of 8% + Rising savings rate in economy Only large economy with reducing dependency ratio Widespread adoption of mobile telephone and penetration of 3G Huge investment in infrastructure Rapidly globalizing Indian corporate Sustained economic growth of 8% + Rising savings rate in economy Only large economy with reducing dependency ratio Widespread adoption of mobile telephone and penetration of 3G Huge investment in infrastructure Rapidly globalizing Indian corporate

3. 2 Indian Banking 2020 Ten major trends 1. Retail banking to get a boost; mortgages to cross Rs 40 Tn 2. 10X growth in wealth management 3. "Next billion" segment to be large; Will demand low cost banking 4. Branches to grow 2X; ATMs 5X (3-4 times more additions than last decade) 5. Mobile banking will come of age 6. CRM and data warehousing will define next wave of technology 7. Margins under pressure on both retail and corporate 8. New models to serve SME 9. Investment banking to grow 10X 10. Infrastructure will cross Rs 45 Tn; Will need better risk management 1. Retail banking to get a boost; mortgages to cross Rs 40 Tn 2. 10X growth in wealth management 3. "Next billion" segment to be large; Will demand low cost banking 4. Branches to grow 2X; ATMs 5X (3-4 times more additions than last decade) 5. Mobile banking will come of age 6. CRM and data warehousing will define next wave of technology 7. Margins under pressure on both retail and corporate 8. New models to serve SME 9. Investment banking to grow 10X 10. Infrastructure will cross Rs 45 Tn; Will need better risk management

4. 3 Indian Banking 2020 Two critical challenges 1. Meet nation's expectations on financial inclusion 2. Public sector to address its HR challenge 1. Meet nation's expectations on financial inclusion 2. Public sector to address its HR challenge

5. 4 Indian Banking 2020 Demographic dividend for retail – opportunity at the extremes of spectrum 1. At constant prices. Note: (E) = Estimate; (F) = Forecast. Sources: BCG estimates; NCAER; BCG analysis. Household income Rs '000 per annum Indian households by income distribution 1 Fastest growing segment – the rich households – to demand quality wealth management services Largest customer segment – "The Next Billion" – will demand affordable low cost banking offering 2020 (F) 290 120 50 20 18 2010 (E) 221 75 22 6 CAGR (%) 16% 13% <90 90 – 200 200 – 500 500 – 1000 > 1000 9% 5% (3%)

6. 5 Indian Banking 2020 Second wind for retail lending – mortgages to cross Rs 40 trillion Mortgage penetration rate Mortgage loans to cross Rs 40 Trillion by 2020 Retail Advances (Rs Trillion) 2020 (F)2009 Mortgage Loans / GDP (%) USA UK Germany Korea Malaysia China India Note: (F) = Forecast. Source: RBI; IBA; Capitaline; Analyst reports; BCG analysis.

7. 6 Indian Banking 2020 50,000 more branches, 175,000 more ATMs Note: (F) = Forecast. Sources: IBA; WB Financial Access Survey; IndiaStat; EUI; BCG Analysis. Low channel penetration levels IndiaUKChinaUS 2009-20 (F) Branch additions ('000) 3 times 2001-09 ~15 ~44-50 Branch Network Expansion UKIndiaChinaUS Branches per lakh ATMs per lakh 160-190 2001-09 2009-20 (F) 4.5 times ATM additions ('000)

8. 7 Indian Banking 2020 Industry will need to evolve low cost models Low-cost models prevalent across industries 1. Customer experience 2. Products 6. People & organisation 3. Distribution 4. Processes and Technology 5. Risk Management Simplicity Convenience Value A fundamental change in the DNA of the bank will be required

9. 8 Indian Banking 2020 Branches will look very different Survey Q: Bank branches will look very different from those seen today % respondents Highly Unlikely Unlikely Likely Highly Likely % respondents Highly Unlikely Unlikely Likely Highly Likely Public Sector BanksPrivate/Foreign Banks Note: Sample Size: 13 PSU banks, 7 Private banks, 4 Foreign banks. Source: IBA–BCG Survey of banks. IBA survey of banks

10. 9 Indian Banking 2020 Very high faith in mobile phones Highly Likely % respondents Likely Unlikely Highly Unlikely % respondents Highly Unlikely Likely Unlikely Highly Likely IBA survey of banks Note: Sample Size: 13 PSU banks, 7 Private banks, 4 Foreign banks. Source: IBA–BCG Survey of banks. Survey Q: Mobile Banking will see explosive growth Public Sector BanksPrivate/Foreign Banks

11. 10 Indian Banking 2020 Extent of dissatisfaction (Index) 321 Transparency Error free service Speed of service Exception handling Personalization of service Availability and up time Channel look and feel Call centre, internet 250-300M mobile internet users by 2020 Source: NCR; BCG Market Survey; BCG analysis. 8% US Usage/Visit of channel India 64% Channel usage – India vs USA Significant improvement required in phone, internet banking Internet, call centre Branches, ATM Unprecedented reach of mobile internet by 2020 No. of mobile subscribers (Mn) 2020 (F)2010 6–9% 25–30% Internet penetration on mobile

12. 11 Indian Banking 2020 No. Primary bank 1 of respondent Global best–practice benchmark rangeGlobal best–practice benchmark rangeGlobal best–practice benchmark rangeGlobal best–practice benchmark range 6.0 4.0 Public banksForeign banks Private banks Major adoption of CRM to reduce costs Benchmark of average number of products used per customer with primary bank 1Primary bank defined as bank with which majority of transactions are done on regular basis. Source: Consumer survey (N=3,000); BCG experience. India average 2.2 India

13. 12 Indian Banking 2020 SME continue to be most underserved Source: FICCI – BCG Survey (N=100). % of respondents satisfied Small Medium Large PricingProduct RangeSpeed of CreditSpeed of OperationsRelationship ManagementQuantum of funding

14. 13 Indian Banking 2020 "New" expectations from banks Sources: FICCI – BCG Survey (N=100). Small MediumLarge Relationship management Credit TAT Product range IT integration All India presence Relationship management Fund M&A Support international expansion IT integration

15. 14 Indian Banking 2020 New models and skills required in corporate banking Pressure on margins; need for fee income Savings account rate deregulation Deepening of whole sale debt markets Renewed attention to SME business for growth and profitability Low cost model; better risk management Investment banking to see more than 10X growth Provide fee income to banks Support corporate in international forays, M&A, capital market access Large exposure to Infrastructure will need better risk management About half of Rs 45 Tn to be on banks' books Affordable given high savings rate expectations But banks' risk management will be put to severe test Pressure on margins; need for fee income Savings account rate deregulation Deepening of whole sale debt markets Renewed attention to SME business for growth and profitability Low cost model; better risk management Investment banking to see more than 10X growth Provide fee income to banks Support corporate in international forays, M&A, capital market access Large exposure to Infrastructure will need better risk management About half of Rs 45 Tn to be on banks' books Affordable given high savings rate expectations But banks' risk management will be put to severe test

16. 15 Indian Banking 2020 Two critical challenges 1. Meet nation's expectations on financial inclusion 2. Public sector to address its HR challenge 1. Meet nation's expectations on financial inclusion 2. Public sector to address its HR challenge

17. 16 Indian Banking 2020 % respondents Survey Q: Percentage of banks responding as "Highly Likely" Financial inclusion: Confidence not yet very high % respondents Note: Sample Size: 13 PSU banks, 7 Private banks, 4 Foreign banks. Source: IBA–BCG Survey of banks. Industry will find a solution to serve the excluded in profitable manner Public Sector BanksPrivate/Foreign Banks IBA survey of banks

18. 17 Indian Banking 2020 Commercial bank models are not effective in rural low ticket business 1. Growth rates for MFI 07 to 09. Note: For commercial banks and RRB the data pertains to semi–urban and rural business. Source: RBI BSR, NABARD, M–CRIL, BCG analysis. Growth in non–urban credit (2005–09) MFI 1 Commercial banks CAGR (%) '05-'09 Co-operative banksRRB No. of accounts Amount outstanding Average ticket size (Rs. '000) Total outstanding (Rs. Cr) 5 11,000 98 414,00 0 36 60,000 15 108,00 0

19. 18 Indian Banking 2020 “No frilling” will not work Low ticket size needs 0.1X transaction cost High cost in last mile High risks; no collateral Low (or no) float income Unique customers characteristics Low financial literacy / discipline Unpredictable / cyclical cash flows Defunct local economic eco-system and business value chains

20. 19 Indian Banking 2020 Need "ring–fenced" businesses Model 1: Integrated tie–upModel 2: In–house approach Bank Corporate BC Bank network BC Network/ Sub agents Bank Bank network Low cost separate SBU / subsidiary (F.I. SBU) Source: BCG

21. 20 Indian Banking 2020 NBFC will thrive in niche areas Infrastructure finance Asset based lending to SME Rural / small ticket finance Housing Infrastructure finance Asset based lending to SME Rural / small ticket finance Housing

22. 21 Indian Banking 2020 NABARD needs to be supported for rural infrastructure development Financial inclusion is not sufficient for inclusive growth Need to accelerate rural infrastructure investment Rural infrastructure faces market failure challenges; there is no "profitable" way to do it Need a dedicate agency with government support to fund quality rural infrastructure at accelerated pace Financial inclusion is not sufficient for inclusive growth Need to accelerate rural infrastructure investment Rural infrastructure faces market failure challenges; there is no "profitable" way to do it Need a dedicate agency with government support to fund quality rural infrastructure at accelerated pace

23. 22 Indian Banking 2020 PSB recognise HR as the biggest challenge Highly Unlikely % respondents Unlikely Likely Highly Likely Note: Sample Size: 13 PSU banks, 7 Private banks, 4 Foreign banks. Source: IBA–BCG Survey of banks. Survey Q: One of the biggest challenges for banks will be attracting good quality talent and retaining them Public Sector Banks

24. 23 Indian Banking 2020 Complex problem Source: BCG analysis. Demographic riskGeneration gap 1 Massive re-skillingLingering "Unlearning" 4 Performance discipline 3 Motivation Talent inductionContain employee cost 2

25. 24 Indian Banking 2020 Revenue productivity is now comparable Revenue per employee (FY 2010) Sources: IBA; BCG analysis. Rs Lacs (FY10) PSU BanksHDFC BankKotak Mahindra BankAxis BankICICI Bank

26. 25 Indian Banking 2020 Public sector HR issue has reached tipping point Source: Capitaline; IBA; BCG analysis. Starting 2010, average cost per employee of public sector is higher Average employee cost / employee Rs Lacs 201020092008 New private banks PSU banks

27. 26 Indian Banking 2020 Talent Induction is unsustainable 1. Data is for 2006–09. Source: Capitaline; IBA; BCG analysis. CAGR (2007-10) Assets Employee PSU banks New private banksForeign 1 banks

28. 27 Indian Banking 2020 Yawning generation gap Note: Assumption 80% of new hires between 20–30 years of age and 20% between 30–35 years. Sources: IBA; BCG analysis. % workforce currently Age-group % workforce in 5 years with recruitment Age-group Existing employees New hires Demographic riskGeneration gap

29. 28 Indian Banking 2020 Need a balanced programme 1. Steady talent induction 2. Sensitive PMS 3. Systemic succession planning 4. Structural adjustments in employee cost 5. Empower the second layer 6. Stimulate non officer cadres 7. Skill development programme 8. Structured change programme DisciplineMotivation

30. 29 Indian Banking 2020 % respondents Bankers' expectations differ Sources: IBA survey of banks 2010; BCG analysis. NIM will come under pressure; Fee income will be important Large scale will be critical to survive Banks with international presence will have significant advantage Survey Q: Percentage of banks responding as "Highly Likely" Public Sector BanksPrivate/Foreign Banks

31. 30 Indian Banking 2020 Key imperatives for government Deepen the wholesale debt market with top priority Enhance economic viability of financial inclusion Continued emphasis on co-operative banks revitalization Enable NABARD to play a crucial role in rural infrastructure development Spur HR transformation in Public Sector Banks Deepen the wholesale debt market with top priority Enhance economic viability of financial inclusion Continued emphasis on co-operative banks revitalization Enable NABARD to play a crucial role in rural infrastructure development Spur HR transformation in Public Sector Banks

32. 31 Indian Banking 2020 Key questions for discussion Why do public and private sector perceptions differ on key strategic trends? Pressure on NIM, importance of international presence, scale Is the industry ready to innovate low cost solutions for retail, SME? Is the industry ready for assisting corporate international aspirations? Why are banks diffident about profitable inclusive banking solutions? Is there sufficient will to make fundamental changes in PSB HR? Why do public and private sector perceptions differ on key strategic trends? Pressure on NIM, importance of international presence, scale Is the industry ready to innovate low cost solutions for retail, SME? Is the industry ready for assisting corporate international aspirations? Why are banks diffident about profitable inclusive banking solutions? Is there sufficient will to make fundamental changes in PSB HR?