Indian Banks Building Resilient Leadership

Indian banks:
Building resilient
leadership
August 2023
Indian banks:
building resilient
leadership
August 2023
Authors
Renny Thomas, Senior partner
Peeyush Dalmia, Senior partner
Siddhartha Gupta, Partner
Madhur Maheshwari, Associate partner
Ranganathan Badrinarayanan, Consultant
Contents
Executive summary 1
Section A: Global banking: Testing times ahead

9
Section B: Indian banks: Financially strong; opportunity to drive

holistic impact 15
B1. Financial performance: Indian banks have experienced healthy growth with
attractive economics and granularization of the balance sheet has helped lower risk 17
B2. Industry health: PSB consolidation has led to stronger financial institutions
and increasing competition has led to innovation in banking services 22
B3. Customer experience: E2E digital journey and super apps have improved experience; the
public digital infrastructure is likely to bring in multiplier effect on experience and efficiency 25
B4. Societal impact: Significant headroom for further penetration into underserved areas like
rural, MFI, MSME exists; Indian FIs are at a nascent stage on financing the green transition 29
B5. Operational resilience: Requires attention and prioritization; concerns remain around data
management/privacy, core tech modernisation and talent management 34
Section C: Outlook ahead: Multiple forces to challenge banking economics 41
Section D: Way forward: Building resilient leadership 47

D1. Winning the next set of new money flows like digital commerce, resurgent
corporate credit cycle, and tapping the emerging mass affluent segment 48
D2. Horizontal capabilities to optimize productivity and operational efficiency 54
D3. Leveraging co-lending and fintech partnerships to drive scale 60
D4. Driving customer experience through personalization 62
D5. Digital and analytics-led collections to help shift to “assistance” mindset 66
D6. Driving financial inclusion through targeted focus on rural segment 68
D7. Financing the green transition is a key global and national priority going forward 70
D8. Invest in technology resilience to ensure data security and management of operational risks 73
D9. Focus on talent management to build a compelling value proposition 76
Acknowledgements 79
Executive summary
Depending on one’s world view, the current phase Global banking saw a mini-resurgence with ROEs
of global banking can either be seen as one of the at around 12 percent3 in CY 2022 through better
most exciting phases or the most unnerving ones. operating cost control, even as the COVID-19
Indian banks have so far held ground—having pandemic accelerated digital banking usage and
withstood the global macros and interest rate the rising rate environment. In the last six months
volatility, they are poised to deliver strong financial however, the banking sector has witnessed
returns. However, it is becoming increasingly significant turmoil, precipitated by the pace and
evident that strong financials alone cannot quantum of interest rate movements. As a result,
guarantee outperformance in shareholder returns many of the small and mid-size banks in North
—bankers have been tested across operational, America and long-standing institutions across
reputational, competition and technology risks, America and Europe have faced material stress,
and outcomes have been far from ideal. with some having gone into liquidation. Given the
muted economic growth outlook and continuing
As banking institutions become increasingly
geopolitical situation, the growth of global banking
inter-connected, accessible, and purpose-
and profitability levels will continue to be tested.
driven, it is no longer sufficient to measure their
performance through the narrow lens of financials
and profitability. Banks may need to assess
Indian banks: Financially strong, with
their performance more holistically to ensure
opportunities to drive holistic impact
continuous and enduring value-creation (that Over the past five years, and more so through
is, financial, operational, customer, employee, the recent global banking turmoil, Indian banks
environment and social) as any material slippage have remained remarkably strong and have
or weakness along these dimensions can devolve outperformed their global peers on growth and
into significant P&L and value-creation risks. profitability. A large portion of the banking system
Essentially, banks may need to strengthen their remains profitable, primarily driven by strong
defences as well as engage with a broader gamut growth in the retail and MSME lending segments.
of stakeholders to build what we term in this report Consolidation across public sector banks (PSBs)
as ’Resilient Leadership’. has also yielded larger, healthier institutions.
While financial returns have been strong, Indian
Global banking: Testing times ahead banks are witnessing multifold challenges
across their operating model that may limit their
Post the global financial crisis of 2008–09, banks
long-term value creation potential. It is now
focused on building capital reserves in the wake
imperative for banks to take a more holistic view
of heightened regulations (for example, Basel III
of value creation. Toward this, we have devised
norms).1 Consequently, lending growth was slow
a “holistic impact” scorecard for Indian banking
through the following decade (growing at around
that suggests several areas of improvement for
4 percent annually from 2009–19)2 with global
banks to strengthen their positions and mitigate
banking ROEs staying below the cost of equity
business model risks (Exhibit 1).
during the period. Both profitability and valuation
of banks declined relative to peers at a time that
saw increased participation of non-banking, tech-
forward players in financial services.
1
Basel III: International regulatory framework for banks,” BIS, June 2023.
2
All data and analysis in the report is based on McKinsey analysis, unless otherwise mentioned.
3
Global Banking Annual Review, McKinsey, December 1, 2022.
Indian banks: Building resilient leadership 1

Executive summary
Exhibit 1
B. Indian banks: Financially strong; opportunity to drive holistic impact.
Strong performance Continuous improvement needed Needs attention
B1 Financial performance
a Profitability: Indian banking sector, especially top performers, have healthy

ROAs and have largely been immune to interest rate risk
b Diversification of risk: Granularization of balance sheet has helped lower risk
B2 Industry health
a Consolidation: PSB consolidation has led to stronger financial institutions while

achieving scale efficiencies
b Increasing competition, leading to innovation: With multiple new entrants,
eg, fintechs and SFBs, incumbents have collaborated/innovated
Holistic B3 Customer experience

impact
a Digital service: E2E digital journey and super apps have improved experience;
areas of friction remain
b Public digital infrastructure is likely to bring in multiplier effect on experience
and efficiency
B4 Societal and environmental impact
a Financial Inclusion: While FIs have increased penetration into Rural, MSME and
MFI, significant headroom for further penetration
b ESG: Indian FIs are at a nascent stage on financing the green transition
B5 Operational resilience
a Tech resilience: Significant digital investments; however, data security, data

privacy, core modernization, and tech resilience are areas to address
b Talent: Attrition and attracting the right talent has been a concern; key agenda
in boardrooms
On Financial performance, Indian banks led them to compete. This is evident in the slowing
with a healthy credit growth of 10–11 percent rate of year-on-year loss in market share of
over the last decade, with higher return on assets PSBs.5 Moreover, specialized banking players
(ROA) than global peers, resulting in a valuation and dynamic fintechs are innovating in areas
premium.4 While having a conservative investment like payments and micro-lending, prompting
portfolio, granular deposit base and a diversified larger incumbent banks to innovate in customer
asset base, compared to peers, they have shown acquisition and servicing.
higher resilience to market risks and portfolio
Customer experience and centricity has
concentration. This was achieved through an
improved materially but can be further improved
increase in deployment towards retail credit and
via continual investments. While notable progress
deeper geographies over the last few years.
has been made via digital journeys and banking
Health of the industry has been driven by the super apps, they are yet to satisfactorily create
consolidation of PSBs, reducing their number frictionless processes across onboarding,
from 27 to 12 over the past five to six years. underwriting, and servicing touch points. This is
Consolidation, along with recapitalization, reflected in the fact that branch-led acquisition
resulted in stronger and bigger banks, enabling and relationship management still dominates new
4
Panorama; S&P Global; Global-Banking-Annual-Review, McKinsey, December 1, 2022.
5
Basudha Das, “PSBs’ share in loan market declined by nearly 20% in 10 yrs, private banks’ pie nearly doubled: RBI,” Business Today,
September 28, 2022.
2 Indian banks: Building resilient leadership

Executive summary
business growth. India’s emerging public digital Outlook ahead: Multiple forces to
infrastructure, however, is likely to have a multiplier challenge banking economics
effect on customer services and efficiency as While banking RoAs have been healthy, there
open infrastructure solutions like AA, Open Credit are multiple trends that may exert downward
Enable Network (OCEN), and Open Network pressure on banking profitability over the next few
Digital Commerce (ONDC) scale up (improving years. Left unmitigated, banks are likely to see
discoverability of MSMEs and providing a boost to considerable compression on margins. Some of
digital commerce). the key drivers are:
In terms of societal and environmental Net interest margins (NIMs): With increasing
responsibilities, banks have played a critical penetration, new-to-credit (NTC) pools will get
role in driving financial inclusion, especially on credit-tested (NTC mix across products has
counts of business correspondent coverage and plateaued and is even diminishing), and yield
microfinance. While there has been meaningful expansion opportunities will be limited. Growth
progress, there is still distance to cover on of deposits will continue to remain constrained
incremental penetration in these segments (formal as India undergoes a structural shift in household
credit gap remains escalated). On the environment financial product allocation levels, as a result of
front, while most banks have started committing which real interest rates may remain escalated.
to net zero on climate change, they are yet to
Fee income: There has been a secular decline
lay down a comprehensive strategy and KPIs to
in fee income for the banking sector in India. The
track their performance. Both regulators and
disintermediation of financial services, rising
bankers may need to work toward creating viable
customer awareness, and regulatory push toward
institutions, supportive policies, and a framework
transparency of charges and schedules could also
for climate finance—where the need is both
lead to a downward bias in fee incomes. Moreover,
urgent and important. India currently requires INR
the growing significance and prevalence of
12-13 lakh crore annually to finance the transition
partnerships has led to division of the fee income
economy, of which only a fourth is being serviced.6
pools among banks, NBFCs, and fintechs.
Operational resilience requires attention
Operating expenses: Intensifying competition
and prioritisation. For instance, banking tech
and a shift in the profile of talent are expected
infrastructure, cybersecurity, data management,
to lead to higher per-unit personnel costs.
and talent management practices will need
This will need to be mitigated by technology-
to adapt to deliver a very different scale and
led transformation in sourcing, underwriting,
operating environment. While banks in India
operations, and support functions (which will
have undertaken significant investments across
reflect as increased productivity over a period of
digital banking and journeys, concerns remain
a few years). As a result, we may observe a large
around data management practices and privacy,
variance in operating expenses across banks
along with modernising core tech platforms.
depending on their strategies around talent, digital
Attracting and retaining talent has been another
transformation, and technology capex.
area of concern, with the sector seeing annualized
attrition increasing to 30 to 40 percent at frontline
levels and high attrition in specialised roles like
analytics and product management.7 While the
competitive landscape is a key driver, there may
be a need to relook at organizational culture,
decision-making processes and employee value
proposition across layers of the organization.
6
CRIF, financial year 2022, June 2023; Reserve Bank of India database, financial year 2022, June 2023.
7
Annual report 2021, HDFC Bank, 2021; Annual report 2022, HDFC Bank; Sustainability report 2021–2022, Axis Bank, 2022.

Executive summary
Way forward: Building resilient leadership

To summarize the outlook for Indian banking, while may need to continuously improve to ensure
the going has been good on financial metrics, consistent value-creation.
material actions may need to be considered to
Along the lines of our holistic impact dashboard,
ensure continued outperformance. At the same
we propose nine priority actions across five broad
time, there are non-financial metrics that banks
parameters for Indian banks to consider:
Exhibit 2
Building resilient leadership may require Indian banks to focus on holistic impact.
Financial Win the next set of new money pools

performance • Build capabilities for digital commerce and open architecture banking
• Participate in corporate capex cycle
• Create differentiated capabilities for the mass affluent
Horizontal capabilities to optimize efficiency and experience
• Develop full stack AI (generative optimize or otherwise) with focus on adoption
• Zero-ops capabilities to lower operational complexity
Industry • Partnerships: Leveraging co-lending and fintech partnerships to drive accelerated outcomes
health
Customer • Meaningful connect to customers via N=1 personalization

experience • Digital and analytics-led collections shifting to an “assistance” mindset
Societal and • Driving financial inclusion in agri and NTC cohorts

environmental • Financing India’s green transition with innovative business models
impact
Operational • Build technology resilience to enable scale and digital businesses

resilience • Revamp employee propositions to win the talent battle
Financial performance next few years. 8 Incremental investments will

1. Win the next set of new money pools largely be concentrated in select sectors that are
Build capabilities for digital commerce and open supported by enabling policies and infrastructure
digital infrastructure: Account aggregator (AA) (for example, agriculture and food processing,
is a precursor into the future of consumer and healthcare, logistics, and auto equipment to
merchant finance. Combined with OCEN and the name a few). Moreover, with new opportunities
ONDC protocols, end-to-end digital sourcing in sectors like clean energy and defense, banks
in conventionally challenging segments (NTC, can think strategically around exposure mix at a
micro-enterprises) may become a near-term granular level. They may need to factor the deal
possibility. Banks will have to think like digital- size complexities like term-versus-project finance
first players to capture this opportunity—with and ratings profile, besides installing monitoring
stand-up cross-functional products, risk and frameworks to assess ongoing risks. In these
operations teams, and partnership management priority segments and clusters, banks can create
capabilities to develop an integration layer across strong knowledge and product propositions that
platforms in a modular, scalable fashion. is, build / reinforce product propositions (for
example, cash management, API banking), as
Participate in financing a resurgent capex
well as build underwriting capabilities in these
cycle: Driven by higher capex spending in both
priority segments. Simultaneously, corporate
public and private sectors, corporate lending
banking processes will also need to be reviewed,
is expected to grow at 8–10 percent over the
8
Reserve Bank of India sector lending database.

Executive summary
leveraging analytical techniques and digital been largely piecemeal, leading to only partial
workflow platforms that can enhance insight realization of gains. While near-term optimization
generation across corporate clients and improve is important, there can also be a simultaneous
productivity. effort towards creating a “zero-ops” road map
for the organization. This requires an end-to-end
Mid-affluent and mass affluent are still
relook and interventions beyond the operations
underserved from a wealth management
function (for example, front-end demand
perspective: Mass affluent and mid-affluent
management and hygiene practices). A zero-ops
segments will be the largest contributors to wealth
transformation can enable a 30 to 50 percent
creation over the next decade.9 Given the size
improvement in efficiency, and internal and
of this segment, executing at scale will require
external NPS across the organization.
banks to invest in digital capabilities, such as (i)
virtual relationship managers, supported by the Industry health
right analytical nudges, conversational prompts, 3. Leverage co-lending and digital
coaching, product and investment experts, and partnerships to drive scale
technology infrastructure, and (ii) self-serve The co-lending model is a one-of-a-kind
wealth platforms that are able to simplify and framework that India has enabled to drive lending
organize the portfolio allocation and enable to the last mile and to segments where entities
investments seamlessly. Banks need not build all have limited expertise. While there has been
these capabilities organically—they can leverage traction in the last few quarters (INR 25,414
the opportunity to collaborate with wealth techs. crore)10, lack of common product norms, policy
templates, and API protocols has restricted the
2. Build horizontal capabilities to
growth of point-to-point integrations. There is a
optimize efficiency and experience
significant use case for banks (and intermediaries)
Full-stack AI (generative or otherwise) capabilities
to create an industry-wide unlock to drive
with a focus on adoption: While banks have
accelerated outcomes on co-lending. Co-lending
recognized the inherent value in incorporating AI
has seen increasing traction over the last couple
and machine learning into their decisions, there
of years since its launch and is expected to
are several challenges that have prevented banks
grow further as banks and NBFCs overcome
from fully leveraging AI, namely, a fragmented
the implementation challenges. Fintechs also
data landscape, limited data governance
present a large partnership opportunity, with their
practices, underinvested analytics talent, limited
capabilities around digital lending, understanding
use analytics platforms, and lack of automated
of surrogate data points and tech-forward
pipelines into downstream consumption systems.
operating model. Lastly, integrating with large
Value from generative AI requires much more than
scale B2B and B2C consumer platforms also
the underlying foundational models. It requires
presents a considerable opportunity for banks to
leveraging a full business system approach
improve digital sourcing penetration and improve
supported by a culture of experimentation. To
operating costs.
successfully scale generative AI, banks will need
to look at (a) building cross-functional ownership Customer experience
(b) providing rapid feedback cycles between 4. Drive improved customer experience
business, product, and analytics, and (c) creating through N=1 personalization
explainable models (where generative AI can While personalization is customary across most
play a significant role). Most important, analytics banks, the extent and maturity of personalisation
strategy and investments can be co-owned can significantly differ. Most Indian banks are
between analytics, technology, and business using segment or rule-based engagement
teams. strategies that target similar cohorts of customers
with similar messages. At the same time past
Zero-ops capabilities to lower operational
interaction feedback as well as most recent
complexity: Back-end operations consist of
signals are often not accounted for, given the
multiple repeatable, rules-based tasks, which
static approach to defining next-best action
are both complex and data-intensive. While
strategies. While personalization is a journey, the
efforts have been made to plug in robotic process
maturity of digital marketing and analytics
automation (RPA), etcetera the approach has
9
Global Wealth Data Report, Credit Suisse, 2022; Global Banking Pools, McKinsey, 2023; Global Wealth Pools, McKinsey, 2023.
10
Piyush Shukla, “Co-lending volumes may hit Rs 1 trillion in FY24,” Financial Express, April 18, 2023.

Executive summary
landscape have made it possible to tailor opportunity, selection of the right markets based
engagement strategy and content at an N=1 level. on a combination of crop types, specialty produce,
This can lead to 3 to 5x improvement in conversion allied activities, and investment credit can enable
rates and retention rates. It is important to create banks to go deep into profitable clusters and
a clear road map (digital capabilities, analytics create a curated go-to-market by leveraging value
infrastructure, organization structure) that takes chains, BCs, SHGs and other intermediaries. At
the bank ultimately to a level of N=1 dynamic the same time, given the emphasis on land record
personalization. digitization geospatial advances in land zoning and
penetration of credit bureaus due to MFIs, there
is an opportunity to disrupt via straight-through
5. Use digital and analytics-led collections to lending to certain segments. This will require
improve customer experience building the right enablers and collaboration
Customers are increasingly digitally savvy and across multiple bank teams.
expect a uniform experience across their loan
7. Financing India’s green transition
journey. It is thereby imperative for banks to
and decarbonization
focus on their loan servicing activities as well,
A significant gap of around 70 to 75 percent
shifting from a collections-oriented view to a
exists between India’s need for climate finance
customer-service mindset. This will entail a
and its current supply. While draft regulations on
cultural shift, as well as building the necessary
climate finance are being discussed, there is an
technology infrastructure and analytics model to
opportunity for banks to become first movers in
tailor strategies to customer-specific behaviours
key areas of the climate finance agenda. Similar
(for example, self-cure versus assisted journeys,
to banks in other geographies, banks can begin to
preferred mode of outreach, offer strategies,
create viable partnerships/go-to-market models
etcetera). Successful implementation of this shift
for frontier industries (for example, electric vehicle
can unlock significant value—reducing collections
batteries and charging points), build up their
costs by up to 15 percent and ncreasing
green finance product suite and create internal
engagement by up to five.
glide paths on financed emissions. Clear tangible
Societal and environmental impact targets can be set up across departments and
6. Drive financial inclusion through a focus on lending portfolios, with stage gates to identify
rural and agri market action triggers. Templates around climate risk
Rural credit demand has grown at more than 10 pricing and identification can be tested for use and
percent over the last few years, signifying the banks could start preparing for climate stress test
large, latent potential in the segment.11 While rural impact on their portfolios. Finally, banks can start
has been traditionally driven by public sector thinking about their sustainability organization
entities and inclusion players (for example, MFIs, in anticipation of the larger build-out of climate
rural NBFCs), there is a clear opportunity to drive finance capabilities.
profitable, sizeable growth in these segments.
While rural can appear to be a fragmented
11
RBI Data.

Executive summary
Operational resilience 9. Revamping employee value

8. Invest in technology resilience propositions to build retention moats
to manage operational risks Banking talent mix has evolved over the past
Technology resilience is a multi-dimensional few years, with increasing need for product
discipline that requires purposeful design management, technology, data analytics, and
and active ongoing management. Three key design skillsets. At the same time, attrition
areas need attention for Indian banks: (i) rates across these functions as well as frontline
modernizing core systems and API management, functions are at an all-time high, with some
keeping flexibility and scalability in mind; clear functions reporting 30 to 40 percent at an
governance and ownership that is assigned annualized basis.12 While compensation has been
across infrastructure, application, and event an area highlighted by employees, it is only one of
management, (ii) building a clear and robust cloud the many challenges that banks need to address.
strategy that is able to deliver load management Levels of empowerment and collaboration,
effectively, enabling data access in a secure structured approach to mentoring new, especially
manner to decision makers, and (iii) heightened early tenure colleagues, and enablers like work
cybersecurity, information security, and data environment, tooling and recognition strategies
privacy norms. Another critical area for banks to are also key factors. Finally, both internal and
focus on is data governance—there needs to be external strategies must be driven off a revamped
a clear data ownership and ongoing maintenance employee value proposition; levels of satisfaction
structure (with roles and responsibilities assigned) and attrition across critical roles identified must be
to enable maximum value extraction and risk reviewed and discussed at CXO and board levels.
mitigation arising from digital and analytics.
12
Annual report 2021, HDFC Bank, 2021; Annual report 2022, HDFC Bank, 2022; Sustainability report 2021–2022, Axis Bank, 2022.
Indian Banks: Building Resilient Leadership 7

Section A
Global banking:
Testing times ahead
Global banking performance global banking ROEs were at 15 to 16 percent

has closely mirrored the global during the 2002–06 period, and global bank
economy over the last two decades credit to the private non-financial sector grew at
The performance of the global banking industry around 12 percent per annum during the same
has closely mirrored the general economy, period, from around $21 trillion in 2002 to around
indicating a high correlation between the two $37 trillion as of 2006-end.13 14
(Exhibit 3). The global economy experienced However, with the onset of the global financial
growth and expansion in the early 2000s, and crisis, numerous institutions experienced severe
the banking sector followed suit with strong losses, and some even collapsed; the world growth
profits and a rapid rise in lending growth. The rate plummeted and global banking profitability
13
14
Bank for International Settlements (BIS) credit statistics.
Exhibit 3
Global macroeconomic and banking performance over the last two decades.
Global macro & banking metrics

CY 2000–22 Global GDP growth rate Global banking ROE
Banks’ ROE Real GDP growth

percent percent
20 8
Golden Global financial Flat Pandemic 7
age crisis decade outbreak
6
15 5
4
3
10
2
1
0
5
-1
-2
-3
CY 2000 2005 2010 2015 2020
Source: IMF, S&P Globall, Global Banking Annual Review, McKinsey Panorama by McKinsey.

Section A
took a considerable hit, with ROEs dropping to that banks’ provisions for nonperforming loans
3.4 percent in CY 2008. (NPLs) were lower than expected.
In the decade following the global financial crisis Absolute levels of profitability of
(2009–19), lending growth slowed to around banks have secularly declined; mini-
4 percent per annum as banks focused on resurgence post pandemic
repairing balance sheets. The global economy
Following the global financial crisis, banks focused
slowly recovered with moderate growth, but the
on building capital reserves and had to adjust
banking sector struggled to match the pre-crisis
to a new regulatory landscape with heightened
ROE levels, as banks were focused on building
risk management and financial security. The
up their capital reserves. This was a response to
Basel-III norms raised the minimum common
the Basel-III norms, which had raised the total
equity requirement from 2 percent to 4.5 percent
common equity requirement to 7 percent (from 2.5
and introduced a capital conservation buffer of
percent earlier) and introduced capital buffers and
2.5 percent.17 In addition, the low interest rate
minimum global liquidity standards.15
climate that persisted in many nations decreased
The global pandemic outbreak in CY 2020 and banks’ net interest margins. As a result, banks’
CY 2021 disrupted the global economy, causing ROEs hovered at or below the cost of equity
a sharp contraction in the world growth rate. during the pre-pandemic decade (Exhibit 4).
However, banks largely withstood the pressures
However, the pandemic accelerated the usage
of the pandemic, and their core equity Tier 1 ratios
of digital technology, with digitally active
rose marginally in 2020 (from 12.4 percent to 12.7
banking customers worldwide rising from around
percent)16 due to economic recovery, which meant
43 percent during 2015–19 to around 55 percent
15
“Basel III,” BIS.
16
Global Annual Banking Review, McKinsey, 2021
17
“Basel III,” BIS.
Exhibit 4
ROE and Tier 1 capital Ratios over the last two decades for global banks.
Global banking metrics

CY 2000–22 Global banking ROE Tier 1 capital
Return on equity,
Tier 1 capital, percent
20
Global
Golden Flat Pandemic
financial
age decade outbreak
crisis
16
12
Cost of equity band: 9–11%
CY 2000 2005 2010 2015 2020

Source: S&P Global; Global Banking Annual Review 2022, McKinsey; Panorama by McKinsey

Section A
during 2020, as per Finalta and Statista. As a Despite the resurgence, valuations
result, efforts like digital onboarding, mobile continue to stay depressed
banking, digital payments, and digital lending were due to low expectations of
expedited, helping banks’ bottom lines. growth and profitability
Banks also experimented with new operating In recent years, the gap between the valuation
models such as rethinking the physical branch of global banks and the broader economy has
network, the emergence of super apps for widened significantly (Exhibit 5). About half of
banking, etcetera. This digital engagement, this gap is due to the lower profitability of banks
combined with low mobility and hybrid work, compared to other industries, while the remaining
meant that banks saved on operating costs linked half is due to the impaired growth outlook for
to customer acquisition, rent, electricity, and the banking sector. This trend is reflected in the
conveyance, leading to improved profitability. broader economy as well as the banks’ price-
Consequently, banks rebounded from the to-book (P/B) ratio. In 2005, the P/B ratio of all
pandemic with strong income growth, better industries (except banks) and banks were at 2.4
margins, and healthier capital ratios. Bank and 2, respectively, representing‘around a 17
profitability reached a 14-year high in 2022, with percent valuation gap. However, in 2022, the gap
around 12 percent return on equity.18 had increased to 70 percent, with the P/B ratio
for all industries (except banks) at 2.7 and the P/B
ratio for banks at 0.8.
18
Exhibit 5
Globally, bank valuations continue to stay depressed relative to other parts of the economy,
with a divergence in their P/B ratio movements.
All industries (excluding banks) Banks

Price-to-book ratios
3.5
3.0
Reduced profitability
2.5 Impaired growth outlook
2.0
Sources of
48
1.5
~70% gap 52 gap,
percent
1.0
0
CY 2004 2010 2020
Source: S&P Global; Global Banking Annual Review, McKinsey, 2022; Panorama by McKinsey

Section A
The policy and the macro -0.5 percent to 3 percent.21 This has resulted in
conditions of the past two years are high treasury losses for major banks, with the top
creating systemic uncertainties five banks in the United States holding more than
Central banks worldwide have hiked interest rates $200 billion of unrealized losses due to the rise in
in response to higher-than-expected inflation, treasury and mortgage-backed securities’ yields.22
resulting from the economic recovery and
Banks with a higher share of securities in their
monetary and fiscal stimulus during the pandemic
asset composition and lower G-sec proportions
(Exhibit 6). According to IMF data, global inflation
have been significantly impacted by both,
increased from 3.2 percent in 2020 to 8.8 percent
realized and unrealized losses, with some banks
in 2022.19 In the United States, inflation rose
under stress or going through liquidation. This is
from 1.2 percent in 2020 to 8.1 percent in 2022,
primarily due to the sharp rise in treasury yields,
while the European Union saw inflation increase
with the ten-year yields rising 5x from around 0.7
from 0.7 percent in 2020 to 9.2 percent in 2022.
percent in September 2020 to around 3.5 percent
In response, central banks raised policy rates
in April 2023, and the five-year yields rising 12
sharply, with the US Federal Reserve increasing
times from around 0.3 percent to around 3.6
its policy rates from 0 percent to 5 percent,20
percent during the same period.
while the ECB raised its policy deposit rates from
19
World economic outlook database, International Monetary Fund, April 2023.
20
Effective federal funds rate, Federal Reserve Bank of New York, June 2023.
21
Key ECB interest rates, European Central Bank, June 2023.
22
Footnote 22: Stephen Gandel, “Bank of America nurses $100bn paper loss after big bet in bond market,” Financial Times, June 29,
2023.
Exhibit 6
Macroconditions and central bank policy interest rate movements of the past few years for
major Western economies.
Inflation surged from around 2 percent to around 9 percent In response, central banks have hiked interest rates by
across United States and EU as a result of the economic +475 bps and +375 bps in US Fed and ECB respectively
recovery and monetary & fiscal stimulus during the pandemic to counter the effect of higher inflation
Annual inflation rate, percent Central bank interest rate movement, Jan’22–May’23
World US European Union US Federal Reserve (US Fed)
10 5
+475 bps
8 0
European Central Bank (ECB)

6 5
0
+375 bps
4 -5
Swiss National Bank (SNB)

2 2
0
+225 bps
0 -2
2017 2018 2019 2020 2021 2022 Mar’ June’ Sept’ Dec’ May
22 22 22 22 ’23
Source: IMF, US Federal Reserve, ECB, SNB, Company Data

Section A
As a result, excess capitalization levels concentrated portfolio have suffered more, with
are under pressure and business those in the United States further hit by a deposit
model choices are being put to test flight toward larger banks and money market
Following the effects of the current interest rate funds for higher yields. The deposits of the US
risk-related global banking turmoil, the loss- commercial banks fell by around 4 percent to
absorbing capital of global banks, measured using around $17.2 trillion as of April 2023, from around
tangible common equity, has eroded significantly, $17.8 trillion, as of December 2022.23 On the other
with around 40 percent of the top US banks hand, banks in India and Southeast Asia have
having a tangible common equity base of less shown resilience, with most banks maintaining
than 7 percent. Regional banks and banks with a their capital base (Exhibit 7).
23
US Federal Reserve Bank economic data.
Exhibit 7
Loss absorbing capital of global banks across major geographies.

TCE ratio ≥ 7%
TCE ratio < 7%
Distribution of banks based on tangible common equity (TCE) ratio,1 Share of # of banks
US Europe India China Japan SEA2
-22% -8% +6% -2% -1% +2%

9% 7%
19% 19%
25%
36%
41% 44%
55% 57%
91% 92%
91% 93%
81% 81%
75%
64%
59% 56%
45% 43%
9% 8%
21 Q3 22 Q3 21 Q3 22 Q3 21 Q3 22 Q3 21 Q3 22 Q3 21 Q3 22 Q3 21 Q3 22 Q3
1 Tangible
common equity divided by tangible assets; based on a sample of ~500 leading banks globally.
2 SoutheastAsia: Including Indonesia, Malaysia, Philippines, Singapore, Thailand and Vietnam.
3 Accumulated other comprehensive income.
Source: SNL; McKinsey analysis

Section B
Indian banks: Financially
strong; opportunity to
drive holistic impact
Taking a wider lens on impact 15 to 30 percent of pricing premium is ascribed

is becoming increasingly critical to companies that have a more sustainable
for the banking industry, not operating model while more than 80 percent of
just financial performance the young workforce today strongly affiliate their
While financial performance (that is, growth and employers to a sense of purpose. Operational
profitability) has long been the primary driver resilience has become critical—the market value
of value creation, banks have been impacted by lost due to operational risk events is on average 12
shifts in their broader stakeholder ecosystem (for times larger than the actual losses suffered. As a
example, financed clients, deposit customers, result, we have formulated a “holistic assessment
employees, regulators, technology partners). scorecard” for the banking industry—taking a
Taking a broader view on impact has become decade-long view of progress of banks along
highly relevant for continued success and multiple impact parameters (Exhibit 8).
outperformance. Depending on industry, almost
Exhibit 8
Holistic impact scorecard for banks.
Driving holistic impact across five key parameters
5 key
parameters
Financial performance Operational resilience
Robust asset growth Adoption of technology to
Healthy return ratios drive operations
Balance of growth, Ensuring data security
efficiency and investments Talent management across
employee lifecycle
Industry health Societal impact

Industry structure and Driving financial inclusion
competitiveness through focus on
Customer experience underserved segments
Innovation by incumbents
and new entrants Digitalization driving Catalyzing transition to
convenience green economy
Focus on transparency
and fair practices

Section B
Financial performance: Strong 22 percent per annum over the last three years.24
Riding on the overall outperformance of the Indian Nonetheless, India remains underpenetrated from
economy, the Indian banking sector has also a credit and branch coverage perspective, and
outperformed its global peers with robust growth banks would need to focus on increasing their
and significantly improved asset quality across last-mile customer outreach through digitization
PVBs, PSBs, and other banks. Banks have also and partnerships to aid the drive for financial
managed the recent interest rate shocks well, inclusion.
driven by granularity in their deposit base and
On the environmental and sustainability front,
ability to re-price assets rapidly.
most banks have started committing to net zero
Industry health: Strong on climate change, but they have yet to lay down
With the clean up of bad loans and initiatives for a comprehensive strategy and KPIs to track
consolidation and recapitalization, PSBs are in their performance. While financing the transition
a much stronger position and poised for record economy may likely require INR 12 to 13 lakh
profitability. New, specialized players have also crore of investments over the next 25 years,
entered the financial services space, requiring India is currently servicing only a fourth of the
banks to innovate to retain their dominance. demand. Banks, supported by regulatory actions
Banks have been largely successful in doing and enabling stakeholders, could play a more
so, and the prevalent digitisation initiatives central role in green financing. While government
and innovative operating models are crucial for agencies may need to create carbon markets
continued outperformance. and set up “green banks” to accelerate funding
to the sector, regulatory bodies could incentivize
Customer experience: Moderate,
banks to drive participation and standardize
continuous improvement needed
disclosure norms to increase transparency.
Facing competition from fintechs and big tech
As these enablers are put in place, financial
players, banks have become much more customer
institutions can set their own financed emission
centric, with digital loan journeys and banking
targets and reduction strategies and build the
super-app plays fundamentally changing how
necessary capabilities to address the opportunity
banks interact with their customers. The rise of
through tailored products, climate-specific risk
neo-banks has also led to banks reimagining their
management frameworks, and dedicated climate
operating model, with some banks partnering
finance teams.
with these new entrants to widen their reach,
and others ramping up their digital offerings in Operational resilience: Needs attention
response. However, the progress has neither been Technology infrastructure is an area that has
uniform nor comprehensive. Considerable pain been under-invested, with both global and Indian
points continue to exist across customers across banks facing significant financial repercussions
onboarding, underwriting, and servicing touch for mismanaging risks related to infrastructure,
points across banks. cyber-security, data privacy, and workforce
management. Most banks continue to operate on
Societal and environmental impact:
their legacy core tech system without a clear cloud
Progress made, will need further attention
strategy, and the new data privacy bill would have
Banks have played a critical role in driving
financial implications for non-compliance. Hence
financial inclusion, especially with their expansion
a holistic approach to maintaining data privacy is
to the rural, MSME, and MFI segments. Their
needed.
MFI portfolio alone (with around 4.7 crore loan
accounts for bank MFI loans and around 80 lakh
credit funded SHGs) has grown at around
24
Microfinance Institutions Network (MFIN), National Bank for Agriculture and Rural Development, (NARBARD), Reserve Bank of India
(RBI).

Section B
Exhibit 9
B. Indian banks: Financially strong; opportunity to drive holistic impact.
Strong performance Continuous improvement needed Needs attention
B1 Financial performance
a Profitability: Indian banking sector, especially top performers, have healthy

ROAs and have largely been immune to interest rate risk
b Diversification of risk: Granularization of balance sheet has helped lower risk
B2 Industry health
a Consolidation: PSB consolidation has led to stronger financial institutions while

achieving scale efficiencies
b Increasing competition, leading to innovation: With multiple new entrants,
e.g, fintechs and SFBs, incumbents have collaborated/innovated
Holistic B3 Customer experience

impact
a Digital service: E2E digital journey and super apps have improved experience;
areas of friction remain
b Public digital infrastructure is likely to bring in multiplier effect on experience
and efficiency
B4 Societal and environmental impact
a Financial inclusion: While FIs have increased penetration into rural, MSME, and
MFI, significant headroom for further penetration
b ESG: Indian FIs are at a nascent stage on financing the green transition
B5 Operational resilience
a Tech Resilience: Significant digital investments; however, data security, data

privacy, core modernization and tech resilience are areas to address
b Talent: Attrition and attracting the right talent has been a concern; key agenda
in boardrooms
B1 a B1. (a) Profitability: Indian banks have experienced healthy growth,

Financial performance:
attractive economics and been more resilient than global peers
Profitability
India has had a high credit growth correlation between economic growth and credit
multiplier historically with respect to GDP growth in India, which is more pronounced than
and benefited from a robust economic in other economies. From 2000 to 2020, India’s
performance vis-à-vis other countries credit multiplier was 1.9 times, substantially higher
Over the past two decades, the Indian economy than the world average of 1.2x. Different segments
has shown remarkable growth, outperforming have contributed to this growth at varied points
many advanced and emerging economies. The in time—the first half of the early 2000s was
pandemic had a strong impact on the Indian dominated by corporate lending, while retail
economy in 2020; however, it quickly recovered lending outperformed in the second half of the
in the aftermath, with real GDP growth of around 2010s.26
9.1 percent in 2021 and around 6.8 percent in
2022, as per the IMF.25 Further, there is a strong
25
“Real GDP growth, Annual percent change,” IMF, 2023.
26
McKinsey analysis.

Section B
B1 a
Indian banks’ profitability has exceeded have declined, driven by actions in wake of the
Financial performance: pre-pandemic levels, while NIM and opex have AQR and the Insolvency and Bankruptcy Code.
Profitability remained rang bound and improved credit Operating costs have remained range bound, with
costs have contributed to healthy margins operational efficiencies largely offsetting absolute
Indian banking sector’s profitability has remained cost increase (Exhibit 10).
attractive, driven by resilient NIMs and declining
Indian banks have been shielded in the face of
credit costs. NIMs have remained high due to
interest rate risk affecting global banks due to a
increased penetration of retail lending and a
diversified deposit and asset base, and tighter
significant proportion of floating rate loans driving
regulations.
faster transmission of rate changes. NPA levels
Exhibit 10
Indian banking sector financial performance over the last decade.
Indian banks RoA , % movement from FY’12 to FY’22 Key factors affecting RoA, FY’12-22 trend in India
NII
1.2
3.0
1.0 2.5
Other income
0.8
1.5
0.6 1.0
Opex
0.4
2.5
0.2 1.5
Risk costs
0
3
-0.2 1
2012 2014 2016 2018 2020 2022 2012 14 16 18 20 2022
Note: All factors are as percentage of weighted average assets during the FY as stated by RBI, weights being the proportion of total assets of
the bank as percentage to total assets of all banks
Source: RBI

Section B
B1 a
Indian banks have remained largely immune from vulnerable to interest rate risks affecting banks
Financial performance: the recent interest rate risk that has impacted globally.
Profitability banks in the Europe and the United States due to
As a result, Indian banks have a valuation premium
a combination of factors (Exhibit 11).
relative to global peers, and capital markets
Indian banks have a granular deposit base, with have disproportionately rewarded breakout
around 60 to 70 percent of deposits from retail performers.
customers.27 In addition, Indian banks have
In the past decade, Indian banks, especially the
lower investment book proportions of around
leading ones, have made significant progress
30 percent compared to affected banks like SVB
in growth, managing credit costs, improving
(where investments formed around 85 percent
deposits experience, operational efficiencies ,and
of the financial assets),28 reducing their exposure
digital investments. India’s leading banks stand
to interest rate risks. Finally, the RBI has
out, not just in the country but also globally, for
implemented conservative regulations on banks’
their consistent outperformance.
investments portfolio, making Indian banks less
27
RBI.
28
SVB annual report.
Exhibit 11
Indian banks unlikely to register major effect from the interest rate risk affecting
global banks.
Tighter
regulations
Ability to re-price Lower investment

loans faster book proportions
ALM risk
Granular management
deposit base
Indian banks have a granular deposit base with The maximum impact of losses on the HTM portfolio for
60–70 percent of deposits from retail customers leading banks would be in the range of 5–15 percent of
vs around 55 percent for US banks their net worth, subject to deposit redemptions exceeding
maturing assets, borrowings and the banks’ AFS/HFT
Indian banks have a higher percentage floating investment books and yields remaining elevated in the
rate loan book (70–75 percent) and hence they near future
have been able to reprice their asset book faster
Most Indian banks are well positioned to handle ALM risk,
RBI has conservative regulations on banks’ and major banks with their granular nature of deposit base
investments portfolio with a cap on HTM and continued deposit inflows unlikely to witness
investments, restrictions on securities under HTM a bank run
portfolio and requirement to create IFR;1 regulations
that are absent for US and EU banks
1 Investment fluctuation reserve.
Source: RBI, Bank data, McKinsey analysis

Section B
B1 a
Top banks’ choices, such as early pivot to serving relatively underpenetrated credit market and the
Financial performance: retail customers, building up a strong deposit rising formalization of various components in the
Profitability franchise, using advanced analytics capabilities Indian economy. This is reflected in Indian banks’
and establishing digital platforms for retail, small valuations relative to global banks, with higher
business, and corporate customers, have helped price-to-book (P/B) multiples compared to global
them outperform and create a strategic lead over peers (Exhibit 12).
their peers. In addition, the growth expectations
for Indian banking sector are high as well, given a
Exhibit 12
Valuation premium for Indian banks relative to global banks.
Difference in price to book between top banks and rest of the market
Top three private-sector banks in Top banks Rest of the market
India
Price-to-book spread: Top three banks1 and rest of the
Price to book vs return on equity market
Price to book, as of Jun’22
3.5 3.5
3.2
India (Top three private banks)2
3.0 3.0
3 .2
2.5 India (top 3 banks)1 2.5 2.3 2.5
2 .5
2.0 2.0 1.8
Middle
Emerging Asia East/ Latin
Africa America
1.5 1.5 1.3
Rest of India 1.5 1.5
North America
1.3
1.0 1.0 1.2
Developed Asia 0.6
0.5
Europe 0.4
0.5 China 0.5 0.5
0.4
0.2
0 0
0 2 4 6 8 10 12 14 16
Vietnam
Canada
France
China
India
UK
US
ROE, 2021 YE, Percent
1 Topthree banks by market capitalization. Specifically in India, State Bank of India, HDFC Bank and ICICI Bank are included.
2 Topthree private banks in India by market capitalization: HDFC Bank, ICICI Bank and Kotak Mahindra Bank.
Source: S&P Global; Global Banking Annual Review, 2022, McKinsey, 2022; Panorama by McKinsey

Section B
B1. (b) Diversification of risk: Granularization of

the balance sheet has helped lower risk
Indian banks also have a more granular and with approximately 70 percent coming from
diversified deposit base relative to global banks individuals and households (Exhibit 13). As per
About 82 percent of the total liabilities for Indian RBI data, households are the major contributors
banks are funded through deposits.29 On the other to Indian banks’ deposits, accounting for around
hand, debt contributed to a higher funding mix 60 to 70 percent of the total deposits, followed
for banks in the EU and the United State (around by corporates (around 22 percent) and the
20 to 30 percent of the total liabilities). India’s government sector (around 9 percent), with
Banking Sector also leads other global banking the rest coming from entities around the world,
sector in their retail share of total deposits, including NRI deposits.
29
RBI
Exhibit 13
Indian Banks have a granular and diversified liabilities base, relative to global banks.
Share of deposits1 in total liabilities Share of retail deposits in total deposits

2022E,2 Percent 2022E3, Percent
Other liabilities Deposits1 Higher percentage Corporate4 Retail5
of retail deposit
18 13
27 27 30 31
38
45 47
54
Average Average
82 87
73
76% 53%
73 70 69
62
55 53
46
US Europe India China Japan US Europe India China Japan
1 Deposits from customers and banks.

2 Estimates based on around 600 leading banks across the listed markets; taking 2022 Q3 data if 2022 Q4 data is not yet available for the bank.
3 Based on partial-year estimates from GBP.
4 Including deposits from non-FI businesses and financial institutions.
5 Including both resident and non-resident deposits.
Source: SNL; Global Banking Pools, McKinsey.
.

Section B
B1 b The asset composition of Indian banks is housing, vehicle loans and credit cards, as per
Financial performance: becoming more focused on retail as they have RBI datasets. At the same time, bank credit
Diversification of risk diversified and de-risked their asset books deployment to the industry segment was almost
The fastest growth in retail loans was observed flat, growing at 1 to 2 percent per annum over the
for private sector banks, which grew their retail last five years, with a decline in credit deployment
books at a CAGR of 21 percent over the last five towards the Basic Metals & Metal Products,
years (Exhibit 14). Within retail loans, high growth Manufacture of Cement & Cement Products, and
of 15 to 20 percent annually was observed across Gems & Jewellery industry sub-segments.
Exhibit 14
Increasing retail focus for Indian banks and NBFCs in their asset books.
Wholesale1 Retail + MSME2

Deployment of credit, value of portfolio
INR lakh crore
21 52 15 6
FY 17 46% 54% 94 47% 51% 75% 55%
FY 18 46% 54% 107 53% 49% 45%
25%
Private bank PSU banks NBFCs Others3
FY 19 48% 52% 122
45 67 29 10
FY 20 50% 50% 130
40% 43% 51%
64%
FY 21 52% 48% 138
60% 57% 49%
36%
FY 22 53% 47% 151 Private banks PSU banks NBFCs Others
1 Inclusiveof loans to industry, services, and other sectors (net of MSME advances reported by RBI).
2 Inclusiveof loans to retail, personal, agriculture and allied activities, and MSME segments.
3 Includes financial institutions like RRBs, Payment Banks, SFBs and foreign banks.
Source: RBI
B2. (a) PSB consolidation has led to stronger financial

institutions while achieving scale
Over the last couple of years, PSBs have staged a These moves have led to significant efficiencies,
strong resurgence, posting aggregate operating driven by the rationalisation of branch networks,
profits in FY21 and FY22 after five years of deployment of staff to more productive roles, and
losses from FY16–20. Return ratios have also geographical diversification, thereby leading to
significantly improved, with ROA and ROE growing improved returns on assets (Exhibit 16).
to 0.5 percent and 8.8 percent, respectively, for
Improved funding position due to continued
PSBs in FY22.30 Two factors have played a vital
ability to attract CASA deposits
role in this transformation:
Despite the challenges of the last few years,
Consolidation of PSBs to drive higher efficiency
PSBs have continued to enjoy trust and credibility,
Over 2017–2022, mergers have reduced PSBs
mainly due to their sovereign backing.
from 27 to 12, in line with the government’s stated
intent to create four to five at-scale banks with
similar quality and strength as the State Bank of
India (Exhibit 15). The mergers created seven large
PSBs with total assets exceeding INR 6.5 lakh
crore, and five smaller-scale PSBs.
30
RBI data on scheduled commercial banks.

Section B
B2 a This has enabled them to hold a leadership ratios have a further potential to improve, PSBs
Industry health: position in deposits, holding around 60 percent of have been able to attract a healthy amount of
Consolidation INR 170 lakh crore of deposits as of FY22 (a slight deposits over the pandemic period, thus enabling
decline from their 63 percent share in FY19).31 a low cost of funds.
While CASA (current account and saving account)
31
RBI DBIE
Exhibit 15
Mergers have led to reduction of PSBs from 27 to 12 over 2017–22.
Number
of PSBs 27 21 20 18 12 12
2017 2018 2019 2020 2021 2022
Amalgamations/ Merger of five IDBI Bank Dena Bank Corporation Bank, Andhra
mergers SBI Associate recategorized as and Vijaya Bank merged into Union
Banks and ‘private sector’ Bank merged Bank of India
Bhartiya Mahila after stake sale into Bank of
United Bank of India,
Bank into State to LIC of India Baroda
Oriental Bank of
Bank of India
Commerce merged with
Punjab National Bank
Allahabad Bank merged
into Indian Bank
Syndicate Bank merged
into Canara Bank
Source: Press releases
Exhibit 16
Merged banks have shown strong improvement across productivity and

profitability parameters.
Merged banks1 Acquirer banks2 Pro-forma3 Post-merger2
Pre-merger Post-merger Pre-merger Post-merger

Return on assets, Employee
percent productivity4
0.4 INR cr per
employee 21.2
-0.7 16.9 19.4 18.4
-1.5 -0.2
36,940 34,433
Cost-to-income Branch optimisation
ratio, percent Network in nos
63.7 46.9 16,914 20,026
47.2 53.8
Mar’2020 Mar’2022 Mar’2020 Mar’2022
1 Includesdata for banks that were merged effective April 1, 2020 [Allahabad Bank, Andhra Bank, Corporation Bank, Oriental Bank of Commerce, Syndicate Bank,
United Bank of India].
2 Includes data for banks that remained after April 1, 2020 [Canara Bank, Indian Bank, Punjab National Bank, Union Bank of India].
3 Weighted average of data as on April 1, 2020.
4 Computed as total deposits + advances divided by number of employees. Numbers indicate INR crore of business per employee.

Section B
B2. (b) Increasing competition leading to innovation: With multiple new

entrants like fintechs and SFBs, incumbents have remained nimble and agile
The banking sector has seen several behemoths, prominent e-commerce players, and
new entrants over the last decade big-tech players.
The banking sector in India has witnessed a
In this evolving environment, banks have also
significant transformation in recent years, with the
collaborated effectively with fintechs as follows:
issuance of banking licenses to erstwhile NBFCs
and MFIs, and increased involvement of fintechs — Partners to drive scale in emerging niches
and big-techs in the financial services sector. As a such as small-ticket personal loans, cash flow-
result, banks have focused on improving customer based financing and buy-now-pay-later offers,
experience and expanding financial inclusion among others; or
and outreach efforts to maintain their leadership
— Integrating with Infrastructure enablers that
position in the broader financial services sector.
can help build critical capabilities such as
Fintech on the rise alternate credit scoring, KYC/ AML checks,
India has produced a record number of fintech digital loans, and collections journeys, etc.
startups over the last decade, and they have
It is equally critical that banks be aware of
received significant interest from investors, raising
challengers that can disrupt traditional banking
over $ 22 billion32 over the past five years. These
models and continue to develop products and
players have challenged traditional operating
services that can help protect banking value
models of banks, bringing a customer-centric and
pools.
transparency-focused approach to banking. With
the disintermediation of financial services, banks
increasingly face competition from consumer
32
‘State of Indian Fintech’ Report by Inc42
Exhibit 17
The broader fintech space is evolving into four archetypes of players.
Non-exhaustive
Innovation amd
Customer ownership and
product/service/ Large technology
experience Infrastructure engagement—integrated into
platforms1
Technology
differentiation providers “everyday life”

using financial
seeking to help Large data opportunity
services to
Agility financial institutions
strengthen
digitize and modernize Regulatory scrutiny
relationships
their tech stacks (eg, data privacy)
with users
Origin
Large existing customer base/

Financial Services
scale with cross-sell opportunity

Pure play attackers Incumbent financial
seeking to disrupt institutions Regulatory protection
financial services aiming to be (product/market dependent)
using technology digitally forward
Slow to react (typically second
movers), with legacy cost structures
Challenges and and tech processes/systems
Low High
time to scale
Typical scale
1 Large tech platforms foraying into financial services are sometimes also referred to as ”techfins."

Section B
B2 b Despite increasing competition, banks have servicing, focusing on digital loan journeys to
Industry health: retained a stronghold across retail assets reduce friction and improve turnaround times.
Increasing competition, While NBFCs and fintech players have Using big data and and AI and machine learning
leading to innovation
aggressively entered the market over the last technologies has also helped banks target
decade, banks have largely been able to maintain customers better and drive higher conversions
their market shares (Exhibit 18). To maintain through personalization at scale. Focusing on the
their leadership in the retail market, banks have innovation agenda is critical for banks to maintain
relied on innovation in customer acquisition and their lead over emerging competitors.
Exhibit 18
Banks have largely been able to maintain their share across retail assets, driven by innovation
in the face of competition.
Market share by player type, percent Banks NBFCs Fintechs + others
Housing loans Auto loans Personal loans

100%
80%
58% 62%
60% 76% 80% 83% 79%
40%
20% 41% 36%

22% 19% 16% 19%
0% 1% 1% 2% 1% 2% 3%
2018 19 20 21 22 Q3 2018 19 20 21 22 Q3 2018 19 20 21 22 Q3
FY 23 FY 23 FY 23
Source: Experian
B3. (a) Digital service: End-to-end digital journeys and super apps
have ensured customer experience as the focal point for all FIs
End-to-end digital journeys have improved — Enhanced credit decision-making logic and process
customer experience through four levers through holistic customer data procurement from
E2E digital journeys have significantly improved customer sources like AA, third-party partnerships, etcetera.
experience in the financial sector; it is estimated that
— Innovations in IT architecture and workflow systems,
40 to 60 percent of retail asset loans are being sourced
leading to greater automation and data integration
digitally by leading banks, with a higher proportion of
with reduced manual data inputs and manual
digital PL sourcing (80 to 90 percent)33.
validations
Towards this, four levers have been deployed:
At the same time, there remains ample scope for
— Redesigned credit processes to increase incumbents to improve their digital journeys further to
effectiveness and speed of credit journeys compete at scale with the fintechs and other financial
institutions.
— Restructured governance and roles in the credit
journey to improve turn-around time
33
Annual reports and investor presentations of top banks.

Section B
B3 a Indian banks are also partnering with digital technologies to emerge as platform-based
lenders and emerging neo-banks to serve companies providing personalized offerings. They
Customer experience: customers and improve reach digitally are also cross-selling to the customers, from the
Digital service
In recent years, Indian banks have been core product and service into a broad range of
experimenting with new ways to increase their related products and services. Industry verticals
reach and mobilize savings from a wider audience. have blurred, especially in Asian economies, and
Banks are partnering with digital lenders to offer have seen the emergence of super apps like SBI’s
instant MSME and personal or retail loans to YONO, BOB World, ICICI’s Instabiz, etcetera.
customers, and at the same time, they are also
Most banks in India have created or are in the
partnering with emerging neo-banks (for example,
process of building their super-app play, even
Jupiter, Fi, Niyo and Open). These partnerships
as success at the bank-wide level is yet to be
have enabled banks to offer more diverse and
seen. While there has been notable progress on
innovative services while also leveraging the
the servicing and lending features available for
technological capabilities of the neo-banks and
customers, significant capability-building efforts
digital lenders.
are required in product management, campaign
Over the last five years, major Indian banks analytics, branding, personalization, etc., where
have launched their banking super apps banks currently lag consumer-focused technology
to provide integrated financial services players.
solutions to customers on one platform
Banks and non-banks worldwide are looking
at leveraging the reach and adoption of digital
B3. (b) Customer ease is the driving force behind India’s seamless digital
infrastructure, powered by open banking and interoperability
India’s public and fast-developing of India’s open financial services ecosystem
digital infrastructure is accelerating the have been laid down with significant public and
growth of financial services vis-a-vis private sector investments, including more than
other countries in the APAC region 90 percent Aadhaar enrolments,35 the ubiquitous
India’s fast-developing digital infrastructure use of digital payments (including IMPS, APB,
is driving the growth of financial services and AEPS, and UPI) by active banking customers, and
making them more accessible to customers creation of assets around identity management
(Exhibit 19). Centralized identity systems like (eKYC and eSign) and open banking (AA and
Aadhaar, with over 1.37 crore enrolments,34 have OCEN).
allowed the government to provide seamless
In the future, as adoption increases, a few use
access to financial services. India has also
cases can potentially disrupt banking volumes and
made significant progress in digital KYC and
revenue pools:
interoperable digital payments through UPI, with
40 percent of the population using it for money — Digital-first lending for small-ticket size
transfers. In contrast, China and Singapore have personal and MSME loans based on AA and
closed digital payment systems. India’s open OCEN can create a paperless journey from
banking enablers like Account Aggregator, Open application to disbursement.
Credit Enablement Network and IndiaStack are
— ONDC can facilitate disintermediation in
facilitating the seamless sharing of financial data,
the e-commerce journey leading to rising
which in turn is enabling the growth of innovative
digital penetration for SMEs and more digital
financial products and services.
transactions, which in turn will help banks
India’s adoption of India Stack components expand their MSME portfolio.
like UPI has democratized digital payments,
— The AA ecosystem has the potential to enable
while AA and OCEN are gaining traction
financial inclusion at the next level, based
Indian banks have widely adopted various
on credit underwriting on easily accessible
components of the India Stack, a set of digital
alternative data, including utility bills, taxation,
infrastructure components developed to enable
insurance, investments, etcetera.
easy and secure access to services for Indian
citizens (Exhibit 20). The foundational components
34
Aadhaar dashboard.
35
Aadhar enrollments database.

Section B
B3 b
Customer experience:
Public digital
infrastructure
Exhibit 19
India’s radical innovation across digital public infrastructure is encouraging broad-based

and has democratized growth.
Applications Financial UPI apps GeM and

by government services like BHIM GST Sahay
Agriculture E-NAM Kisan Rath Kisan Suvidha
Health Co-Win eSanjeevani Aarogya Setu
B2B/B2C/
GEM
B2G
Logistics planning and

Logistics/ FasTag
performance monitoring e-Way bill
infra
tool (LPPT)
Education/ DIKSHA/ National Career

National Digital
skilling SWAYAM Service (NCS)/
Library (NDL)
eSkill India
Standards/ Open Credit Health Unified logistics National digital

framework/ Enablement information interface education
protocols Network (OCEN) Agri Stack exchange and platform (ULIP) architecture
Unique consent manager (NDEAR)
Account farmer ID (ABDM)
aggregators (ABHA Number, ICEGATE (Indian
Unified customs electronic Decentralized
farmer HFR, HPR, PHR)
Goods and data exchange skilling and
service Unified health gateway) education
Services Tax interface interface protocol (DSEP)
(GST)
Digital products and services (e.g., ONDC)
DEPA
Open
Unified Payments Digilocker e-Sign Aadhaar enabled Bhashini
utilities
Interface payments
Identification
layer Aadhaar-led individual Udyog Parivahan Know your customer TIN GSTIN
identification Aadhaar (C-KYC, e-KYC)
Connectivity
Mobile network (4G/5G), smartphone penetration, Wi-Fi (Bharat Net, PM-WANI)
layer
Source: Industry expert conversations

Section B
B3 b
Customer experience:
Public digital
infrastructure
Exhibit 20
Journey of India Tech Stack components.
Timeline of India tech stack
Identity
layer Aadhaar eKYC eSign
Payments
layer IMPS: Instant APB: Cash AEPS: Biometric UPI
remittance transfers payments
Data
DigiLocker: Document Consent Account
layer
repository artefact Aggregator
2009 2011 2013 2015 2017 2019
Transaction value through UPI

INR lakh crore
+249 percent pa Account Aggregator framework

Around 26 FIPs and 78 FIUs are live on AA, with
125 around 4.6 million bank accounts enabled and
around 5.4 consent requests successfully fulfilled
84
OCEN
41 Currently, two LSPs are active on OCEN—GeM
21 Sahay and SIDBI GST Sahay. GeM Sahay is live
9 with eight lenders with 3.24 lakh MSMEs
0 1
registered on its platform, and loan disbursals of
FY 17 FY 18 FY 19 FY 20 FY 21 FY 22 FY 231 around 15 crores
1 Till
February 2023.
Source: India Stack. NPCI, Sahamati
API-based transaction banking has been a allow customers to perform a wide spectrum of
successful operating model for Indian banks banking tasks seamlessly and securely, including
due to the speed and flexibility offered account management, payments, fund transfers,
API-based transaction banking has been a collections, etcetera. Leading banks have enabled
successful operating model shift; API banking 100 to 150 APIs on their developer portals with
has delivered speed, customized solutioning, and clear documentation, easy to integrate processes,
flexibility to corporations, e-commerce players, and RM enablement to pitch customised solutions
fintechs, and MSMEs. Banks have been able to to their clients.
engineer and deploy various tranches of APIs that

Section B
B4. (a) Financial inclusion: While FIs have increasingly penetrated into rural,
MSME, and MFI segments, there is still significant headroom for penetration
There has been an increased push for financial increase financial inclusion by providing savings
inclusion through the roll out of differentiated vehicles and credit to small business units,
banking licenses and the introduction of BCs marginal farmers, and other unorganized sectors.
There has been a significant regulatory push for The business correspondent (BC) model has
financial inclusion in India in recent years through shown some success, with the mobilised savings
the roll-out of differentiated banking licenses, increasing from around INR 30,000 crore in FY17
such as Small Finance Banks and Payment Banks, to around INR 1.07 lakh crore in FY22, growing at a
and the introduction of Business Correspondents. healthy 30 percent CAGR.36
RBI granted SFB and PB licenses to banks to
36
RBI data.
Credit flow to segments like MSME, MFI, and 20 to 25 percent per annum from around INR 1.5
rural segments have increased, however, NTC lakh crore in FY19 to around INR 2.7 lakh crore
proportions are still below pre-pandemic levels in FY22, while rural and MSME loans also saw a
Lending growth is increasingly coming from healthy growth of 10 to 12 percent over the same
deeper geographies as banks improve their period (Exhibit 21). However, the proportion of NTC
focus on Tier 2 towns and below, with 86 percent customers has declined across retail products
of the customers for personal loans (up from with NTC cohorts forming around 13 percent
around 80 percent in FY18) and 76 percent of and around 10 percent, respectively, of the total
the customers for home loans coming from these customer sourcing for home loan and personal
segments for FY23 (till Q3). Microfinance loans loan (based on data from Experian India).
(including SHG and JLG loans) have grown at
Exhibit 21
Increased growth in Tier 2 and below retail loans with a rise in bank credit towards
underserved sectors like MSME, MFI, etcetera.
Share of Tier II towns & below, percent HL PL
Based on # of loan accounts
80
75
70
65
2018 2019 2020 2021 2022 FY 23
(till Q3)
Percentage HL 25% 23% 20% 15% 16% 13%
of NTC
customers1 PL 24% 21% 17% 12% 15% 10%
Rising bank credit flow to underserved sectors
Rural segment MSME segment Microfinance inc. SHG/JLG

L cr L cr L cr
29 18 20 2.7
26 15 16 2.0 2.2
22 23 1.5
2019 20 21 2022 2019 20 21 2022 2019 20 21 2022

1 Based on sample of around six lakh customers each for HL and PL.
Source: Experian India: MFIN; NABARD; RBI

Section B
B4 a There is still ground to cover—India being of around 32 to 34 crore people based on

Societal and remains a credit under-penetrated market factors like age, income and wealth, the formal
environmental impact: with around 50 percent of the eligible lenders, which includes banks as well as non-
Financial inclusion
competition, population not covered by formal lenders banking financial companies, have extended
leading to innovation India remains a credit under-penetrated market, active loans to only 12 to 14 crore retail customers
where despite the potential retail lendable base (Exhibit 22).
Exhibit 22
Credit under-penetration in India.
Age limitation Wealth threshold Credit score threshold
Retail credit addressable market, FY22 (Crore) # Active loans (Crore)
135-140 46-47 Credit card 7.1
A proportion of this
segment is eligible for MFI Personal loan 5.8
5.5-6.5
9-10
32-33 Consumer durables 4.1
13-14 Two-wheeler 2.2

32-34
Business loan 1.2
Total Aged Aged Urban Rural Customer Potential Total base 12-14
population below 20 above 65 population population with low lendable (ex-MFI and
in India (low (low credit score base accounting for
income) income) (<650) overlaps)
1 Assumed average number of cards per customer to be 1.8 (based on expert input).
Source: National Commission, July 2020; Periodic Labor Force Survey FY21; UN Population Prospects

Section B
B4 a At the same time, India also has an under- branches and about 22 ATMs per 100,000 adults,
Societal and penetrated bank branch and ATM network, which is significantly lower than other developing
environmental impact: relative to other emerging and developed and developed countries, as well as the global
Financial inclusion
competition, economies. According to the World Bank average (Exhibit 23).
leading to innovation database, India has around 15 commercial bank
Exhibit 23
Bank branch and ATM network of other major emerging and developed economies.
Emerging Markets Developed Markets Bubble size represents GDP size

300
South Korea
250
Netherland, Singapore, and Canada

200
Sweden have high digital
banking penetration United States
ATMs per 100,000 population
Russia
150
Australia Japan Spain

China
100 Brazil United Kingdom
Singapore Mexico
Malaysia Turkiye Poland France
50 Indonesia
Netherlands
India
Sweden
4 6 8 10 12 14 16 18 20 22 24 26 28 30 32 34 36 38
Bank branches per 100,000 population Price to book, 2022 H1
Source: IMF, World Bank
B4. (b) ESG: Indian FIs have recently embarked

on the journey toward green financing
The need for climate finance additional annual investment of $3.5 trillion over
Based on the current trajectory, the world is likely current spending levels. In recognition of this
to see a temperature increase of around 2.8°C, need, globally, banks managing around $71 trillion
vis-à-vis a target of 1.5°C. Moving to a net-zero of assets have committed to the net-zero initiative,
path, which will help limit global warming to 1.5°C with EMEA and Americas-based banks leading
by 2050, will require substantial investments, the way (Exhibit 24).
estimated to exceed an annual average of $9.2
trillion over 2021-2050.37 This indicates an
37
The net-zero transition: What it would cost, what it could bring, McKinsey Global Institute, January 2022.

Section B
B4 a
Societal and
environmental impact:
ESG
Exhibit 24
Globally, banks with about $71 trillion in assets have already committed to
net-zero targets.
Global view on net-zero commitments from banks, as of November 2022
Americas EMEA APAC

Aggregated assets, $ Tn $20.5 tn $34.8 tn $15.3 tn
Number of institutions 28 68 24
EMEA
Americas
APAC
Note: Includes signatories from the Net Zero Banking Alliance (NZBA).
Source: NZBA

Section B
B4 a Green finance flows in India are far Indian financial institutions

Societal and short of required investments have a long way to go
environmental impact:
ESG
As per current estimates, for India to reach net The transition to green finance would require
zero by 2050, an average annual investment of concerted action from key stakeholders across
INR 12 to 13 lakh crore would likely be required government agencies, regulatory bodies, and
over the next 25 years. However, current flows financial institutions (Exhibit 26).
only cover about one-fourth of the requirement
Banks in India are currently at a nascent stage in
(Exhibit 25).
their journey to build a green finance business.
Across sectors, the investment required varies While most banks include a sustainability report
depending on sub themes, with the transportation as part of their annual reporting, standards of
sector requiring around 40 percent of the disclosure vastly differ. Similarly, most banks are
investment towards decarbonizing mobility and yet to chart a road map to their net-zero goals
developing charging infrastructure, followed by and are yet to set a glide path for their financed
the power sector that requires around 35 percent emissions.
to increase the share of renewables in India’s
power mix.
Exhibit 25
Scale-up funding may be required across all sources to meet the annual demand.
Preliminary
Key levers
Regulatory support as well as pro-active stance of

Current annual green FIs toward financed emission
INR 2.5–3L cr
finance flows
Introduction of carbon markets, policy support
toward scope 1, 2, 3 emissions
Requirement for Continued policy and budgetary support toward

INR 12–13L cr2
annual demand India's NDC1
Global action toward climate justice, increase in "in-

the-money" investments
1 Nationally
determined contributions.
2 Annualdemand to keep increasing from 2020 to 2050; average annual demand of 12 to 13L Cr in first decade; about 35 lakh core on average for next 25 years.
Source: Climate Policy Initiative
Exhibit 26
Well-coordinated set of interventions would likely be required across all stakeholders to

accelerate transition financing.
Government • Launch carbon markets to get ideas into the money faster
agencies • Setting up green banks to accelerate and enable financing of ‘hard-to abate’ use cases
Regulatory • Regulatory support to incentivize banks to support the transition

bodies • Upgrade disclosure norms to increase transparency on emissions and linked strategies
Financial • Set targets for financed emission, own emission (Scope 1,2,3); define and execute
institutions plans to achieve it
• Capture new business opportunities and build new propositions (eg, green products)
• Strengthen the climate risk management, including frameworks, policies, etc.
• Build internal capabilities and teams to drive climate finance agenda

Section B
B5. (a) Tech resilience: While digital investments have been meaningful, data
security, data privacy, core modernization and tech resilience are key focus
areas going forward
Globally, BFSI sector was the second- Globally, BFSI sector was the second-biggest
biggest target of cyber-attacks, with target of cyberattacks, with india- and United
India- and United States-based institutions States based institutions being the focus of
being the focus of attackers attackers (Exhibit 27).
The banking sector is one of the most affected
Absence of skilled security talent, weak
by cybercrimes, as the organizations involved
credentials of employees, and contractual
manage and hold a vast amount of sensitive data
workers, limited allocation of funds and lagging
and financial information of customers. In addition,
infrastructure for security remain as major
with the sector witnessing rapid digitization in the
concerns for banks.
form of digital payments, digital banking and use
of open APIs, the scope for data breach and other
cyber-attacks like ransomware attacks,phishing
and social engineering have not increased
exponentially.
Exhibit 27
Increase in cyberattack incidents reported, with India- and United States-based

institutions being the focus of attackers.
Cyberattack incidents reported Top five most targeted countries

# of cyberattacks reported by sector # of cyberattacks reported by country
Percentage of total 869 2021 2022
779
Government 642 12%
BFSI 531 10%

491 484
395
Services 448 8%
181
IT & Tech 360 7% 160 158
119 116
Manufacturing 294 6%
USA India UK Brazil China
Data breaches as a percentage of

Healthcare 236 4% 50% the total cybercrime reported
cases faced by BFSI sector
Total ~5,300 100% ~$6 mn Average cost of a data breach for

financial services industry
Source: CloudSEK Global Threat Landscape Report 2021-2022, IBM Security, Ponemon Institute

Section B
B5 a While Indian banks have improved their — Finally, in terms of tech resilience, banks have
Operational resilience: front-end digital services, there is significant seen mixed success with limited adoption of
Tech resilience
scope for improvement of data security and emerging technologies like AI and machine
privacy, and to invest in tech resilience learning, cloud computing, and de-risking
Indian banks have made good strides in improving the vendor landscape etcetera. Complexities
their front-end digital services, making banking on integrating modern front-end with legacy
more accessible and convenient for their systems remain a continuous improvement
customers. However, data privacy, security, and area.
tech resilience remain a key challenge (Exhibit 28).
While transaction security measures have been
— The revised draft of the “Digital Data implemented, very few banks have incorporated
Protection Bill” by the government aims next-generation solutions such as behavioural
to protect individual’s privacy and places analytics, contextual heuristics, audio data
significant rights and responsibilities on exfiltration, etcetera. To advance in data
banks and proposes significant penalties for security and privacy, and to optimally manage
breaching the regulations . Banks will need to cybersecurity within a given budget, organizations
rapidly assess and execute on their readiness should identify where their high-risk information
across systems. sits, as well as how it moves across the estate, and
uncover their greatest risk areas. The organization
— Data security challenges are expected
can then strategically prioritize the application of
to increase over time; banks will need to
advanced data loss protection controls to achieve
continuously upgrade their capabilities and
the greatest impact.
invest to mitigate significant incidences
Exhibit 28
State of banks’ tech resilience in India.
Tech infrastructure Data privacy Data security Tech resilience

Current Introduction of digital Indian banks lack the Banks are less prepared Tech resilience of
situation banking has made necessary for data breaches and banks has seen mixed
banking more infrastructure and lack the necessary success with limited
accessible and policies to adequately resources and expertise adoption of emerging
convenient for their protect customer data to prevent, detect, and technologies like
customers and prevent data respond to such AI/ML, cloud
breaches incidents effectively computing, and
blockchain
Challenges Back-end of most Lack of awareness BFSI sector is one of High cost of
banks still runs on among bank the biggest targets of technology adoption
legacy system and employees regarding cybersecurity attacks, and integration with
attracting and data privacy policy/ with increase in attacks legacy systems and
retaining tech talent laws and their on Indian institutions shortage of skilled
remains a challenge implications tech talent
Interventions Significant Robust data Banks need to build Increase investments
required investments are protection a truly robust in emerging
required by banks in infrastructure and cybersecurity function technologies like
upgrading their CBS policies and that delivers a wide generative AI,
and LOS, along with procedures to manage set of services to the personalization at
building their tech customer data enterprise utilizing scale etc and develop
teams' new-age securely, along with three key enablers to strategies to integrate
skillsets preparation to comply deliver security service them seamlessly with
with the proposed at a desired level legacy systems
Data Protection Bill

Section B
B5 a Indian banks would need investments in These investments can help banks improve their
Operational resilience: core technology modernization, which are services’ resilience, accelerate their time to
Tech resilience
crucial for meeting the growing requirements market, and provide timely and role-appropriate
of scalability, flexibility, and speed. access for various use cases, including
Investments in core technology are an important regulatory compliance and exploratory analytics.
determinant for Indian banks to meet the Additionally, Indian banks would need to increase
increasing demands of scalability, flexibility, and their investments in best-in-class cloud, data
speed (Exhibit 29). management, and API technologies. These
investments can enable banks to achieve higher
scalability, better resilience of services, and faster
time to market.
Exhibit 29
Investments are required in core tech, critical to deliver increasing demands for scalability,
flexibility and speed.
Cloud Challenges Core/legacy systems can’t scale sufficiently

Significant time, effort, and team sizes required to maintain infrastructure
High time required to provision environments for development/testing
Cloud Higher scalability, resilience of services, platforms through virtualization of infra

Reduces IT overhead, enables automation of several infra. management tasks and allows dev
teams to 'self-serve’
Enables faster time to market—dramatically reduces time by providing managed services
Data Challenges High error rates, poor refresh rates, lack of golden source of truth
Hard to access timely for various use cases
Data trapped in siloes across multiple units and hard to integrate externally
How best-in- Ensure high degree of accuracy and single source of truth in a cost- effective manner
class data
Enables ‘timely’ and ‘role-appropriate’ access for various use cases (regulatory, BI-at scale,
managemen
AA-ML analytics, exploratory)
t can help
Enables a 360-degree view across the organisation to enable generation of deeper insights
by decision-making algorithms
API Challenges Higher time to market, limited re-usability of code, software across internal teams
Hard to partner/collaborate with external partners
Sub-optimal user experience—hard to stitch data, services across multiple functional siloes
How APIs Promotes re-usability and accelerates development, by enabling access to

can help granular services
Reduces complexity and enables faster collaboration with external partners—long time to
integrate
Enhance customer experience by enabling timely access to data, services, across different
teams; faster time to market due to limited coordination, cross-team testing

Section B
B5. (b) Talent: Attrition and attracting the

right talent has been a key priority
Wage costs have been rising due to for PSBs, and 160 bps for PVBs (Exhibit 30).
increasing employee count for PVBs and While the primary driver for PVBs has been the
higher per-employee costs for PSBs expansion in employee strength, the rise in wage
Banking and finance, along with IT services, are costs for PSBs despite a fall in PSB, headcount,
the major sectors driving employment growth post-consolidation is driven by an annual
in India, accounting for 93 percent38 of new jobs increase of around 10 percent in per-employee
in 2021 to 22. In all, banks employed around 1.6 cost over FY17 –22 (attributed to compensation
million people as of Mar’22.39 restructuring at PSBs, including a 15 percent pay
hike, increase in contribution to family pension,
Over 2017–22, a sharp rise has been registered
and the introduction of performance-linked
in wage costs across both PSBs and PVBs, with
incentives, announced in 2020).
wage cost to income ratio increasing by 460 bps
38
Bank of Baroda economic research.
39
RBI data.
Exhibit 30
Both public and private sector banks have seen a sharp rise in wage costs to income, over the
last four to five years.
PSB wage costs driven by increase in per employee costs, despite fall in headcount
Wage cost to 16% PSB

total income1 14%
percent
12%
10% P VB
8%
6%
2017 2018 2019 2020 2021 2022
Number of 858 844 808 791 784 771

employees
‘000s 646
554 571
478
403 421
PSB PVB
2017 2018 2019 2020 2021 2022
+10.3 +4.2
Wage cost per percent pa percent pa
employee
INR lakhs
14.7 15.9 17.2 7.7 8.2 8.5 8.8 9.1

10.9 12.6 7.4
10.6
2017 18 19 20 21 2022 2017 18 19 20 21 2022
1 Total
income = net interest income plus other incomes.
Source: RBI

Section B
B5 b Banks are seeing high attrition, especially Employee value proposition is key to
Operational resilience: among frontline employees attraction and retention strategy
Talent
Post-pandemic, banks have seen a sharp increase The banking industry’s evolving skillset
in attrition, especially among sales staff and other requirements over the past decade have
frontline employees. While annualized attrition has necessitated competencies in digital
increased to over 40 percent at frontline levels, technologies, automation, AI, and softer skills
churn at senior levels has been relatively lower like problem-solving, emotional intelligence,
(except key roles like analytics, technology). Key adaptability, and resilience.
drivers of higher attrition include:
To remain competitive, banks have made key
War for talent among banks, as well as other fast- changes to their recruitment and retention
growing financial institutions including fintechs strategies, including offering flexible, remote or
and NBFCs driving higher compensation and hybrid working options, emphasizing diversity
incentive structures and inclusivity in their workforce, investing in
learning and development programs for emerging
Technology-oriented specializations such as
technologies, and fostering non-linear growth
product management, cloud services, and data
paths, and a culture of innovation.
analytics are seeing high demand from new
economy players, neo-banks, and fintech players All the key elements of the employee value
propositions for banks across key roles will
At the same time, softer aspects such as work
need a holistic review to ensure better retention
culture, collaboration, levels of ownership,
outcomes going forward.
mentorship, and appreciations have played a
material role in explaining variation in attrition rate
across players
38 Indian Banks: Building Resilient Leadership

Section C
Outlook ahead: Multiple forces
to challenge banking economics
While there has been strong momentum, the healthy, allowing banks to sustain NIMs. However,
banking sector faces certain headwinds and as these cohorts get increasingly credit-tested,
structural trends which will exert pressure on continued yield expansion will be challenging.
margins, requiring banks to make changes to their
Similarly, the potential for growing fee income
operating model. Over the past five years, retail
is also limited, as greater transparency and
assets have outpaced corporate credit growth
competition have increased customer awareness,
and the proportion of NTC lending has been
Exhibit 31
Banking RoAs are likely to be under pressure if current trends continue to play out.
I mp a c t o n R o A: Positive Negative Neutral/Limited
Outlook in case no
As a % of total assets, Mar’221 Key themes and expected impact action is taken
Current NTC vintages expected to become credit-

Interest income 6.2
tested and mitigate yield expansion opportunities
Structural re-allocation of HH savings away from deposit

Interest expense -3.2 products leading to muted growth in deposits; combined
with high inflation will keep upward bias on rates
Regulations driving transparency and increased customer

1.2 awareness has reduced fee potential
Non-interest income
Partnerships for retail growth, leading to fee sharing with
frontend partners (NBFCs, fintech)
Fintechs, big tech entering adjacencies (eg, payments,
4.1 insurance), leading to competition for fee revenue
Total income
Increasing attrition, competition for skilled talent will

Opex -2.0 continue to drive high personnel costs
Technology has become a source of competitive advantage –
but has high capex (will flow through P&L over time)
Increasing compliance costs to data security/privacy
Provisions and
Contingencies -1.2
Portfolio cleanup has helped bring credit cost under control
Expected to remain low given stricter monitoring and
provisioning norms, and improved underwriting practices
RoA 0.9
Overall, RoAs have a negative bias, primarily driven by
NIM compression and upward bias on opex
1 RBI data on ratios for scheduled commercial banks (as of 31 March 2022).

Section C
and partnership models have led to increased increasingly complex, costs related to which are
fee-sharing arrangements. Further, the recent expected to increase and will need to be offset.
interest rate hikes by the RBI and the slowdown
On the other hand, credit costs have been largely
in deposit growth have created a cost of funds
brought down over the last two to three years
pressure on banks—a trend that will likely play out
following a significant clean up of bad loans
in the medium term. Total income (net of interest
(especially in public sector banks). Continued
expense) will thus likely remain under pressure
efforts to monitor and manage delinquencies are
over the next 4 to 5 years and there will be a
vital to maintaining these lower credit costs.
strong emphasis on cost and risk management to
create room for maintaining profitability. Reducing total income and rising operating
costs will likely increase pressure on RoAs, and
On the expenses side, personnel costs at a per-
banks may find it challenging to maintain the
employee level are expected to rise, especially
outperformance of the last four to five years. This
for technology and analytics-focused roles that
section looks at the factors affecting RoAs in
are in demand, and the supply of talent is limited.
further detail.
This could be mitigated by improved productivity
and digital gains, thus reducing the need for Current NTC vintages are expected
incremental manpower across front line and to become credit-tested, limiting the
back-end processing roles. The impact on overall scope for yield expansion.
personnel costs will therefore be mixed across
Over the last few years, a rising proportion of
institutions.
NTC customers have been absorbed in the formal
Increasing investments in digital transformations credit ecosystem as banks increased their focus
and core system modernization are also likely to on retail loans. For instance, NTC customers
create cost pressures in the near-to-medium term, accounted for around 13 percent of personal
while the resultant productivity impact will play loans, around 21 percent of auto loans and around
out over a longer horizon. In parallel, compliance 19 percent of the credit card amounts sanctioned
and cybersecurity considerations will become by banks in irst quarter of FY2018 (Exhibit 32).
Exhibit 32
Sourcing of NTC customers has reduced across retail assets in the last few quarters as
existing cohorts have become credit-tested.
Sanctioned sourcing by borrower profile,1 percent NTC Sub-prime Prime Above Prime
Personal loans Auto loans Credit Cards
13% 8% 12% 8%
21% 19% 7%
13%
9% 11%
4% 16%
12% 10%
20% 15% 12%
13%
66% 65% 69%

59% 57% 62%
Q1 Q3 Q1 Q3 Q1 Q3
FY18 FY23 FY18 FY23 FY18 FY23
1 NTC= new to credit; sub-prime = credit score of 300 to 680; prime = credit score of 680 to 740; above prime = 740 to 900.
Source: Experian India

Section C
However, as Indian banks continue to credit-test prime loans, which have marginally increased from
the existing NTC cohorts, the potential for yield 9 percent to 13 percent for personal loans in the
expansion opportunities may be limited. This is last five years, with the same trend reflecting for
reflected in the recent decline in the share of auto loans and credit cards as well.
NTC customer-sourcing for retail assets, as per
While yields will remain range bound, absolute
the third quarter of FY2023 data. NTC sourcing
interest income is likely to grow at healthy levels
declined to around 8 percent for personal loans,
due to the corporate lending revival from capex-
around 12 percent for auto loans, and around
related demand, with corporate credit expected
8 percent for credit card sanctions. This is
to grow at around 10 to 14 percent over the next
substantiated by the fact that risk appetite has
three years.40
not materially changed, as seen in the mix of sub-
40
McKinsey analysis
Exhibit 33
Rising cost of funds due to slower deposit growth and yield hikes.
Term deposits growth has slowed down over the years as HHs have shifted to non-bank deposit investments
Incremental HH gross financial savings, FY1222 Bank deposits growth (CAGR)

INR ‘000 cr, percent FY12–22
Bank deposits Life insurance fund Others1

Currency Provident and pension fund
TD CASA Overall
Financial FY12-15 14% 12% 14%

1,064 1,257 1,615 2,399 2,560
savings
FY15-17 5% 18% 10%

58.1 26.0
36.1
46.1
56.4 10.5
FY17-20 8% 9% 9%
11.8 17.2
10.6 21.9
15.5
11.4 22.7
23.8 20.2 19.0
21.0 FY20-22 8% 15% 11%
15.2 20.4 17.6 23.6
10.3 4.3
1.0
-20.6
Overall 9% 13% 11%
FY12 FY15 FY17 FY20 FY22
With rising repo rates, banks have raised yields on term deposits, which will lead to rising cost of funds
SCBs WADTDR Repo Rate

7
3
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar
2022 2023
1 Shares and debentures, claims on Government, non-Bank deposit, and trade debt.
2 WADTDR = Weighted Average Domestic Term Deposit Rates
3 Source: Annual Reports: RBI, SEC filings,

Section C
Slow growth in deposits and Growth partnerships with fintechs, wealth techs,
rising interest rates keeping and other players have led to sharing of income
pressure on cost of funds streams. As more banks enter the market for
Over the last decade, there has been a significant such partnership agreements, banks may need
financialization of savings, away from physical to lower their share of fees and charges to remain
holdings such as gold and real estate, from 67 competitive, which can further shrink their
percent in FY2012 to 47 percent in FY2021.41 margins.
However, over the last few years, the mix of
Big techs firms like Amazon, Google and
financial assets has materially moved from
Apple have made meaningful plays in financial
deposits to investment-related products (across
services by partnering with established financial
equity, mutual funds, and market-linked insurance
institutions. They are focusing on cross-sell of
products). As a result, deposit growth has come
financial products to their user base (that overlaps
under pressure—with term deposits growing at 9
with bank customers). By using transactional data
percent over the last decade—and is expected to
and big data about their consumers, Big techs are
remain muted over the next few years.
also expanding into lending verticals like MSME
At the same time, to combat the effect of higher loans, BNPL services, and personal loans.
inflation, the RBI has increased the repo rate by
250 bps, from 4 percent in January 2022 to 6.5 Personnel expenses and technology-
percent by end of February 2023. Banks have related costs to rise; will need
responded by increasing interest rates on term to be offset by productivity
deposits, leading to escalated cost of funds. A and digitization gains
combination of structural re-allocation of financial
As banks continue revamping their legacy
savings and the macro-interest environment
systems, digitizing customer journeys, and
would keep real interest rates high.
integrating advanced analytics, talent costs, and
Fee income will be impacted by capex levels are expected to increase over the
increased competition, regulatory near term. Leading banks already spend 7 to 10
changes, and growth partnerships percent of their total expenses on technology, and
this is likely to remain escalated in the near-term
The fee income for Indian banks, including
as the transition to technology-driven operations
processing fees, commissions, and other charges,
are undertaken. Further, attrition across roles
has declined from around 0.63 percent in FY2012
will remain higher than steady-state for the near
to about 0.55 percent in FY2022. 42 This decline
term, necessitating continuous recruitment and
can be attributed to several factors:
training costs. Costs to comply with data security
Rising competitive intensity in the financial sector and privacy norms will also lead to incremental
has led to an increase in fee waivers, to incentivize investments.
price sensitive customers
There is a need to offset these costs across a
Regulatory changes and disclosures have also combination of dimensions, that is, reimagining
increased pressure on banks to rationalize their the organisation structure, especially from a
fees and charges. With the implementation of technology-business interaction model, to
various regulations and guidelines like the trail deploy AI and machine learning to mitigate
income guidelines and master directions on credit operational expenses across newer use-cases
and debit cards in 2022, banks must provide more (e.g. KYC / AML), to re-think the branch and digital
transparency to customers and reduce their fees investment ratio and to efficiently transmit digital
and charges. investments into productivity gains.
41
Reserve Bank of India.
42
McKinsey analysis.

Section C
Credit costs have trended e-commerce spending behaviour, etcetera, are

downward and are expected expected to improve underwriting for customers
to remain range-bound with thin credit history, thereby mitigating some of
Overall credit costs have been significantly the credit risks inherent to these segments.
reduced over the last five years, driven by
concerted action from PSBs to clean up their Returns are likely to remain under
books and write off bad loans, coupled with pressure over the medium term
recoveries and resolution through the Insolvency
With limited avenues to grow net interest
and Bankruptcy Code mechanism (Exhibit 34).
income or increase fee income, total income (as
Further, loan delinquency and collections a percentage of assets) is unlikely to expand
management has been tightened by banks, driven significantly beyond current levels. While credit
by stricter provisioning norms and improved costs are expected to remain under control, banks
fintech landscape. As per RBI’s Financial Stability will be under pressure on the operating costs,
Report, issued in December 2022, GNPA is especially with the war for talent driving personnel
projected to fall to 4.9 percent by September costs higher. Technology has been a critical
2023, vis-à-vis 5.8 percent in March 2022. differentiator between laggards and leaders in the
As banks increasingly incorporate advanced industry and there will be investments to minimise
analytics into their credit scoring and monitoring or increase competitive distance. In this backdrop,
mechanisms, we will likely see better underwriting the next section explores critical levers for banks
practices, further reducing the occurrence of non- to maintain their leadership and outperform.
performing assets. Newer product innovations
such as transaction-based financing or using
alternate data sources such as satellite-imagery-
based farmland data, payments scoring based on
Exhibit 34
Steadily declining trends in non-performing assets from FY18 peaks.

PSBs PVBs All SCBs
GNPA percentage1 by bank category, FY 2017–2022 NNPA percentage1 by bank category, FY2017–2022
Share in GNPA
FY 17 FY 22
15 9
8
7
10 6
5
88% 75% 4
5 3
12% 25% 2
1
2017 18 19 20 21 2022 2017 18 19 20 21 2022
1GNPA percentage is calculated as gross non-performing assets by gross advances; NNPA percentage is calculated as net non-performing assets by net advances.
Source: RBI

Section D
Way forward: Building
resilient leadership
Against the backdrop of an uncertain global performance is not going to be sufficient to

environment, while Indian macros and banking generate consistent outperformance in terms
have held strong, it is becoming increasingly of value creation. Therefore—extending the
evident that the number of constraints and principles of holistic impact – we have suggested
threats banks will have to manage in the future nine key actions that Indian banks could consider
will continue to become more complex and inter- to build in resilience and drive performance.
dependent. It is also clear that merely financial (Exhibit 35).
Exhibit 35
Building resilient leadership would require Indian banks to focus on holistic impact.
Financial 1 Win the next set of new money pools

performance • Build capabilities for digital commerce and open architecture banking
• Participate in corporate capex cycle
• Create differentiated capabilities for the mass affluent
2 Horizontal capabilities to optimize efficiency and experience

• Develop full stack AI (generative or otherwise) with focus on adoption
• Zero-ops capabilities to lower operational complexity
Industry •3 Partnerships: Leveraging co-lending and fintech partnerships to drive accelerated outcomes
health
Customer •4 Meaningful connect to customers via N=1 personalization

experience •5 Digital and analytics-led collections shifting to an “assistance” mindset
Societal and •6 Driving financial inclusion in agri and NTC cohorts

environmental
impact •7 Financing India’s green transition with innovative business models
Operational •8 Build technology resilience to enable scale and digital businesses

resilience
•9 Revamp employee propositions to win the talent battle
D1. Winning the next set of new money flows

We see three areas or segments that could drive a GMV in FY2026,43 growing at 30 to 35 percent
significant proportion of net new money flows that annually by building new capabilities like open
banks may think about strategically: architecture lending (through Open Network
for Digital Commerce, Open Credit Enablement
— Providing financial services across the fast-
Network, and Account Aggregator integrations),
growing digital commerce value-chain, which
product innovations, and partnerships.
is expected to reach INR 14-15 lakh crore of
43
The way ahead: Open network for digital commerce, ONCD, January 2022.

Section D
— Corporate credit (along with government — Lastly, while a lot has been done to bank the
infrastructure spend) is expected to see a affluent and HNW segments, mass affluent
revival and grow at over 10 percent over the remains and opportunity up for disruption
next few years, reaching about from a wealth management perspective.
INR 65 lakh crore of portfolio for banks by While banks have built Virtual Relationship
FY2027.44 However, choice of segments and Management (VRM) capabilities, there is still
sectors will be critical and banks can think significant potential to create a more holistic
about pre-emptively building their capabilities proposition tying in products, analytics,
and propositions along these areas. relationship management, and digital
engagement.
D1. (a) Tapping into fast-growing digital and SME opportunity

Large and growing digital commerce towards underserved. Estimates expect an
opportunity; further boosted by the incremental contribution of 3 to 4 lakh crore in
introduction of ONDC additional GMV over the next few years.47 As a
result, an integrated digital commerce strategy is
Digital commerce is a fast-growing segment
an important area to get right for banks.
within the SME lending space, with the GMV
for digital commerce in the retail sector in India Banks would need to think like digital
expected to grow to INR 15 lakh crore by 2026, incumbents to enable them to successfully
growing at a CAGR of around 30 to 35 percent capture and unlock financial flows on
(Exhibit 36).45 There is a significant potential for commerce platforms
incremental digital commerce flows; about 20 to
The discovery, engagement, and financial product
25 percent of India’s internet-using population
purchase can follow multiple pathways and time
consists of digital commerce transactors while
periods across customers and therefore it is
just five to six percent of the 90 million MSMEs are
critical to engage across the life-cycle of a digital
active on a digital sales platform.
consumer.
Multiple initiatives and factors are accelerating
— Digital customer cohorts must be segmented
the adoption of digital commerce and facilitation
in a very different way compared to traditional
of digital lending to these entities (both consumer
offline cohorts; There must be a clear
finance and micro-enterprise lending). First,
“engagement ladder” to provide the right
there has been continuous improvement in the
nudge and the right time to the participants.
data landscape—that is, improvement in the
commercial bureau penetration among micro- — Customized product propositions (or example,
SMEs, availability of GST records, and emergence small-ticket line of credit, merchant finance)
of alternate data providers that give both that can be delivered end to end digitally.
incremental information as well as efficiency gains
— Flow based underwriting, leveraging platform
(for example, bank statement digitization, digital
data becomes critical to build compelling
validation, etcetera).
journeys with acceptable approval rates and
Lending based on the AA framework (supported fulfilment processes; credit teams must adopt
by OCEN) is expected to reduce the turnaround a POC approach to test and learn (to create
times and friction in loan processing and income estimation cohorts and dynamic limit
sanctioning (6 million accounts have already assignment strategies).
been enabled on AA, with around 200 FIPs
— Rewiring the technology architecture and
on the framework).46 AA integrations can
capabilities to seamlessly link the bank’s
potentially improve bank loan monitoring process
system to the platforms. The project teams
through digital access to up-to-date account
delivering the interfaces must keep the
and transaction data on the suppliers financed
architecture modular and flexible to adapt
through the new-age digital systems.
and accommodate to changing protocols and
Moreover, ONDC is expected to further facilitate standards.
inclusion and thus formal credit deployment
44
McKinsey analysis.
45
The way ahead, ONDC, 2022.
46
Ecosystem dashboard, Sahamati, 2023.
47
The way ahead, ONDC, 2022.

Section D
D1 a
Tapping into fast-

growing digital and SME
opportunity
Exhibit 36
ONDC can unlock key areas of growth in financial services for digital commerce players with
implementation of targeted use cases.
Growth of digital
commerce GMV in >1 bn consumers
India, INR lakh cr. Consumer
30–35 Buyer- ONDC Network

percent Buyer-side Super apps/ Services:
side
aggregator fintech apps Registry
app(s)
Banks Network policies
Payment processor
14–15
Account aggregator & OCEN
Alternate data
sources availability
for underwriting
Seller- Seller-side app
NBFCs side app (aggregator) TReDS/invoice
financing
Value-added
services like
advisory, taxation,
Other and GST filing
2.5–3 lenders Supermarket Kiranas Self-employed
(inc. retailers and other Integrated payment
fintechs) services provided gateways
eg, BBPS, UPI
FY20 FY 26 >90 mn sellers
Source: ONDC
— Specific capabilities to drive partnerships — Thinking through the suite of value-added

with platform players and their participants features that the bank can host or build (for
become important; creating joint execution example, content, taxation services) that
and marketing teams have had higher success improve time spent on platform and journeys
in integration and business traction compared can enable incremental traffic, data collections
to siloed co-ordination efforts. and payment flows.
D1. (b) Facilitate revival in corporate credit cycle

by tapping into capex-related demand
India is on the cusp of a new capex cycle, with Indian corporates have made significant progress
rising government and public sector capex in improving balance sheets over the years.
expected to result in 8 to 10 percent growth in According to data from RBI, the leverage of Indian
corporate lending over the next three years. companies, as measured by their debt-to-equity
ratio, has declined steadily from around 0.5 in
The government’s infrastructure development
FY2017 to 0.37 in FY2021. In addition to reducing
focus has spurred governmental and public
leverage, operating profits of Indian companies
sector capex, alongside the introduction of the
have also improved in recent years, increasing
Production-Linked Incentive (PLI) scheme, which
from around 15 percent to around 17 percent
is set to attract private investment in key sectors.

Section D
D1 b
Horizontal capabilities
Exhibit 37
8-10 percent lending growth expected over …driven by govt. focus on manufacturing &
next 3 yrs driven by capex cycle revival… infra, pent-up demand, rising prices
Banks’ Wholesale loan growth (INR lakh crores) Early indication

Gross credit that includes industry and services,
• Govt. capital expenditure budget has grown by
excludes Agri, Personal loans, Priority sector
35 percent in FY23 vs. FY22
MSME loans
8-10% p.a. • GFCF as a percentage of GDP seeing upward trend:
Grew from 28 percent to 29 percent, in Q1 FY23;
expected to reach pre-covid levels in 1 yr
64
+6% p.a.
56 Key drivers
46 • Govt. focus on benefiting from Geo-political

44 43 situation: Aim to increase manufacturing share in
41
36 GDP from 15 percent to 25 percent in 10 yrs; PLI
schemes being revised
• Govt. focus on rapid ramp-up of infrastructure –
10+ mega projects initiated in 2021 e.g., Mum-Del
expressway
• Pent-up demand from COVID expected to see revival
over next 1-2 yrs
• Inflation and rising material prices expected to
FY18 FY19 FY20 FY21 FY22 FY25 FY 27 raise Ops & Maintenance costs, boosting working
capital and Capex needs
Source: RBI Sectoral Credit Database
over the last five years, despite the pandemic.48 time—trends around de-carbonization,
In addition, the capacity utilization levels for disruptions in technology, and shifts in global
the manufacturing companies are back to pre- supply chains may alter the risk-return profiles
pandemic levels (around 75 percent as of first of many segments. It is therefore important that
half of FY2023, compared to around 60 percent banks think about their sectoral mix strategically
in FY2021, as per RBI data) and sustained high and build the right product and underwriting
levels would result in capacity expansion by capabilities across priority sectors.
the manufacturing sector, leading to a revival in
ii. Digital enablement of relationship managers
corporate credit demand.
to improve their productivity and coverage
Banks would need to gear up to There is a need to ensure relationship managers

serve the right segments with the (RMs) get the full benefit of customer relationship
right propositions requiring a management techniques and technology that
refresh of their operating models banks have adopted at other parts of their
business. Enabling RMs through a digital
(i) Develop sector-specific value propositions
work bench can improve funnel outcomes and
across priority value chains
efficiency. Creating scientific account plans,
Over ten industries have the potential to generate share-of-wallet estimations, and building sound
an additional $320 billion in Gross Value Added coverage models across RMs, product specialists,
over the next few decades (Exhibit 38). Not all and leadership teams becomes critical for
sectors will remain attractive at the same ensuring productivity.
48
RBI

Section D
D1 b
Horizontal capabilities
Exhibit 38
Banks can develop sector-specific value propositions across priority sectors' basis credit
requirement, risk potential, and feasibility of lending.
Potential gain in India’s gross value added1 Sector-specific value propositions for priority sectors
$ billion Illustrative for Chemical Sector
By value chain Potential offerings to address
Total 317 Key challenges value-chain challenges
Aerospace/ Furniture, Apparel and Tier 1 Suppliers Manufacturers Sector-specific

defense leather, and textiles supply chain finance
rubber offering
8 12 17
International GST
Pharmaceuticals Capital Metals payments and non- Reconciliation Invoice discounting
goods and and basic availability of timely for receivables
21 machine
tools
materials guarantees
Vehicles and
vehicle Money saving
components 22 27 30 Subsidy FX solutions
receivables
Reconciliation of
Agriculture and food Electronics and
vendor payments
semiconductors Fund/non-fund-
due to lack of ERP
60 47 integrations based lending
(LC/BG) solutions
International
payments and
Chemicals 73 guarantees for Tech-enabled SCF
Working capital imported raw platform
crunch material
Source: India's turning point, McKinsey Global Institute, August 2020; "A new growth formula for manufacturing in India," McKinsey, October 30, 2020; Digital India: Tech
to transform a connected nation, McKinsey Global Institute, March 27, 2019.
iii. Credit process transformation to improve iv. Leverage advanced analytics structurally
efficiency and risk identification across the value chain to improve pricing and
RM productivity
Unlike retail lending, corporate lending
journeys are less suited to a “factory-like” Advanced analytics has been typically used by
approach. However, many of the principles still corporate bank teams either for lead identification
apply—providing a smooth customer experience or monitoring, based on transaction data and early
with a faster “time-to-yes” and creating a sharper, warning triggers. However, several use cases
more insightful version of the credit note continue exist across the corporate banking value chain,
to remain priorities. At the same time, creating like wallet estimation, using lookalike modeling
swim-lanes across complexity and criticality and next-product-to-buy suggestions, for RMs to
levels (for example, renewal versus new, ticket- make targeted cross-sell. For instance, a global
size and nature of the deal) can also bring in bank unlocked significant value in select use
notable efficiencies in the process with credit cases like constructing client archetypes, client
and business teams focusing on “what’s really sizing, and performance management which
important”. resulted in the identification of 15 to 20 percent
frontline efficiencies and around 10 percent

Section D
D1 b revenue upside from cross-sell and up-sell corporate banking analytics use case; insights on
Horizontal capabilities activities. It is critical to translate these insights to the “optimal deal strike price”, coupled with tight
the RMs and clear governance (ensuring proper governance of the frontline, can deliver significant
pitch, capture of feedback) to drive beneficial upside on the yield income of the division.
outcomes. Pricing is also emerging as a valuable
D1. (c) Leverage a combination of relationship management and technology

to deepen mass affluent and upper-mass market wallet share
Affluent and emerging-mass affluent segments Banks would require operating shifts across
are expected to drive the growth in wealth their distribution channels, capabilities and
management AUMs with rising wealth and partnership models to tap the emerging
improving penetration levels affluent customers
Wealth management services in India have been With increasing digital penetration and the
primarily limited to high-net-worth individuals availability of higher amounts of data on
(HNIs) and upper end of the affluent segments, consumers’ income, expenses, and wealth,
who have been provided with dedicated RMs and there is now an opportunity for Indian banks to
differentiated private branch access, with wealth democratize wealth management for the fast-
management penetration for these segments at growing mass affluent segment by leveraging the
40 to 50 percent. However, with the rising middle- virtual RM channel, supplemented by digital self-
class population in India, the next set of growth serve channels and partnerships (Exhibit 40).
is likely to come from mid-affluent and emerging
affluent segments, whose financial wealth is likely
to grow at 13 to 15 percent annually by FY2027.
The wealth management penetration is expected
to be around 33 percent and around 23 percent,
respectively.
Exhibit 39
Affluent segment is expected to drive growth in the wealth management segment faster than
others due to rising penetration.
Segmentation based on financial wealth, INR

Total HH financial
WM assets, INR lakh core Total HHs
penetration, CAGR,
Percent 2022 2027E (22-27E) 2022 2027E
>50 cr UHNI 36% 127-128 12-14% 30-35k 40-50k
67-68
10–50 cr HNI 36% 17-18 31-32 12-14% 165-170k 240-250k
1–10 cr Affluent 33% 32-33 58-59 12-14% 2.5-2.6M 3.6-3.7M
Emerging
0.5–1 cr 23% 25-26 51-52 13-15% 32-33M 39-40M
affluent
<0.5 cr. Mass market NA 74-75 110-111 8-9% 208-210M 210-215M
Source: Global Wealth Data report, Credit Suisse; Global Banking Pools, McKinsey; Global Wealth Pools, McKinsey

Section D
D1 c
Leverage combination
of relationship and
technology
Exhibit 40
Operating shifts required to tap the emerging affluent and mass market customers.
Channel— Introduce the virtual RM channel, for customized offerings to the affluent and mass-
introduce VRMs affluent customers
Hire investment and product specialists to support VRMs
Revamp organization structure with a distributed model to capture regional nuances and
customize the experience
Capabilities— Develop digital tools for wealth management offerings (eg, risk profiler, asset-allocation
develop digital model, portfolio analytics tools, taxation tools)
wealth offerings Analytics-driven customer engagement
Develop self-serve channels through website, mobile application, social media, etc, to
reduce dependence on RMs/branch
Partnerships— Partnerships with new-age wealth techs to co-develop PFM and robo-advisory services
collaborate to Provide value-added services like estate planning, succession planning, and creating wills
improve customer through partnerships with law firms
experience
Virtual RMs for affluent and emerging affluent — VRM assignment could capture regional
customers can deliver on both efficiency and nuances and customize experiences based
experience measures on the previous interactions (that is, the
calling scripts and systems must reflect past
Using virtual RMs, banks can build meaningful
interaction history, most frequent requests,
customer relationships and increase relationship
any important milestones coming up, and the
value through cross-selling. Most corporate
right next best actions and services).
salary customers have adopted to mobile and
net-banking and do not prefer to visit branches — Time spent with customer may not always
unless mandatorily required—while many of them provide the right interventions—quality of
admit that they would prefer to have a relationship time spent with customer can be continuously
manager who is a phone call away and who could monitored and measured.
enable digital transactions for them. Many banks
— Virtual relationship management provides
have scaled up or are in the process of setting up
an ideal test bed for conversational AI and
the virtual relationship manager (VRM) channels.
generative AI—continuously experiment
There are some best practices to incorporate:
to deliver the right leverage to the virtual
— Equal emphasis to be given on relationship RMs and at the same time ensure predictive
management and technology—not an “either/ customer service is delivered.
or”; the tech platform must enable first time
Strong self-serve digital wealth management
connectivity, easy conversational access
features can provide valuable engagement and
and ability to fulfil transactions on the phone
insights; may need to build everything on your
(co-browsing or OTP based fulfilment for non-
own
complex processes); at the same time, RM
training focusing on conversational fluency By leveraging robo-advisory and personal
and empathy are key to ensure the customer financial management tools along with virtual
engagement is beyond transactional in nature. RMs, banks can provide affordable and accessible
investment solutions that cater to the specific
— VRMs processes can be backed with strong
needs of individual customers. Eight critical
SOPs but build in flexibility to deliver “offline-
elements considered to deliver a fully digitized
like” comfort (deviation-based waivers,
wealth advisory experience for the customers:
taking non-standard banking requests, and
coordinating with physical channels to fulfill
the demand).

Section D
D1 c
Leverage combination
of relationaship and
— Detailed risk profiler that can categorize customer and tracking tools for relationship
technology customers based on their investment appetite managers.
and goals.
— Auto-rebalancing tools based on market
— Goal-based investing tools, where movement, goals or life stage changes, or life
investment goals are defined, such as buying a events.
house or saving for retirement.
— Taxation tools, including tax loss harvesting
— Asset allocation models that specifies the features and auto-computation of taxation on
right asset mix for each possible combination capital gains for customers.
of risk profile and goal.
— Customer education programs and
— Curated selection of specific financial dissemination of information via online and
products, like mutual funds, equities, and offline channels.
gold, to be included in the model portfolios via
Banks may need not build the entire stack of
a research team.
capabilities on their own. Multiple opportunities
— Portfolio analytics tools that enable exist to leverage the wealth tech and PFM
automation logic for each model portfolio and ecosystem to deliver an enhanced experience to
the segment.
D2. Horizontal capabilities to optimize productivity and operational efficiency

AI (generative or otherwise) is at the cusp of intervention in several areas, especially with
creating a new revolution in banking; multiple use repeatable, rules-based processes such as KYC,
cases are being experimented upon and scaled AML, routine customer service requests, and even
up for production. Further, a “zero-ops” driven some credit decisioning activities.
reimaging of operations can help reduce human
D2. (a) Developing full-stack AI (generative or otherwise) capabilities

While banks recognize the potential benefits of effectiveness. Banks often rely on third-party
integrating AI, critical enablers are yet to be put providers for critical functionalities instead
in place of developing in-house talent to create
differentiation and competitive advantages.
Many banks have begun their journey toward
integrating AI into their operating models across — Lack of enabling infrastructure: While core
marketing and sales activities, as well as fraud technology systems perform well on stability,
and risk management practices. However, they often lack capacity and flexibility required
despite investing significantly in AI-driven to support variable computing requirements,
transformations, banks have met with limited data processing needs, and real-time analysis
success in diffusing AI through their operations required by closed-loop AI applications.
due to the lack of a clear AI strategy. Some key Most banks also lack a robust set of tools,
challenges include: and standardized processes to build, test,
deploy, and monitor models in a repeatable,
— Fragmented data landscape: Within legacy
at-scale manner. Finally, the last-mile pipeline
systems of most banks, customer data has
to down-stream systems (for example, CRM,
been fragmented at a product level, with
LOS) remain broken and manual—diluting the
limited cross-utilization by other teams.
analytics experience for the frontline.
Further, data quality has also been low, as
customer engagement was largely driven — Limited focus on end-user adoption and
manually and was dependent on traditional interpretability: Business and operations
sources such as credit bureaus. teams in banks today often have a limited
understanding of data and analytics
— Undervalued role of analytics talent:
applications, and they tend to define goals
Analytics applications have typically been
unilaterally, which may not be consistently
narrow,focused on specific use cases,
aligned with the organization’s overall analytics
primarily due to fragmented data availability.
strategy. Further, decisions and output from
Hence, analytics talent has also developed
analytics applications are not always clear to
in siloes, and is not well integrated with
end users, exacerbating adoption issues.
business or operations teams, limiting their

Section D
D2 a Generative AI has been around for a while but pre- and post-model capabilities can drive
Developing full-stack AI only gained traction in the banking sector in multiples of impact through query engineering,
2023 data engineering, teaching, and change
management. This requires leveraging full
While generative AI has been present for
business system approach supported by a
a considerable duration with numerous
culture of experimentation. To successfully
advancements occurring since 2017, several
scale generative AI, Banks will need to look at all
companies across various industries have begun
dimensions including strategy, talent, operating
integrating Generative AI with the aim of attaining a
model, etcetera. Those who act quickly would
prominent market position. The banking sector has
create competitive distance from their peers with
witnessed significant acceleration in the utilisation
capabilities that can’t be obtained “off-the-shelf”.
and development of generative AI in the year 2023.
Within the banking industry, organizations are To effectively leverage the potential of
adopting generative AI across diverse horizons: AI and ML, banks would need to create a
some entities employ generative AI to enhance comprehensive and robust AI strategy (including
targeted productivity (for example, South State an infrastructure and adoption charter)
Correspondent), while others are undergoing
An integrated AI strategy would involve three key
substantial business transformations (for example,
elements:
Bloomberg).
— Define a clear use case roadmap that can best
Contrary to popular belief, the realm of generative
leverage AI and ML capabilities
AI extends far beyond the scope of ChatGPT alone.
A plethora of specialized tools exists, catering to — Data engineering, governance, and tooling to
different contexts such as voice, video, images, and enable large-scale feature engineering
code, thereby causing disruptions across various
— Define KPIs for success and drive adoption
business models and occupational domains. For
through interpretable AI
instance, tools like StyleGAN enable the creation of
high-resolution images, while models like Jukedeck Define potential use cases to be developed
and MuseNet possess the ability to generate
The advancements in AI and analytics have
original music.
presented banks with a wide range of use cases
Extracting value from generative AI will require across customer experience improvement and
multiple pieces to come together process optimization, with a potential impact of
$1 trillion globally (Exhibit 41).49 Functionally, the
Value from generative AI requires much more
highest value drivers include marketing and sales
than the underlying foundational models. The
49
Ibid.
Exhibit 41
We see four domains that generative AI can transform banking industry.
Prioritized use case Future state: what could this look like?
RM/VRM co-pilot Empower your frontline with gen-AI based “professional advisors” for better sales
performance, by building customer relationship through more effective
conversations and product recommendations
Coding Enhance your tech delivery capability by interpreting, translating, and generating
code with gen-AI as co-pilot
Operations Introduce more effective and efficient working process in underwriting, claim
management, fraud detection, risk analytics, and legal documents and disclosure
draft and reviews
Customer Engage customers with personalized content, which increases productivity &
engagement reduces risk from content moderation failures
Source: “AI-bank of the future: Can banks meet the challenge?”, McKinsey ,September 19, 2020

Section D
D2 a (61 percent) and Risk (36 percent), followed by profiles and generate video content based on
Developing full-stack AI other administrative functions such as finance and customer life-stage and preferences.
HR.
Integrated data management strategy and
Four types of use cases are gaining momentum governance practices to ensure the full
in the banking sector potential of AI is realized
Generative AI is uniquely able to handle insight Integrated data management strategy: A

extraction through rapidly searching through strong data foundation is a key element of an
large texts to extract relevant answers, content integrated AI architecture. Banks should ensure
generation by swiftly developing complex that the data management practices are in place
documents and messages tailored to specific or are taking place in parallell to the scale-up of AI
context and user interaction through “out of box” teams and models. Further, the platforms should
human like conversational ability. This has led be accessible to multiple teams, and augment
to four priority use cases of generative AI in the internal data with external sources take as well, to
banking sector (Exhibit 41). form a single source of truth.
— RM or VRM co-pilot: Banks can move away Set up enabling infrastructure: Three layers
from the current, highly-RM dependent model built on the data platform can drive the AI engine
to generative-AI-based virtual advisors (Exhibit 42):
who summarize unstructured customer
— Data lake layer: Forms the foundation of the
demand and behavior at scale, understand
AI model, utilizing comprehensive data sources
the customer need and provide insightful
to drive personalization and 360-degree
suggestions, and compare product terms
understanding of customer behaviour
and recommend the best fit. This would help
uplift leads-to-sales conversion rate and drive — Decisioning layer: AI and ML engines drawing
up-selling and cross-selling ratio through on data from the data lake layer, as well as
continuous customer engagement. feedback loops from continuing customer
interactions
— Coding: Banks could enhance their tech
delivery capability by interpreting, translating, — Engagement layer: Design omnichannel
and generating code with generative AI communications and marketing strategy,
as co-pilot, which can increase developer ensuring that customers have a uniform
productivity when properly integrated into experience across all channels of engagement
workflows. In an internal Mckinsey-run (email, SMS, mobile apps, website, branch and
experiment, engineering productivity went contact center)
up by 40 to 50 percent while maintaining the
End-to-end integration of the three layers can
quality of code and engineering experience.
help banks drive a data-driven approach across
— Operations: Banks could use generative AI to the organization, with real-time insights generated
introduce more effective and efficient working by automated backend ML-ops models fed
process in underwriting, claim management, seamlessly into downstream applications (CRMs,
fraud detection, risk analytics, and legal marketing dashboards, etcetera), enabling front-
documents and disclosure draft and reviews end teams to engage and convert customers
etcetera. For example, conversation AI tools better.
could be used for customer onboarding,
Drive adoption using a combination of relevant
query resolution, and call center personnel
KPIs and interpretable AI models enabled by
replacement.
generative AI
— Customer engagement: Generative AI can be
AI deployment with well-defined KPIs: Banks
used to engage customers with personalized
have seen increasing success by creating cross-
content, which increases productivity and
functional teams to deploy analytical solutions
reduces risk from content moderation failures.
(business, products, credit, marketing, analytics,
These tools can be used to auto-generate text
operations, and technology). This helps align
content for each customer individually based
objectives and drive real business traction on the
on nuanced prompts, create personalized
ground. Once use cases are tested and viability is
visual and images based on customer

Section D
D2 a
Developing full-stack AI
Exhibit 42
Enabling AI/ML integration requires full stack capabilities.
Engagement layer
Email SMS Mobile app Website Branch Contact Center …
Decisioning layer
Martech stack Design and activation
Customer
Channel
relationship Data mgmt Content Campaign
Adtech Testing analytics/
management platform mgmt mgmt
server platform feedback
(DMP) platform platform
loop
AA/ ML models: Decisioning and

personalization engine
Edge capabilities
NLP Voice analysis Virtual agents Computer vision
Facial recognition Blockchain Robotics Behavioral analytics
Data lake layer
Other use Customer Personalization

Raw data lake Curated data lake cases 360 store
Additional derived elements for personalization
Comprehensive set of data sources
Internal structured data CRM, external data

Unstructured data Campaign
(eg, applications, product holding, (eg, telco,
(eg, call logs) performance data
payment behavior) clickstream data)

Section D
D2 a established in these teams, their role is to develop bank’s needs. Therefore, banks would need to
Developing full-stack AI the MVP into an at-scale solution. Adopting such invest time and efforts in two areas:
a cross-functional lab and factory approach would
— Training foundational LLMs on the bank’s
require a combination of talent, rapid feedback
proprietary data, design language, and tone
from ground back to the operating teams, and an
of communication to ensure outputs are in line
ability to measure impact in short weekly cycles
with internal policies and rules
rather than months. Further, inter-linking KPIs
for success if defined well can drive multiplicative — Developing the right workflows and products
benefits on the ground. to leverage the AI output, in a manner that
is understandable by human users and
Generative AI has the potential to create real-
repeatable at scale
time interpretable decisioning models, leading
to wide-spread adoptions of well-built models: However, banks should also be aware of the
Banks can potentially utilize generative AI to drive associated risks, with generative AIs known to
efficiencies in customer servicing and marketing sometimes “hallucinate”, that is., confidently share
activities and build in interpretability, whereby inaccurate information with no mechanism to flag
end users will have clarity around how decisions this to the user or challenge the output. Similarly,
are taken by the model. While foundational large some responses from user testing have indicated
language models (LLMs) are built over publicly biases inherent in the foundational LLMs. Hence,
available data, they will need to be tailored to the banks should build appropriate guardrails before
deploying generative AI at scale.
D2. (b) Zero-ops capabilities to drive lower operational complexity

Banking operations functions are undergoing a This process helps create a continuous product
silent but sure transformation backlog of improvement which, rolled up at the
bank level, becomes the “zero-ops transformation
Operations today form up to 15 to 20 percent
road map”. While the process to run the zero-
of bank budgets and are labor intensive,
ops transformation is nuanced, three traditional
necessitating the adoption of AI or ML,
principles lie at the heart of it:
automation, and other technology tools to reduce
complexity and drive efficiency. A redesigned — Elimination of unnecessary steps
ops function can lead to automation of around and minimizing handovers by reducing
75 to 80 percent of transactional operations and intermediaries
around 40 percent of strategic activities, thereby
— Migration from physical documentation to
achieving a significant reduction in workforce,
digital data pulls and uploads, and changes
as well as a skillset shift towards personalized
in service channels from physical to digital
AI-enabled advice, problem solving, and product
platforms across video and voice
ownership.
— Automation by pre-filling text forms, providing
Many traditional banks are still in the early stages
real-time updates, and driving STP (straight-
of modernizing their operational processes, while
through processing) through decisioning
leading banks and digital natives have made
engines
strong progress. A successful ops transformation
can potentially drive significant reduction in cost- Leveraging conversational AI across use cases
to-serve as well as improve responsiveness to
Adoption of self-cure channels such as virtual
customer needs.
assistants and IVR has traditionally been low,
Some design principles for banks to consider as due to relatively poor customer experience. The
they build zero-ops capabilities include: advent of sophisticated generative-AI applications
has opened new possibilities for banks to improve
Zero-based design approach to journey
their conversational bots. By leveraging NLP
building
capabilities, banks can create bots that can
Banks can create a rhythm and frequent cadence understand and respond to customer queries in a
of a “zero-based process review” to continuously more natural and engaging way (Exhibit 43). This
redesign ops processes, and identify journeys also frees up collections and services manpower
that can be eliminated, as well as evaluate the to focus on more complex, value-added activities.
digitization potential of activities that remain.

Section D
D2 b
Zero-ops capabilities
Exhibit 43
More than 300 Conversational AI use-cases detailed across six key themes.
Preliminary Illustrative
Knowledge
Servicing and Onboarding and repository
FAQs Transactions cross-sell Collection Advisory and MIS
Use cases
~60 20 7 25 25
~225
Customer-specific Assist customer in Assist ETB and Remind customers Provide step-by- Automate key
requests/inquiries carrying out NTB customer(s) of payment of step investment backend banking
across liability, transactions with end-to-end upcoming bills, guidance basis a operations,
lending products, across P2P, onboarding EMI, premiums holistic content and MIS
eg, Statement P2M,EMI, for journeys.For (2 use-cases) assessment of report
download, credit example, UPI, example, saving customer profile. generation. For
Make proactive
card block / IMPS & Utility bills account, pre- For example, risk example,
outreach to
unblock, EMI hold- (~50 use cases) approved personal profile-based business reports
defaulting
back, rewards loans, SIP etc. portfolio at circle, network,
Assist customer in customers for
balance (15 use cases) management, branch level
self-managing overdue
(~200 use cases) goal-based (15 use cases)
accounts, for Hyper- payments, assist
investment
Product and example, fund personalized repayments, or Empower
service-related PPF, schedule offers for a cross / record promises to employees with
general payments, manage upsell. For pay key info on
information(FAQs). SI, etc example, nudges (5 use cases) product features,
For example, (~10 use cases) for pre-approved policies and
Interest rate on loans, next best regulations, For
loans, deposits, product example, scheme
branch/ATM (5 use cases) details, changes
location in regulation
(~25 use cases) (~10 use cases)
Conventional AI to be available across banking
channels—pp and web for customer self-service, for Use cases to be built across various modes of chat, voice
branch and agent assist and third-party channels eg, and video basis propensity of usage and effectiveness
WhatsApp, social media
AI platform to form the foundation for advanced generative-AI use cases such as coding assist, underwriting report
generation that may be introduced in future
Drive smart operations using new-age tech can enable a more in-depth understanding of
customer preferences, enabling a personalized
Banks can leverage OCR and RPA to run
approach to customer service.
repeatable but time-consuming processes in a
more efficient manner, improving accuracy and Real-time measurement and decisioning nerve
processing time. Further, banks can also invest centers
in edge capabilities such as facial recognition,
As banks shift further toward zero-ops, it is
speech analytics, and blockchain to drive
critical to build centralized monitoring capabilities
critical functions such as KYC and AML checks.
to ensure real-time availability and reliability
Behavioral analytics are another capability that

Section D
D2 b of integral systems. Continuous tracking via metrics—as well as maximize the value of
Zero-ops capabilities automated dashboards will help the bank minimize every customer interaction. Investing in an ops
service downtime, as well as reduce the likelihood transformation will be critical to ensuring that
of breaches in key operating or risk related KPIs. banks can build a robust operating model that
is more efficient, highly accurate, scalable, and
Significant effort required to move to a zero-
resilient in the face of increasing competition and
ops mindset, but gains are worthwhile
scrutiny.
A distinctive service ops structure has clear
benefits across cost-to-serve and productivity
D3. Partnerships: Leveraging co-lending and

fintech partnerships to drive scale
Scaling up co-lending and fintech partnerships While banks have a good physical reach through
can help banks extend beyond traditional their networks, a large base of customers and
channels, deepen engagement, and reduce their trust, and a brand built over the years,
operating costs fintechs and NBFCs, on the other hand,have deep
distribution in select pockets and technology
Indian banks have a unique opportunity to shape
stacks that are more modern compared to
a vibrant partnership ecosystem by combining
banking cores. There is a natural case to partner
complementary strengths and partnering with
and collaborate—which is being enabled via
NBFCs, fintechs, and other ecosystem players
multiple models.
to achieve scale and streamline their costs
(Exhibit 44).
Exhibit 44
Banks could look at scaling up growth partnerships to improve reach and scale of operations.
Partnerships with other Participation in

Co-lending FS entities customer ecosystems
Objective Partnership with NBFCs (with Partnering with other financial Ecosystem partnerships allow
better reach) to jointly provide services entities like fintechs banks to address critical
loan to customer, specially enables banks to reach customer pain points with
unserved or underserved customers without having to tailored solutions
segments at affordable rates invest in their own distribution
channels. Other use cases
include building tech infra, new
age underwriting models, etc
Pain points Limited traction due to lack of Data sharing, FLDG Many banks have
uniform co-lending tech agreements for loan sourcing experimented with an
platforms and conflicting credit and credit remain a challenge ecosystem strategy, but few
assessment methods have found the way to
distinctive value creation
Structural Joint creation of underwriting Rethink operating models to Build capabilities around
solutions and credit assessment ensure smoother data transfer product management,
methodologies and creation of alternate risk- campaign analytics,
sharing agreements underwriting using platform
Streamlining IT integration
data, etc
through creation of
standardized loan templates Build adjacent, digital
product/service offering to
help capture new customers
and maximize core business
revenues

Section D
D3 i. Co-lending: This model is unique to India and security and ownership and evolving regulatory
Partnership: Leveraging was originally introduced by RBI in 2018and later stance on FLDG arrangements.52 Banks will need
co-lending and fintech amended in 2020 to push the lending to unserved to build robust data management platforms where
and underserved segments at affordable cost.50 fintechs can integrate while retaining control of
Under this arrangement, RBI mandates NBFCs customer data in line with data privacy norms.
to retain a minimum of 20 percent exposure to Banks can also strengthen the monitoring of
the loan and allows the NBFC to be the customer- partner-sourced portfolios.
facing entity. A key factor that has given a fillip to
iii. Participation in broader consumer
co-lending is the rise in interest rates, which have
platforms: Establishing ecosystem partnerships
led to a surge in cost of funds for NBFCs. This
can help banks save on customer acquisition
makes co-lending a viable way for NBFCs to offer
costs, obtain highly accurate customer
competitive interest rates and partially mitigate
information ranging from logistics to behavioral
increases in benchmark rates. Over 40 co-lending
data, and enhance customer relationships
arrangements has been announced over the last
and retention. For Indian banks, an ecosystem
few years, with the co-lending portfolio of PSBs
play would allow them to maintain competitive
pegged at INR 25,414 crore (as of the third quarter
business positions and withstand challenges from
of FY2023).51
digital rivals—particularly by preventing customers
While co-lending is expected to grow by three from switching to competitors. To achieve this,
to four times in FY2024, execution remains they will need to build capabilities around product
a challenge due to complexities around tech management, the ability to customize platform-
integration, product norms harmonization in specific campaigns and products, tweak the
respective loan management systems, and underwriting process to incorporate the platform’s
converging to a “common underwriting policy”. data, etcetera. They must also consider strategies
While continuous improvement and scale up is around product offerings, customer management,
expected, there is a need for industry participants middle- and back-office issues, talent recruiting,
to come together and create industry wide technology, advanced analytics, and performance
protocols and enable creation of entities that management.
could act as “integrators”, that is, provide the suite
How to leverage the partnership model
of APIs and micro-services that could bridge the
to grow at scale?
technology and product differences seamlessly
Most banks understand the importance of
across players.
having a clear strategic rationale and a robust
ii. Partnerships with other financial services governance model to oversee the partnership. It
players: Fintechs have a strong presence in is also essential to establish teams responsible
digital channels with their technology-driven for setting up partnerships and adapting the
understanding of customers. Therefore, technology infrastructure to support the efficient
partnerships with fintechs are becoming and speedy launch of the partnership.
increasingly crucial for banks to innovate internally
— Setting up dedicated teams focused on
and for the customer. These partnerships help in
establishing partnerships: These teams
increasing the customer base without having to
constantly scan the market for potential
incur large marketing spends and aid in entering
partners and assess their relevance to the
niche segments where banks may not have
institution’s growth strategy. They engage
a strong presence. Partnerships with fintech
effectively with a broad range of non-
companies can ramp up banks’ adoption of
bank partners—beginning with a review of
digital capabilities without overhauling the legacy
differences in culture and technology—and
systems. These fintechs are helping banks to build
gauge the flexibility required to align with the
new-age underwriting models that use alternate
partners’ ways of working to enable faster,
data sources, APIs to cut down the loan approval
smoother, and more productive collaboration.
TAT, and give behavioral insights for a better
Typically, an organization that is able to create
understanding of customer needs.
joint product and marketing teams along
While there are many benefits to fintech the partner, with an upfront test and learn
partnerships, challenges remain around data
50
“Co-origination of loans and NBFCs for lending to priority sector,” Reserve Bank of India, September 21, 2018.
51
Co-lending volumes, April 2023.
52
FLDG — First loss default guarantee, a risk management mechanism whereby the fintech partner agrees to compensate the bank for
certain percentage of default in a loan portfolio.

Section D
D3 arrangement on credit policy have seen more integration with partner platforms. This
Partnership: Leveraging scale and success. includes creating sandbox environments
co-lending and fintech to enable rapid experimentation,
— Making the technology infrastructure
proof-of-concept trials, and modern
partnership-friendly: The success of these
data-sharing and storage options compatible
partnerships significantly relies on API
with the partner’s data stack. The role of
contracts and identifying the functionalities
industry-wide intermediaries shaping the API,
that can be developed to meet the partner’s
product landscape could be beneficial for the
requirements. Another crucial step is
collaboration ecosystem
building layers that decouple core system
dependencies and enable faster fast
D4. Driving customer experience through personalization

Despite their inherent strengths, banks have — Trust-based relationships: Based on long-
been relatively slow to adopt personalization term relationships and backed by regulations,
customers consider banks as trustworthy and
Over the last decade, digital-led businesses
willingly share financial data
have been built on benchmark experiences
enabled by personalization-at-scale and a — Mature data capabilities: Banks already
deep understanding of customer needs and leverage significant amounts of data to drive
preferences. These players have spent years lending decisions, and a large proportion of
building customer data, driving engagement, them have also created digital journeys for
and creating the technology backbone to deliver their asset and liability products, creating a
these experiences. Given this backdrop, banks model apt for personalization
have been relatively slow to adopt personalization,
Integrating personalization requires tools that
especially given their extant strengths, including:
enable customer-level decisioning
— Strong data foundation: Access to deep
As banks evolve and integrate personalization
internal data based on customer transactions,
across marketing, underwriting and pricing, the
coupled with structured external data from
end goal can be to achieve n=1 personalization at
credit bureaus
the customer level (Exhibit 45).
— Deep engagement: Banks with strong
A customer-level approach and a unified approach
relationship management capabilities have
tailored to the specific customer rather than
deep insights around customer needs,
product-centric approaches operating in siloes
financial goals, and spending behavior
can drive dynamic decision making (Exhibit 46).

Section D
D4
Driving customer
experience
Exhibit 45
Financial Institutions typically evolve across four levels of decisioning.
Level 4 Dynamic customer-level decisioning

Decisioning at customer level irrespective of
product being purchased using complex array of
underlying features modules
Level 3 Product-level decisioning using complex machine

learning techniques
Gradient boosting/deep learning-based decisioning at
product level using thousands of parameters
Level 2 Product-level decisioning basis decision trees

Logistic regression/single decision tree-based approach for
decisioning at a product level using few parameters
Level 1 Rule-based decisioning

Traditional rule-based approach for decisioning, eg, bureau score >750;
same interest rates for all salaried customers
Exhibit 46
Moving toward Level 4 would entail taking most credit decisions at customer level, rather
than product level.
Model/rule engine From product-centric …to customer-centric

decisioning… decisioning
Product Product Product Product Product Product
A B C A B C
A KYC process
B Dedupe engine 5-10%

increase in ATS
C Credit qualification
D Fraud checks
E Policy reject rules 10-15%

higher conversions
F Credit line
G Pricing

Section D
D4 This can help banks retain high-quality customers with clients and can augment data analytics to
Driving customer and cross-sell relevant products while enabling provide a truly personalized experience. However,
experience them to appropriately price riskier customers and AI models have usually been a black box, leading
decide the level of exposure they are comfortable to employees disregarding or not engaging with
with. Banks that have begun implementation the models’ suggestions altogether. Recent
along these lines are seeing higher conversions on advances in interpretable AI make it possible to
targeted cross-sell and an increase in ticket sizes. program the model to generate a transcript and
explain its rationale for suggestions, thereby
An emerging use case for personalization is
driving higher employee engagement. Employees
pricing decisions, with the potential to drive higher
can also provide feedback for these AI-generated
conversions through risk-appropriate pricing
suggestions, allowing the model to be trained and
rather than relying on rules of thumb or credit-
improved on live customer feedback.
score-based decisions. To develop this use case,
six key capabilities can to be built (Exhibit 47). iii. Build engagement: Not every interaction
is about a sale. Personalization efforts from
Key themes to consider while implementing
banks tend to focus on near-term goals while
personalisation
also missing an engagement layer. AI can help
i. Analytics framework cannot be limited to banks identify customers that require a longer
propensity models: Driven by a product-centric horizon for decision making and help staff nurture
approach, banks have designed their analytical the relationship to ensure better conversion.
models to drive cross-sell or up-sell based on Additionally, building an engagement layer will
product-propensity models, resulting in the same help banks go beyond sales-oriented interactions,
customer often being targeted with generic offers and move towards customer education and
for multiple products. Personalization can add personalized financial advice.
nuance to the question of “who to target”, and
iv. Invest in industrialized capabilities: Despite
can build higher conversion through the following
strong data capabilities, banks have significantly
capabilities:
under-invested in the following areas:
Exhaustive analytical framework incorporating
— Ability to handle external or unstructured data
multiple elements—segmentation, triggers,
channel, and timing optimization — Integrate ML ops to drive at-scale delivery and
execution of ML models
Next-best action framework to comprehensively
personalize interactions — MarTech automation stack has significant
gaps in knowledge of customers
Continuous learning models taking customer
fatigue and feedback into account — Limited specialisation in the data and analytics
organization roles—shortage of ML engineers
Close integration with A/B testing to learn from
and scrum masters.
“look-alike” customers
ii. Interpretable AI to effectively leverage

frontline staff: Bank employees regularly interact

Section D
D4
Driving customer
experience
Exhibit 47
Six capabilities required to deliver n=1 personalized pricing decisions.
3 Full cost-to-serve models

to predict granular elements of 4 Price elasticity models
to understand customer
cost, including operating costs, preferences among
collections costs, etc different offerings
2 Expected loss-based models

(PD-EAD-LGD) to predict
5 Offer optimization engine
to generate best-suited offer
provisioning in P&L optimizing for profitability and
customer propensity to accept
1 Customer lifetime
value models 6 Offer orchestration
engine
6
based on current and to maximize conversions
future earning potential through experimental
marketing campaigns
Capabilities across channels
v. Augment known data with structured — Divide the customer base into homogenous
experimentation: While the personalization behavior based segments and identify cohort
framework of most banks relies on information traits
already shared by customers, there can be
— Based on segments and traits, identify
significant gaps as not all customers are highly
prioritized list of dimensions to experiment
engaged with the bank. Further, customers may
(product, price, content, channel)
not convey their preferences directly, with banks
having to discover them through interactions. Even — Generate list of campaign ideas for each
after understanding the need, discovering the dimension and iteratively test each segment
right channel, time, and content to communicate is
— Based on outcomes, identify dominant tests
critical. To drive better engagement, a structured
(by segment) and scale up across look-alike
experimentation approach can help, as described
customers
below:

Section D
D5 D5. Digital- and analytics-led collections to help shift to “assistance” mindset

Digital- and analytical-led There is a need for an evolved model for clean up of bad loans in PSBs. The RBI has issued
collections collections guidelines, including the Fair Practices Code, to
address this issue, and has taken action against
Bank customers today are becoming increasingly
multiple institutions for using coercive collection
digital, interacting with their bank across multiple
practices in the past couple of years.53
channels and platforms. As banks reimagine their
engagement with customers, a digitally driven Key building blocks for a “customer-first”
collections model can deliver significant value for service model
the bank. Further, bank collections teams need
As banks begin to rebuild their service models,
to shift to a “customer-assistance” mindset, to
there are five key imperatives to consider
better engage with clients and ensure that the
(Exhibit 48).
loan servicing experience is consistent with the
deep personalization and engagement across i. Cultural shift to “true customer assistance”
other banking relationships. Banks that have
The first step would be a cultural shift, away
implemented a digital customer service model
from a “recovery”mindset to a “true customer-
have seen up to a five times increase in customer
assistance” model. There is a need to “think like
engagement, while reducing collections costs by
a marketer”, with a focus on building a lasting
15 percent and non-performing loans by 20 to 25
relationship with the customer and co-creating
percent.
a workable plan for resolution. Use of data-
The digitization of collections is driven by several driven, smart-collection techniques could also
external factors. The rise in the repo rate has led help mitigate conduct risk, and utilize light-touch
to an increase in the overall cost of funds, resulting interactions to achieve similar or better outcomes.
in substantial pressure on margins and return
ii. Digital-first journeys and personalization
ratios. The competitive landscape has intensified
with the emergence of neo-banks and fintech With over 10 percent of overall customers, and
players, compelling banks to build digital journeys more than 25 percent of millennials stating that
for their customers. Additionally, regulators they are likely to engage with their bank primarily
and market commentators have been closely via digital means going forward, it is critical to
monitoring banks’ efforts to prevent and mitigate create personalized, digital-first journeys for loan
non-performing loans, especially after the recent servicing. A digital-first service model will look
53
Master circular: Fair practices code,” Reserve Bank of India, July 1, 2015.
Exhibit 48
Key imperatives for banks to maximize value-creation in customer assistance.
Culture shift to “true Digital-first Analytics-driven Integrated, full-stack Agile execution at

customer assistance” customer solutions intelligence and technology scale, embedding
vs just collections for personalized decision making enablement new-age talent
engagement
Strategic and cultural From one-size-fits-all From siloed systems From siloed functions
shift in the institution Personalized strategy to customer and manual processes to customer-centric,
from traditional treatment at-scale segmentation through to fully-integrated cross-functional
collections to customer with intuitive, advanced analytics tech stack with teams with complete
assistance and smart seamless, end-to-end and tailored treatment frontline app and core integration between
debt resolution digital journeys for each segment systems delivering technical and
(across self-cure, self- omnichannel business areas for
Hybrid man-machine serve, assisted) experience for rapid experimentation
customer engagement partners and
for standardization customers
and seamless
experience

Section D
D5 drastically different from current practices, while on higher-value and complex interactions,
Digital and analytical led improving outcomes at a significantly lower cost- facilitating a shift to a more customer-centric role.
collections to-serve.
A flexible, modern architecture can leverage
iii. Analytics-driven decision making omnichannel offerings (for example, mobile, email,
WhatsApp, or tele-calling), backed by a digital
Banks would need to leverage their evolving
platform that can facilitate self-serve and assisted
analytics capabilities to drive decision making
interactions, and integrated with data partners
and strategies across the collections journey. This
and third-party service providers (for example,
would involve leveraging the right data sources
chatbots or fintech SaaS players). The platform
and alternative indicators of delinquency such
would also have access to historical payment
as historical spending patterns, past customer
behaviors and spend patterns, ensuring the
behavior, and typical responses. These insights
collections strategy can be dynamic and tailored
can be fed into learning models, along with macro-
to the customers’ preferences. The aim is to build
level data such as economic conditions, business
one-stop IT infrastructure that can assist the
cycles, etceter, to predict likely delinquencies and
collections team from the time a loan is sourced
take proactive action.
through pre-delinquency and debt resolution.
An understanding of customer behaviour is key
v. Execution at scale
to devising the right approach, with digital natives
favouring self-cure, while less digitally inclined Executing a collections transformation would
customers being targeted with the right assisted require banks to create a bespoke operating
channels and personnel to ensure favourable model, and onboard critical talent in data science,
outcomes (Exhibit 49). design, and content, combined with existing
business teams. These cross-functiona teams can
iv. Integrated, full-stack tech enablement
be organized into a “collections tribe”, facilitating
As per McKinsey estimates, around 20 percent of rapid application development. These teams
tasks across customer-assistance occupations would be supported by other functions such as
can be automated using current technologies.54 call-center management, channel management,
This automation can free up employees to focus and legal, and overseen by a head of collections.
54
“Global automation impact model,” McKinsey Global Institute; McKinsey Global Institute analysis.
Exhibit 49
Analytics-driven personalized approach can enable significant improvements in

collection metrics.
Traditional, linear contact strategy
Pre- Outbound Offer Write-off

delinquency calling strategy
Shifting to a customer-service mindset enabled by AI
Dynamic, future-state contact strategy
Initial Timing and Offer strategy Offer Fair outcomes Future intel
engagement frequency messaging
Design Deliver benefits
Contact clients Contact at a affordable and Tailor language to bank and its
via preferred time when most sustainable to ensure borrowers
channels likely to respond solutions understanding
Source: ‘Holistic customer assistance through digital-first collections’, McKinsey, May 21, 2011

Section D
D6. Driving financial inclusion through targeted focus on rural segment

Focus on rural credit and the gig economy consistent growth over the last five years, led by
to drive financial inclusion, which is a large personal loans and non-KCC agri products (agri
opportunity growing at around 10 percent gold loans, investment credit loans, etcetera),
annually for the last five years which have seen high growth rates of 14 to 16
percent per annum. (Exhibit 50).
Indian banks have taken significant strides
in promoting financial inclusion, with around Agricultural credit forms around 40 to 50 percent
78 percent penetration of bank accounts. of the rural lending landscape, with a strong
impetus provided to this segment via government
Nonetheless, banks have potential to drive further
initiatives.57 The set up of the India agritech stack
financial inclusion in access to formal credit
is expected to boost rural data points for banks
by focusing on the NTC, rural, and agriculture
and help in better risk management. The rise of
segments, as around 45 percent of adults in India
agritech start-ups has also contributed to this
reported borrowing money in India, yet fewer
trend with innovations around precision farming,
than one in three of them did so from a financial
improved market linkages, etcetera. There is
institution.55
added incentive for banks to improve credit
Rural credit is likely to emerge as a large deployment toward the agricultural segment as
opportunity for driving financial inclusion, most Indian banks fall short of achieving their agri
as rural segment contributes only around 24 PSL targets, which results in an opportunity cost
percent to overall FY2022 bank credit, despite loss of 3 to 4 percent of their PSL shortfall, which
two-thirds of the population residing in rural they eventually meet by investing in relatively low-
areas and contributing around 46 percent of the yield RIDF and PSLCs.
national income56. The rural ecosystem has seen
55
Global findex database 2021, World Bank, July 2023.
56
Reserve Bank of India; NITI Aayog.
57
Reserve Bank of India.
Exhibit 50
Rural credit growth across segments over the last five years.
FY 2017 FY 2022
Market share,5 Percent

Bank credit, Growth,
Segment1 INR L Cr. 5-year CAGR PSBs PVBs RRBs Others3
69% 61%
Agriculture4 ~12.6 ~9% 13% 19% 17% 19% 0% 2%
Personal 80% 71%

Loans ~8.7 ~16% 14% 23% 6% 5% 0% 1%
75% 55%
Trade ~2.7 ~8% 18% 34%
6% 7% 0% 4%
59% 41% 30% 45%

Others2 ~4.6 ~6% 9% 9% 2% 5%
Total ~28.6 ~10% ~70% ~60% ~17% ~26% ~12% ~12% ~0% ~2%
1 Includes loans and advances deployed in the rural and semi-urban regions of the country
2 Includes Industry, Transport, services, finance and other sectors
3 Includes SFBs most of whom got banking licenses post FY2017
4 Includes ~9-9.5 L Cr. of KCC Loans, which have grown at a CAGR of around 7.5 percent, while non-KCC agri loans have grown at a CAGR of around 14 percent over the
last five FYs
5 Figures might not sum to 100%, because of to rounding.
Source: RBI

Section D
D6 The next set of NTC customers for banks are — WhatsApp banking for account and
Driving financial likely to emerge from the gig economy and the transaction services, given its broad reach
inclusion rural economy. The gig workforce is expected to
i. Create customized products for the rural
expand to 2.35 crore workers by 2029 to 203058
economy and diversify the rural portfolio
(from around 0.8 crore as of FY2021) and banks
can consider creating tailored, cash-flow based Banks can take a wider ecosystem lens, targeting
products to target this segment. the entire agricultural value chain of logistics
providers, cold storage facility providers,
Banks would need to focus on enablers like
aggregators, agricultural corporates, and agrarian
rising digitization and increasing last-mile
retailers and exporters. Hence, banks would
reach to capture the emerging rural and mass-
need to create tailored products for value-chain
market opportunity
financing, loans related to farm upgradation,
In the last few years, rural banking has emerged purchase of precision agri tools etcetera.
as an engine of growth for both public and private
Financing commercial and cash crop clusters like
sector banks. To further grow in the market, banks
spices, fruits, and other crops, which are capital-
would need to focus on the following enablers
intensive, presents an emerging opportunity
(Exhibit 51):
for banks. To fund these farmers, banks could
— Creation of customized rural loan products and consider partnering with agricultural nodal
diversification of rural portfolios agencies, agri-universities, FPOs, and other
corporate entities working in these clusters to
— Improving rural outreach through the
create customized products targeted at farmers
introduction of newer channels of sourcing
and cooperative agencies.
— Digitization of loan processes by leveraging
Banks can also provide debt financing to
digital land records, satellite imagery etcetera.
already funded agricultural start-ups under
58
India’s booming gig and platform economy, NITI Aayog, June 27, 2022.
Exhibit 51
Banks would need to focus on the following enablers to capture the emerging rural and
mass-market opportunity.
Creation of Diversifying rural credit portfolio through loans for:

customized Farm upgradation activities like ponds and produce storage facility, precision agriculture
rural products instrument purchase, etc.
Cluster financing of profitable commercial and cash credit crops
Lending to agri-startups and food-processing units
Digitising loan Streamline operational and credit costs by digitizing various steps in rural loan life cycle:
process Sourcing through tie-ups with agri ecosystem players
Designing STP loan journeys by leveraging digital land records, satellite imagery, etc.
Underwriting through data pulls from digital portals like eNAM and leveraging alternate datasets
on weather, soil health, etc.
Improving rural Reaching last-mile customers through:

outreach Hiring specialized agri manpower sourcing high-ticket rural leads in priority clusters
Revamping current BC network through relook at commission structure, onboarding of NRLM
trained Bank Sakhis, and engaging with CSCs and VLEs
Engaging in new partnerships with agritechs for sourcing rural customers
WhatsApp Usage of WhatsApp for:

banking Capturing the roughly 500 million active WhatsApp users for their banking needs
Personalized Marketing with close to N=1 level of customization
Instant renewal of loans and top up of secured loans

Section D
D6 their rural portfolios (as allowed in RBI’s PSL The rise in public and private digital procurement
Driving financial guidelines). Partnerships with accelerators like platforms like National Agriculture Market (eNAM)
inclusion the government’s recently announced Agriculture and improved digital infrastructure like digital land
Accelerator Fund, as well as agri-focused venture records, satellite imagery, etcetera, as increased
capital funds, can help banks identify promising the data points available to banks for financing
start-ups and emerging SMEs in the food and and underwriting rural customers. Banks can also
agro-processing space. utilize the datasets available with agritech players
to automate loan processes and reduce credit
ii. Improve reach and connect with last-mile
costs. Further, improving collections machinery
customers by introducing new channels
by automating pre-delinquency triggers, SMS-
Banks would need to update their strategy for and IVR-based repayment reminders, and digital
reaching out to rural customers by employing repayment mechanisms are key to ensuring low
specialized personnel with knowledge of the rural credit costs in areas with limited physical reach.
and agricultural ecosystem, who can serve as Ms
iv. Leverage WhatsApp banking for account and
for farmers in need of larger-ticket size loans. It
transaction services
would also be crucial for banks to improve the
commission structure for BCs and broaden the A sizable proportion of India’s 500 million active
range of services they can offer, including support WhatsApp users come from rural areas, and this
for loan sourcing and application, loan tracking, adoption is expected to rise further with low-cost
and early collections and recovery efforts. This smartphones and affordable data plans becoming
would revamp the BC network’s economic ubiquitous.59 Banks can consider incorporating
viability. Financial institutions can consider WhatsApp to reach their rural audience, with
extending their existing village outreach by features such as personalized offers, payments via
working with CSCs, Bank Sakhis, and BC Sakhis, UPI and instant renewa or top up of secured loans
as well as by forming alliances with businesses, via Aadhaar or KYC-based consent. However, it
agritech companies, and other participants in the will be critical to keep data privacy and security
agricultural ecosystem. norms in mind while using this channel.
iii. Reduce operational and credit costs

by digitizing the rural loan cycle and using
alternate data to improve underwriting
D7. Financing the green transition is a key global and national priority
There are significant challenges related to the transition to a green economy, which has led to a
demand-supply gap
While the Indian economy has a requirement Blueprint for Indian banks to build their green
of INR 12 to13 lakh crore annually over the next finance business
decade, current funding is meeting only 2030
Four key modules can help banks build a green
percent of the need, signifying the high potential
finance business (Exhibit 53).
for early-mover Indian banks. Most banks are at a
nascent stage in their journey towards building a
green business, as critical regulatory and market
enablers are yet to be implemented. Also, while
many green technologies are competing for
capital, the economic case for them is not always
clear (Exhibit 52).
59
Statista

Section D
D7
Financing the green

transition
Exhibit 52
There are multiple challenges in financing the transition to a green economy.
Huge demand and supply gap… …driven by key structural challenges

Capital formation challenges for positive investment cases, due
INR 12–13L cr
to financial and structural constraints (eg, payment delays by power
distributors, PPA renegotiations, etc.)
Uneconomic business cases for many use cases such as CCUS,
hydrogen-based green steel (till 2045), and green hydrogen as a
4-4.5x grey hydrogen replacement (till 2030)
Most banks are yet to chart a road map to their net-zero goals:
As per RBI survey (Jul’22), 47 percent of Indian banks are yet to
build an ESG strategy
INR 2.5–3L cr Currently, banks have limited capabilities to underwrite and
appropriately price climate risk and have limited internal expertise
to identify new green business opportunities
Lack of banking regulations and incentives to drive sustainable
Current Annual finance in a scalable manner
Annual green demand Mismatch in green project’s long-term funding requirements
finance flows (2020–30)1 against short-term investment horizon for most investor groups
1 Annual demand to keep increasing from 2020 to 2050; average annual demand of 12-13L cr in first decade; ~35L cr on average for next 25 years.
2 CRIF, RBI database for FY2022.
Exhibit 53
Four steps could help define a sustainable finance agenda for financial institutions.
Set the overall ambition and Set targets for financed emission, own emission (Scope 1, 2, 3); define and
emission strategy execute plans to achieve it
Build and capture Define new business opportunities and build new propositions to capture the
business opportunities opportunity (eg, green products)
Strengthen resilience Strengthen the bank’s climate risk management, including appetite statements,
and climate risk frameworks/policies, and tools/processes
management Conduct climate scenario analysis and stress testing to inform climate risk
management and identify opportunities
Ensure capabilities Build internal ESG capabilities across business and risk
for execution Target state and execution plan for capability, culture, and initiatives
Leverage partnerships to drive value
Data, reporting: Track impact of climate related opportunities and commitments
(ensure commercial considerations)

Section D
D7 i. Setting the overall ambition and emission important areas banks can consider to drive their
Financing the green strategy risk management strategy (Exhibit 55).61
transition
As banks move to a net-zero path, it is critical iv. Ensure execution capabilities are in place
to ask the right strategic questions to drive the
As sustainability takes center stage for clients, it is
strategy (Exhibit 54).
imperative for banks to re-orient product strategy
ii. Building and capturing business as well, by developing in-house capabilities across
opportunities business and risk elements. Some Indian banks
are beginning to set up dedicated sustainability-
Product and pricing interventions by Indian banks
focused teams, tasked with developing tailored
are relatively nascent, with limited use of ESG
strategies for sectors served by the bank, as well
factors to drive credit and pricing decisions. There
as developing internal assets covering the gamut
is a growing focus on lending to the renewables
of green technologies. These players also offer
sector, as well as a fast-growing portfolio of
bespoke advisory and research services to further
electric vehicle (EV) loans at preferential rates.
help clients drive their climate strategy.
Some banks and financial institutions including
HDFC, IndusInd Bank, Federal Bank, and Union A key lever to build green finance capabilities
Bank have also offered “green deposits” at higher- is via partnerships, across both financial and
than-market rates.60 non-financial players. Financial players offer an
existing product portfolio that can be proposed
iii. Strengthening resilience and climate risk
by the partnering bank, either as a distribution
management practices
partner, or through a strategic partnership or
Results from RBI’s survey have clearly indicated acquisition. On the other hand, non-financial
limited focus from Indian banks so far on players can boost a bank’s research and advisory
climate risk. While some banks have begun to capabilities, as well as help track its ESG goals
include climate in their overall risk management and impact.
framework, there is a long way to go. There are ten
60
PHDFC Limited green and sustainable deposit,” HDFC Securities, July 2023; “IndusInd Bank launches green fixed deposit,” IndusInd
Bank, December 28, 2021; other financial institutions’ websites.
61
Discussion paper on climate risk and sustainable finance, Reserve Bank of India, July 27, 2022.
Exhibit 54
Strategic questions to define glidepath to net-zero.
… Strategic questions (examples)

Oil & Gas How to measure emissions from clients
Power (eg, which part of the value chain, scope of
emissions, gases, metrics)?
“Where are we today?”
How to attribute these emissions to the
Baseline and evolution of emissions A bank (eg, using drawn or undrawn
amount)?
Emissions (intensity)1
How will these emissions evolve (eg,

“How can we get there?” assuming stated policy, assuming client
Portfolio steering strategy and plans, assuming acceleration)?
business case
Which emission pathway to track (eg,
B based on temperature ambition, market
practice, confidence in assumptions)?
“Where do we need to be?” What levers can decarbonize the
Reference pathway and gap to close portfolio?
C
What will be the impact of these levers
2070 on emissions and on financials?
1 Two types of targets exist: Absolute reduction targets (reduction of CO2 financed) or emission-intensity reduction targets.

Section D
D7
Financing the green

transition
Exhibit 55
Climate considerations can be integrated into all core risk management processes.
Target state: Integration of climate risk into all risk management processes
RBI Discussion paper Risk ID and RAF/Credit
Origination Monitoring
summary (Aug 2022) assessment strategy
Setting up board level A. Risk identification D. Risk appetite F. Risk rating I. Rating review
committees to guide Develop a heatmap framework Embedding of Update of
climate related strategy, view across portfolios Formulation of climate risk counterparty-level
climate risk monitoring and operations overall climate risk assessment in climate risk
and disclosures, etc strategy and PD/LGD assessment as part
embedding into RAF assessment of rating review
Inclusion of climate
related risks in the B. Scenario analysis E. Credit policies G. Credit approval K. Reporting
board approved risk and stress testing Cascading of climate Use of Inclusion of climate
appetite framework, Run dedicated considerations into counterparty- risk exposures and
risk management climate risk stress credit policies, risk and facility-level management
strategy and business test mitigation strategies, considerations on approach in internal
plan and sector limits climate risks in reporting
credit decisions
Usage of stress testing

and scenario analysis to C. Capital H. Pricing
identify emerging risks calculation Adjusted reference price
across different time Use of adjusted PDs to account for higher
horizons for calculation of financial vulnerability
internal capital from climate risks
D8. Invest in technology resilience to ensure data

security and management of operational risks
To succeed in a rapidly changing landscape, i. Modernize APIs architecture and core
banks would need scalable, resilient, and technology
secure technology
Within the bank, APIs enhance flexibility in
The banking sector is at a pivotal moment where technology architecture by reducing siloes and
technological advancements and changing promoting reusability of technology assets.
consumer preferences are driving a new wave Outside the bank, APIs accelerate the ability
of innovation. Built for stability, banks’ core to partner externally, unlock new business
technology systems have performed well, opportunities, and enhance overall customer
particularly in supporting traditional payments and experience. This necessitates a strong, scalable
lending operations. and standardized methodology to develop
and host integrations and APIs. It is therefore
However, banks would need to resolve several
important to identify areas of application and
weaknesses inherent to legacy systems before
establish a centralized governance system to
they can deploy technologies at scale. Hence, to
oversee the development and maintenance.
succeed in this rapidly changing landscape, banks
would need core technology that is scalable,
resilient, and secured, which requires changes in
three key areas (Exhibit 56).

Section D
D8
Invest in technology
resilience
Exhibit 56
Banks would need to build a tech-resilience strategy on three pillars.
API and core modernisation Cloud strategy & data management Cybersecurity and data privacy
Leverage modern cloud-native Implement infrastructure across on- Implement robust cybersecurity in
tools to enable a scalable API premises and cloud environments hybrid infrastructure; secure data
platform that supports integrations aimed at increasing platform and applications with zero-trust
across ecosystem resiliency design principles
Maintain automation-first and fast- Upgrade data management and Identify the right perimeter design
release posture and consider a underlying architecture to support for the cloud and ensure data
modern core for high-velocity areas machine-learning use cases security on the cloud
Strengthen core technology Define the enterprise cloud Ensure customer data privacy by
backbone to enable speed, strategy and establish end-to-end field-level encryption for PII data,
flexibility, and scalability across the visibility across the stack tokenization of data, and
enterprise stack differential privacy
In addition, banks would need to transition The bank’s data management can ensure data
from their traditional, complex, and tightly liquidity (capacity to access, process, and utilize
interconnected core systems to lightweight and the data) that serves as the foundation of all
highly customizable core product processors and insights and decisions. The data value chain
workflows with the right architecture in place. begins with the smooth acquisition of data
They would need to shift to a centrally available from internal systems and external platforms
architecture based on enterprise capability as and segregating incoming data for immediate
patchwork solutions on the legacy core would no analysis and future analysis. The analytical
longer work for them. With a lightweight processor insights generated by these models are also
platform, an organization will be able to launch deployed through MarTech tools to craft the
new-product concept in two to three months as intelligent offers and smart experiences that set
against legacy technology that would take six an AI bank apart from traditional incumbents.
months or more. Underpinning these actions, appropriate technical
documentation and cataloguing of assets can
ii. Clear cloud strategy and data management
be undertaken to ensure proper governance and
Banks would need to modernize their tech access control.
infrastructure through the adoption of public
iii. Cybersecurity and data privacy
cloud to complement the traditional infrastructure
in situations where workloads require resiliency, Banks would need to build a truly robust
scale, and use of hosted or managed offerings. cybersecurity function by implementing a
By using public cloud, banks can increase their comprehensive security framework that delivers a
operational speed through automation and wide set of services to the enterprise (Exhibit 57).
templates, while reducing operational risks.
The security system can have governance,
However, it is essential for banks to establish a
risk, and compliance program that establishes
strong foundation in infrastructure management,
policies, procedures and guidelines to ensure
including observability, resiliency, high availability,
that security objectives are aligned with business
and a robust configuration strategy. With a well-
goals. Banks can also invest in threat and
optimized, scalable, and load-balanced stack,
vulnerability management solutions to identify
banks can provide rapid response times, usually
and remediate security vulnerabilities and
under a second, while also being able to cater to
minimize the attack surface through penetrations
changes in transaction volume.
test, threat modeling and vulnerability scanning.

Section D
D8
Invest in technology
resilience
Exhibit 57
Banks would need to build a truly robust cybersecurity function that delivers a wide set of
services to the enterprise utilizing three key enablers to deliver security service at a desired
level.
Governance, risk
and compliance A Organization structure/talent
Make sure organization is ready to
Threat and vulnerability attract/keep/use cybersecurity talent
management
B Governance, compliance, standards and

Attack surface delivery processes
Service minimisation Enablers Ensure a set of standard operating
family procedures, checklists, and controls is in
place
Advanced security
operations center (SOC)
C Technology stack
Utilize state-of-the-art technology to
Business build digital product, ensure maximum
resilience level of automation
Additionally, banks could establish an advanced severity of risk, which can help identify the right
Security Operations Center (SOC) to continuously data security and privacy techniques. Field-level
monitor the network for suspicious activity and encryption and tokenization could be employed
respond to security incidents in a timely manner. for highly sensitive personal data like identity
It is also important to prioritize business resilience documents, financial documents, etcetera. In
by developing a disaster recovery plan and addition, data-level encryption and data salting
conducting regular business continuity tests to can be employed for confidential and regulated
ensure that the bank can quickly recover from a client data and non-sensitive personal data like
cyberattack and resume operations. past transactions. Banks can also take steps to
ensure that transmission of information outside of
Banks in India would need to adapt their business
the bank is conducted via an encrypted channel
strategy in line with the upcoming Data Protection
and limit access to non-personal client data
Bill which would introduce stringent regulations,
information (without licensed access) to bank
including stricter data transfer requirements and
colleagues.
significant fines, in case of lapses. Banks could
move forward by mapping the data types by the

Section D
D8 Way forward for leaders as they embark on their execution velocity. Standardizing through DevSec
Invest in technology tech-transformation journey Ops typically unlocks productivity could gain of as
resilience much as 20 to 30 percent.
Banks undertaking digital transformation efforts
can consider the following key insights from the vi. Adopt a value-centric approach to building
experience of financial institutions that have data platforms. Take advantage of the fact that
successfully carried out such transformations data and analytics platforms evolve over time,
and do not allow teams to be overwhelmed by the
i. Consider the factory model to build at scale.
rapid shift of tooling and available technology.
Leverage a factory approach in fast-evolving
Organizations that budget the anticipated return
and critical areas of the transformation to
of change efforts are able to prioritize use cases
enable repeatable execution and development
that are functionally simple, fit the road map for
of capabilities within technology teams and to
building the platform in iterations, and realize
promote standardization to speed up execution.
economic value along the way.
ii. Consider insourcing differentiating
vii. Set up a lab and factory (cross-functional)
capabilities. Build certain differentiating
for analytics. Establish a lab to experiment with
capabilities in-house, with robust engineering
tools and platforms for efficient development in
support, starting with APIs, infrastructure, or the
test-and-learn cycles. Also, build a central factory
data and analytics platform.
for producing and deploying analytics use cases
iii. Maintain rigorous documentation on at scale on an individual stack.
integrations. The development of engagement
viii. Establish end-to-end visibility across
systems and comprehensive changes in core-
the technology and infrastructure stack.
technology would require significant adjustments
Recognizing that at-scale digital transformations
to integrations, and substandard documentation
impose limitations on volume and scale,
of the specifications for these integrations often
implement robust automated tools to observe
slows the broader initiative to transform the bank.
stack performance and to diagnose and resolve
iv. Identify an anchor stack but experiment issues.
with others. Emphasize the importance
Banks can build a cohesive technology strategy
of standardisation for engineering-centric
that aligns closely with business strategy and
development at scale and build on a single stack to
clearly defines the key decisions regarding the
support faster change. At the same time, continue
elements, skills, and personnel that the bank
experimenting with other stacks for smaller builds
will retain in-house versus those it will procure
to adopt alternative or newer approaches.
through partnerships or vendor relationships.
v. Maintain an automation-first and fast- Overall, they would need to put in place a strong
release posture. Adopt an automation-first and demand management framework as banks’ IT
frequent-deployments posture on fast-evolving teams are usually overburdened with requests and
applications and stacks. While initial hiccups are struggle with prioritization, besides embedding
not uncommon, release rails could be hardened tech translators in the business units that are
over time to speed up time to market. Well-defined skilled in product management and understanding
release management and deployments are key to of the tech requirements.
D9. Focus on talent management to build a compelling value proposition

Banks would need to fundamentally shift the way coin: banks will not succeed unless they also
they find, attract, and develop talent develop their current employees through reskilling
and up-skilling programmes. Additionally, front-
With rapid evolution in consumer needs, banks
line attrition has also been at its highest levels
have digitized their front ends, and established
on an annualized basis, with banks experiencing
next-generation technologies in the middle and
significant productivity losses due to early tenure
back offices to help save costs and provide better
attrition. Banks will need to re-evaluate their
services. With these trends expected to stay,
approach to human capital, bringing the human
talent with digital, automation, and analytical
resources function to the forefront to attract high-
capabilities is therefore in high demand. However,
potential talent, drive employee productivity, and
banks are competing not only against other banks,
reduce attrition.
but against all firms seeking a sustainable talent
advantage. Hiring is only one side of the talent

Section D
D9 Practices to reimagine talent management v. Use data to revamp decision making

Focus on talent and collaboration: Level of empowerment,
management
Key steps banks can take towards reimagining
collaboration, and decision-making efficiency
talent management include:
are key drivers of employee satisfaction and
i. Define a road map for skilling requirements productivity levels. Creation of transparency on
and gap analysis from current state: While delays in decision making, simplifying decision
banks have traditionally been strong in areas matrices and delegation authority and creating
such as relationship management, operations, cross-functional ownership can deliver superior
and administration, gaps exist in data science, outcomes.
robotics, AI, and customer-experience skillsets.
vi. Prioritize purpose, diversity, and inclusion:
Banks can create a calibrated plan to upskill
Companies in the top quartile for gender diversity
internal employees (typically data reporting roles,
have demonstrated better financial outcomes
BIU personnel) into modern roles and build an
by around 10 percent compared to the bottom
external hiring pipeline to close these gaps to
quartile. Other benefits include improved
maintain their outperformance.
employee satisfaction, brand building, and
ii. Drive focus on talent at the board level, relatively less-biased hiring decisions. Banks
especially on the skilling gap, critical hire could set measurable diversity goals and revamp
outcomes, and attrition: With only 5 percent their recruitment process to minimize unconscious
of corporate directors believing that they are biases in decision making.
efficient at developing talent, there is a clear
vii. Clear mentorship and sponsorship
need to recognise the HR function as a strategic
pathways especially for early tenure, front-
priority, rather than a transactional role. CHROs
line employees: One of the top three drivers
can drive proactive initiatives such as succession
of employee attrition at early levels is linked to
planning, identification of critical talent pools, and
the absence of clear mentors or sponsors of the
mitigating talent risks.
employees within the organization (superiors,
iii. Create tailored development plans for talent tenured employees in the same band in addition
for critical roles: With the traditional focus on to an HR sponsor). A clear 100-day plan can be
hierarchy, a large proportion of critical talent goes created for new hires to ensure deeper integration
unrecognized. Banks could identify these critical with the culture and purpose of the firm.
roles using data and match them with the best
Finally, a bottom-up understanding of the drivers
available talent to drive results.
of employee success can enable banks to revamp
iv. Dynamic and flexible role definitions critical employee value propositions (EVP) and
specially to adapt to cross-functional ways of communicate appropriately internally and to the
working: A flexible structure will enable a shift external market.
away from hierarchical role definitions, giving
talent the ability to develop dynamically with
changing priorities and opportunities. This has
been proven to have multiple benefits, including
40 percent shorter time-to-market, more than 50
percent increase in customer satisfaction ,and 20
percent higher employee engagement.

Acknowledgementsw
Renny Thomas and Peeyush Dalmia are senior partners in McKinsey’s Mumbai office, where Siddhartha
Gupta is a partner, Madhur Maheshwari is an associate partner, and Ranganathan Badrinarayanan is a a
consultant. Siddharth Jogidasani, Satviek Goel, Piyushi Jain, and Ashwaryaa Bhatia are associates in the
Firm.
The authors wish to thank Akriti Agarwal, Akshat Agarwal, Suparna Biswas, Anurag Chaddha, Dipak
Daga, Faridun Dotiwala, Malcolm Gomes, Nagaraj GN, Nilesh Gupta, Rajat Gupta, Adriana Hernandez,
Sudhakar Kakulavarapu, Alok Kshirsagar, Sarath Kumar, Akash Lal, Saravanan Mani, Milan Mitra,
Anamika Mukharji, Fatema Nulwala, Karthi Purushotham, Rakshit Sawhney, Aditya Sharma, Shwaitang
Singhand, and Raksha Shetty for their contributions to this report.
We also express our gratitude to the many business leaders and industry experts who spared their
valuable time to discuss what they see as the potential and challenges in establishing a strong banking
system in the next few years.

August 2023
Copyright © McKinsey & Company
Designed by the INO Design Team
www.mckinsey.com
@McKinsey
@McKinsey

Indian Banks Building Resilient Leadership

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Indian Banks Building Resilient Leadership

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Indian banks:

Section A: Global banking: Testing times ahead

Section B: Indian banks: Financially strong; opportunity to drive

Section C: Outlook ahead: Multiple forces to challenge banking economics 41

Section D: Way forward: Building resilient leadership 47

D2. Horizontal capabilities to optimize productivity and operational efficiency 54

D3. Leveraging co-lending and fintech partnerships to drive scale 60

D4. Driving customer experience through personalization 62

D5. Digital and analytics-led collections to help shift to “assistance” mindset 66

D6. Driving financial inclusion through targeted focus on rural segment 68

D9. Focus on talent management to build a compelling value proposition 76

Indian banks: Building resilient leadership 1

B. Indian banks: Financially strong; opportunity to drive holistic impact.

Strong performance Continuous improvement needed Needs attention

a Profitability: Indian banking sector, especially top performers, have healthy

a Consolidation: PSB consolidation has led to stronger financial institutions while

Holistic B3 Customer experience

B4 Societal and environmental impact

a Tech resilience: Significant digital investments; however, data security, data

2 Indian banks: Building resilient leadership

Indian banks: Building resilient leadership 3

Way forward: Building resilient leadership

Financial Win the next set of new money pools

Customer • Meaningful connect to customers via N=1 personalization

Societal and • Driving financial inclusion in agri and NTC cohorts

Operational • Build technology resilience to enable scale and digital businesses

Financial performance next few years. 8 Incremental investments will

4 Indian banks: Building resilient leadership

Indian banks: Building resilient leadership 5

6 Indian banks: Building resilient leadership

Operational resilience 9. Revamping employee value

Indian Banks: Building Resilient Leadership 7

Global banking performance global banking ROEs were at 15 to 16 percent

Global macro & banking metrics

Banks’ ROE Real GDP growth

Indian banks: Building resilient leadership 9

Global banking metrics

Cost of equity band: 9–11%

CY 2000 2005 2010 2015 2020

10 Indian banks: Building resilient leadership

All industries (excluding banks) Banks

Indian banks: Building resilient leadership 11

World US European Union US Federal Reserve (US Fed)

European Central Bank (ECB)

Swiss National Bank (SNB)

Source: IMF, US Federal Reserve, ECB, SNB, Company Data

12 Indian banks: Building resilient leadership

Loss absorbing capital of global banks across major geographies.

US Europe India China Japan SEA2

-22% -8% +6% -2% -1% +2%

Source: SNL; McKinsey analysis

Indian banks: Building resilient leadership 13

Taking a wider lens on impact 15 to 30 percent of pricing premium is ascribed

Holistic impact scorecard for banks.

Driving holistic impact across five key parameters

Industry health Societal impact

Indian banks: Building resilient leadership 15

16 Indian banks: Building resilient leadership

B. Indian banks: Financially strong; opportunity to drive holistic impact.

Strong performance Continuous improvement needed Needs attention

a Profitability: Indian banking sector, especially top performers, have healthy

a Consolidation: PSB consolidation has led to stronger financial institutions while

Holistic B3 Customer experience

B4 Societal and environmental impact