India offers huge potential for digital challenger banks, says report

But currency depreciation and local regulations are concerns for foreign investors: Report

India offers a huge potential for Digital Challenger Banks (DCBs) but currency depreciation and local regulations are concerns for foreign investors, according to a report.

Leading consultancy BCG said in the report on Wednesday that the revenue opportunity in India, which has a population of 130 crore people, was pegged at being up to ten times higher than that of rest of South East Asia.

"Indian regulators place significant emphasis on financial inclusion and priority sectors, which can limit the potential model and opportunity," the report said, flagging the policies as among the "strategic hurdles" faced by foreign entities.

However, the report said that not all licenses carry the constraint and operating as a Non-Bank Finance Company (NBFC) gives one a significant flexibility.

Once a NBFC gets formed, partnering with a traditional bank is the "best of both worlds", it added.

In the case of currency depreciation, which supports the large number of Indian exporters, the report said considerations are true for multiple other developing economies as well, and an investor needs to look at India's attractive demographics and high growth potential.

The report also highlighted that some entities perceive India as a "diverse and geographically dispersed market" which lead to concerns over significant capital and operational investments to build a meaningful scale.

"This is more a perception than reality on a relative basis. One way to address this is to pick niches and build scale within them," it said and pointed out that micro, small and medium enterprises' business, which are concentrated in 30 clusters, have a credit outstanding of USD 300 billion.

Costs and the inability of Indian markets to absorb developed markets' cost structures are among the other hurdles, the report said, asking all to overcome them by building the majority of the technology stack locally while leveraging global experience for the design principles, customer experience, and security layers.

The Indian DCB landscape includes captive units being set up by banks, new attackers like Niyo focusing on customer experience for financial services products and existing digital ecosystem players with a large customer base like Paytm.

As per the report, when it comes to profitability, a bottomline in the black is very elusive for such companies globally, and picked out Paytm as the only profitable player in India.