The banking industry has grown impressively in the past decade at a Compound Annual Growth Rate (CAGR) of 17-18 per cent in terms of total banking assets.

However, more than the growth story, the last decade stands out for the transformation that the industry has undergone in terms of customer orientation, product offerings, service levels, technology leverages, governance maturity as well as competitive intensity.

Even as the industry gears itself for the next decade of growth and is being challenged by a slower economy, banks will have to recalibrate their focus on “creating” growth and “sustaining” profitability as they respond to an even more dynamic and challenging environment characterised by evolving regulations, increased competition, savvier and value conscious customers, complex operating models and disruptive technologies.

The impact of slowdown is evident at an aggregate level as growth rates have moderated as compared to the past and also shown a dip in certain areas in the last couple of years. Despite economic headwinds, in such uncertain times, it is crucial for banks to maintain a competitive market position. Besides the need to protect their ‘core’ markets, banks would need to be ‘market ready’ for opportunities which such market adversities may offer. The growth opportunities can broadly be categorised as organic growth opportunities, international growth opportunities and inorganic growth opportunities.

Organic Growth Opportunities

In the past decade, India’s GDP growth provided abundant domestic growth opportunities for banks without drastically adapting its business model. Consistent high growth over the last few years has brought economic progress and prosperity — per capita income has increased and the number of millionaire households in India has now soared to 2,86,000, the 18th largest across the globe according to the Deloitte Centre for Financial Services and Oxford Economics Research.

According to the RBI data, India still has 145 million households completely excluded from banking services and this section carries tremendous social appeal and presents a great economic prospect. Banks can serve this customer segment as well as create value for themselves as financial inclusion evolves itself into a business opportunity rather than as a regulatory burden.

International Growth Opportunities

Public sector and private banks collectively had less than 10 per cent of loans and advances and less than 5 per cent of the deposits originating outside India in FY11. Baring few top banks, most of the banks have very limited presence in major business centres or markets where there are significant bilateral trade flows.

Moreover, most of foreign business is still home-linked targeting Trade Finance and NRI population and not really targeting truly foreign business. According to the World Bank estimates, cross-border remittances stood at nearly $483 billion in FY11 and India has a fair share in these remittances and to start off, Indian banks can target increasing their share of global remittances.

The increasing global footprint of India Inc. provides Indian banks an opportunity to realize their global aspirations.

Even after realising the distant hopes of domestic consolidation, top Indian banks are unlikely to feature in the top 50 largest banks globally in the next five years. Therefore, it is an imperative to shift from the philosophy of “scale up to globalise” to “globalise to scale up”.

Inorganic Growth Opportunities

The RBI has come out with the phased roadmap for Basel- III framework implementation for the next five years. The need for risk capital as well as growth capital is likely to lead to higher capital requirement for the sector.

Bigger capital cushions would make the system somewhat safer, but it may challenge some individual bank’s profitability and ability to grow.

With the increased pressure on efficiencies and stakeholder demands, consolidation in the industry may provide banks to an opportunity to grow inorganically.

With the growing complexity of the market place, the industry itself may gravitate towards the following broad structure.

Few large banks or ‘universal’ banks that serve all customers and differentiate themselves by focusing on services and offering a large product breadth. These banks will compete on size and their higher risk taking capability. These banks will develop capabilities to compete globally.

Several ‘niche’ banks offering specific products and services adapted to the needs of their customers, or focusing on specific niches in terms of geographies, industries or even communities. These banks will compete on their knowledge edge.

Few ‘discount/direct’ banks may emerge to offer the best prices to their customers and leverage direct channels in a cost-effective approach.

This may be relevant for new private sector banks which we may see emerge over the next few years. These banks will compete on technology edge.

Banks that fail to align to any of above three models or their variants may become marginalised over time and could become ripe candidates for acquisition by stronger banks. Similar capital challenges faced by several overseas banks may provide an opportunity for Indian banks to acquire banking assets globally.


Banking services are shifting from a brick and mortar dominated paradigm to one of integration and balance between multiple channels. With several technology choices emerging, the new paradigm demands a fundamental shift in the business model. New technologies will need to be evaluated in the context of how they can seamlessly integrate to provide a customer experience and last mile connectivity which can equate a ‘near-branch’ experience.

To summarise, while growth potential remains relatively high for Indian banks in the global context, growth is likely to come with its own multifarious set of challenges. Banks that are better organised around their core positioning and identified strategic initiatives will be more ‘market ready’ for realising these growth opportunities.

(The author is Senior Director, Deloitte Touche Tohmatsu India Pvt Ltd. Views are personal).

(This article was published on July 1, 2012)
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