Public sector banks (PSBs) have historically lagged their private peers in terms of their adoption of technology and digital systems. That might be changing as a pandemic that refuses to die is forcing every financier to take a hard look at the way they have been doing business.
For PSBs, the need to change has become even more relevant as the mergers have expanded their scale and competition from tech-oriented players has only intensified.
Several large PSBs have in recent months set in motion the process of digitising various functions. Most of these projects are focused on redeploying staff from the more mundane, workflow-driven processes to sales and other productive divisions. In March, State Bank of India (SBI) floated a request-for-proposal (RFP) for redesigning its operating model and implementing new strategies with the use of digital tools in its micro, small and medium enterprises (MSME) segment.
Punjab National Bank (PNB) is looking to develop an end-to-end system for ATM reconciliation and redressal of customer complaints. Union Bank of India (UBI) wants to smoothen out the entire recovery function with a software-based solution that will automate the workflow for recovery proceedings, including those which involve tribunals
Bank of Baroda (BoB) was among the first PSBs to envisage a wholly revamped and digitally-driven operational model last year. It has appointed consulting firm McKinsey to develop the model, which even includes a permanent work-from-home (WFH) adjustment. Sameer Narang, chief economist, BoB, said that banks have a huge customer base and can build sophisticated models based on demographic and transactional data of customers. The analytical model-driven approach typically offers the customer a better deal than would be available otherwise. “Another way to look at it is as a retention strategy wherein banks offer their customers pre-approved limits on certain financial products or services such as personal loans or vehicle loans which will otherwise be offered by competition,” he said.
PSBs are now more cognisant of the need to increase efficiency as a strategy. Nitesh Ranjan, executive director, UBI, said that the bank has a large number of accounts in the retail and MSME categories, where managing recovery in the physical mode is very difficult, especially things like keeping track of Sarfaesi proceedings and DRT hearings. “We have also developed an internal recovery app, where there is geo-tagging of properties attached to a particular loan,” Ranjan said, adding that the pandemic has pushed the digital drive which UBI was already considering. “This is a part of the overall digital strategy of the bank that includes straight-through processing of retail and MSME loans,” Ranjan observed.
In a note dated April 9, ICICI Securities said that the digitisation drive at Indian banks is in line with global trends. It cited a global study that shows that retail banks which digitise their customer journey see a 520% boost in revenues, 15-35% cost reduction, and a 10-15% rise in customer satisfaction.
PSBs had a large customer base even before the mergers took place over the last few years, but the expansion in that base helps justify the cost of digitisation. The fixed cost of digitisation can be spread over an even larger number of customers thus bringing down per unit cost. There are economies of scale in such investments, BoB’s Narang said.
PSBs are recognising the challenge from their competitors, which now includes not just private lenders, but also payment companies, fintechs and even global technology majors. “We are competing with players which are highly tech-oriented, so there’s no reason why banks shouldn’t be more technology oriented themselves,” Narang added.
Avisha Gupta, partner, L&L Partners, said that PSBs are now entering the next phase of digitisation (after payments) through implementation of artificial intelligence (AI) and machine learning in credit assessment and operations monitoring. “As part of this phase, on-scale adoption of the digital regulatory initiatives like the account aggregator framework, will provide significant impetus to MSME lending outreach of PSBs by enabling access to consented alternative data,” she said.
The correct use of data and digitisation increases not only better access to funds by borrowers but also facilitates better lending decisions and profitability for lenders. As MSME lending is a priority sector, digitisation of systems and processes will in the long run facilitate profitable lending, said Vidisha Krishan, partner, MV Kini Law Firm.