Banking system to be capital constrained, needs $18 bn in 3 years

The broader banking system in India will continue to be capital constrained and it will require an additional capital of up to Rs 1.2 lakh crore ($18 billion) over next three years, says a report.

In order to thrive in a resource-constrained world, banks will need to have a razor-sharp focus on managing their capital and their risk-return profiles, said the report by management consulting firm Oliver Wyman.

"...Over the next three years, we expect additional capital requirement of up to Rs 1.2 lakh crore (USD 18 billion) driven by asset quality recognition, credit demand, and the impact of new regulations (IFRS9 and Basel)," it said.

Opportunity for banks is substantial if they can successfully address their current stresses and re-invent business models, it added.

"While there are some changes that have already started - like move towards modular services, focus on transparency, democratisation of banking - there are a number of questions that remain unanswered yet like role of public sector banks, consolidation as a cure to banks' problems, rise of specialised banks and FinTechs," said David Bergeron, Partner and Market leader, Oliver Wyman India.

The report further noted that it is imperative for Indian banks to act upon the opportunities and challenges presented by the onset of the revolution in Indian banking.

According to Oliver Wyman, public sector banks have lost significant market share in recent years, and this trend is expected to continue as they grapple with asset quality issues and the resulting capital constraints.

Moreover, Fintech players are rapidly encroaching into spaces previously owned by banks at a time when banks are 'bogged down' by capital constraints and other challenges.

"Declining revenues could combine with capital constraints to restrict the funds available for investing in new technologies and operating models," it added.

As per the report, the largest opportunity is with Small and Medium Sized Enterprises, estimated at $140 billion, which is currently under-served due to high costs.