Accelerating Transformation

Atul Kumar Goel, Managing Director and CEO at PNB, envisions a dynamic future for India's banking sector, driven by robust technological advancements, and prudent financial measures

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Atul Kumar Goel, Managing Director and CEO, Punjab National Bank (PNB)
Atul Kumar Goel, Managing Director and CEO, Punjab National Bank (PNB)

Published: Tue 15 Aug 2023, 11:39 AM

Last updated: Tue 15 Aug 2023, 11:42 AM

Could you share your perspective on the current banking scenario in India?

Indian banking sector is strong, stable, resilient and poised to support economic growth. The results of the banks for the recently concluded quarter are out and all the banks have displayed robust performance. Its’ health has improved in recent years as reflected in key indicators like capital adequacy, asset quality, net interest margins (NIM) provisioning coverage and profitability.

PSBs posted stellar performance in June’2023 quarter by registering double the net profit at ₹347.74 billion as compared to last year’s corresponding quarter. The high interest regime helped the banks to earn higher interest income and most of PSBs registered NIM greater than three per cent. Though, as the deposits reprice going forward, NIM of the banks might moderate.There has been a strong credit demand because of higher capex and robust working capital needs. The rapid pace of personal loan growth has also been supporting the credit expansion. The deposits of the system are also growing at rapid pace, registering double digit growth. The credit growth outpaced the deposit growth last year but now the gap between the two seems to be narrowing and thus liquidity position of the banks is comfortable.

The banks are struggling in maintaining CASA ratios as most of the funds are being transferred to the term deposits by the depositors as the interest differential between the rates offered on CASA deposits and term deposits has widened for most of the banks. Though, I believe that the rates have peaked and banks might go for rate cuts on term deposits in the second half of the current FY.

Gross NPAs and net NPAs are at decadal low levels and will continue on a downward trend due to recoveries and write-offs of legacy problem loans. Slippages are likely to be restricted due to better credit underwriting models and restructuring of loans. The interest rate risk is a risk that is prominent for the banking industry for now. Also, banks need to be watchful as recent rate hikes will put pressure on the loans and can lead to higher delinquencies. Going forward, banks need to focus on ESG adoption and putting in place robust cyber security measures.

Are Indian banks — both public and private investing large sums in deploying new technologies that will make things easier for their customers?

Yes, both public and private banks are investing huge amount of money in deploying new technologies that will completely transform the way banking is done today.

Today’s digital age and hyper-connected environment requires banks to re-imagine their business continuously, and Indian banks are making great strides when it comes to actual digital transformation. Currently, digital transformation is the biggest and a mandatory challenge for the banking industry.

The Covid-19 pandemic was an unprecedented catalyst for digital banking across the globe. Retail bank consumers embraced the self-service channels like never before. This is also reflected in RBI’s recent Digital Payments Index that surged from 153.47 as on March’19 to 395.57 as on March’23, registering CAGR of 27 per cent. UPI transactions are also breaking payments and volumes record each month.

After the pandemic experience, consumers seem to be looking not only for instant gratification, increased convenience, and flexibility, but also more tailored services.

Banks in India were quick to capitalise on the momentum in the use of digital and self-service channels and try to elevate customer experience with an innovative blend of human and digital features. Banks today are offering sector specific solutions, rebooting corporate risk management models and are digitising end to end customer journeys while fully leveraging the power of analytics.

Within 2-3 years’ time frame, banks have been able to make majority of its products and services available on the digital platforms like mobile and internet banking. Banks in India are now exploring the end to end digital lending journeys and have made significant strides. I am optimistic that in the next 1-2 years, all kinds of loans will also be available to customers without the need for a branch visit. Banks are also experimenting with new technological innovations like opening branches in Metaverse, increased usage of AI and Machine Learning in processes, chatbots etc. Thus, definitely banking is becoming much more convenient and easier for the customers due to adoption of technologies by the banks.

There has been a sharp revival in the profitability of banks in the last two years. How much of a role did technology play in this earnings revival?

SCBs’ profit after tax (PAT) recorded a healthy growth of 38.4 per cent (Y-o-Y) during 2022-23, led by strong increase in net interest income (NII) and lowering of provisions. During 2022-23, the NIM for SCBs improved by 30bps to 3.7 per cent as transmission of monetary policy tightening to deposit rates lagged the pass through to lending rates. Higher profitability was also reflected in further improvement in the return on equity (RoE) and the return on assets (RoA) ratios. All PSBs are in profit with aggregate profit crossing ₹.1.04 trillion mark in FY22-23.

Digitisation has definitely played a part in improving profitability of the banks. With many banking products and services now available on digital platforms, it helps reduce the human intervention and deployed resources and eventually bank’s cost to provide a service. Also, it leads to higher customer convenience and eventually customer delight, thus attracting more customers to the bank. Digitisation also aids in better recovery of stressed loans, managing stress and helps in fraud prevention. Thus, digitisation of processes brings cost and operational efficiency in the banks.

Digitising the journey entails one-time high cost but reduces the subsequent cost of providing the products or service. Thus, IT and digital expenditure that banks are doing today should be seen as an investment for future productivity. The high costs undertaken by banks today will definitely reflect in the profitability ratios of the banks in the coming years.

Do you see Indian banks expand their overseas operations, especially in the Gulf, over the coming years?

Many Indian Banks have already established overseas operations to tap international markets and serve the Indian diaspora. However, outlook for further expansion depends on factors such as economic conditions, regulatory changes and geo political developments. Currency fluctuation along-with trade relationship will also play a significant role in way forward. Apart from the mentioned factors, digitalisation of banking operations may lead to less requirements of having physical presence in International arena. The overseas banking operations are being conducted through GIFT City which is present in Gujarat. This is an international Financial Services centre catering to customers outside the jurisdiction of domestic economy, dealing with the flows of finance, financial products and services across borders.

In regards to expanding banking operations in Middle East countries, apart from factors mentioned above, economic growth prospects and presence of demand will also influence the expansion. At present there is tighter monetary policy, leading to lower credit demand and growth. It is likely that the real estate prices will moderate in 2023. However, if the policy and regulatory policies allow, banks in India may look forward to tap such opportunities in future.

How do you see the remittance business shaping up over the rest of the year, especially with the World Bank estimating that Indians abroad will be remitting $80 billion home this year?

Since long time, Gulf Cooperation Council countries of West Asia were the dominant source of remittances into India. With oil being the dominant contributor in the economy and with the boom of construction and business activities in the Gulf, there were migration of workers from India, varying from unskilled to semi and highly skilled. Being migrants holding time-bound visas, often without permission to take their families with them, these workers had to repatriate money to finance household consumption at home and transfer sums for any investments undertaken. With the IT boom and skilled technology labour requirement in advanced economies, India soon started having remittances coming from US and the UK from workers employed to provide software and business services on location, often sent by firms in India taking on offshored contracts to provide onsite support services. This increased the volume and share of remittances originating from the Advanced Economies (AEs), especially the US.

At present, with nearly 18 million nationals living abroad, India is the origin of more international migrants than any other nation. It is worth noting here that India is amongst top five recipients’ countries for remittances inflows in current USD were India (111 billion), Mexico (61 billion), China (51 billion), the Philippines (38 billion), and Pakistan (30 billion). India has been the largest recipient of remittances since 2008. However, there is a likelihood that the year 2023 may see some downfall in remittance as Indians abroad in high income countries may be able to send lesser fund due to high inflation accompanied by slowdown in economic growth in US economy. The share of Gulf countries in total remittances into India stand at around 24 per cent.

I feel that migration patterns and characteristics of Indians going abroad are the crucial determinants of remittance channels and business as we have to design policy interventions accordingly. Given the importance of remittances for India’s balance of payments (around 19 per cent), this head needs to be taken account of as it may become major source of instability for the economy. Going forward, I feel that the remittance business is expected to grow as India is having a greater number of people going abroad.

Will the Indian banking sector in India emerge among the top-10 in the world in about five years from now?

If we have to go by the number of the banks in top, it is the matter of concern that India has only one bank in the global top 100 and given the size of the Indian economy, it should be our endeavour to have at least five to six banks in global top 100.

But scenario is changing now and I feel that there has been a major turnaround in India's banking system due to the efforts of policymakers and various measures. These have ensured that banks are on a stable footing. Some of the measures are undertaken for banks to manage stressed assets better on their balance sheets. These measures were primarily aimed at resolution of long-standing stressed assets on the books of banks. Guidelines on digital lending’ were issued for dealing with the misappropriate practices of the third parties. Measures towards strengthening of cyber security were undertaken. The reforms undertaken by the government over the last few years have been able to address credit discipline, ensure responsible lending and improve governance. Besides, adoption of technology and amalgamation of banks have accentuated the pace of development in Indian banking sector and enhanced the position of the Indian banking. Banks are adequately capitalised and also following all the norms related to risk management both at national and international levels. Keeping in view the pace of positive changes and progress, Indian banking may become part of the leading financial entities of the world in the coming years.

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