Tech adaption puts top Indian banks at low risk of digital disruption: S&P

Rising smartphone penetration and internet connectivity, and young, tech-savvy demographic segment present vast opportunities for existing banks and new players

India's digital disruption poses a relatively low risk to the long-standing position of its top-tier bank. Many banks in India have been quick to embrace new technologies to cater to a vast and growing, young, tech-savvy customer base, according Standard & Poor’s (S&P).

"We believe India's top-tier private-sector banks and State Bank of India (SBI) are well-placed to deal with tech disruptions, given their dominant market positions and continued investments in technology," said S&P Global Ratings credit analyst Deepali Seth-Chhabria.

Covid-19 restrictions have been a boost for India's major digital payment system, Unified Payment Interface (UPI). The value of transactions processed via the UPI almost doubled in June to November 2020 from the same period a year ago. This shift in consumer preferences is expected to remain.

Rising smartphone penetration, increasing internet connectivity, and the young, tech-savvy demographic segment present vast opportunities in India for existing banks and new players.

S&P said the Reserve Bank of India and the government have also been pivotal in laying the foundation and raising the bar for development of fintech in the country.

The banking system's low profitability and weak asset quality present some difficulties in significantly boosting digitalisation for several state-owned banks and smaller private-sector banks.

“Although we believe the industry's competitive dynamics will continue to evolve, new entrants have failed to make their mark so far. Payment banks in India have less than one per cent of the deposit market share and remain unprofitable; restrictive licenses render the model rather unviable”, agency added.

Big tech companies have also entered the industry, but haven't been able to encroach into the mainstays of the incumbent banks, namely lending and deposits.

Some non-banking financial companies (NBFCs) have made considerable traction in having technology-led banking solutions omnipresent in their core business models. In addition, financial institutions use artificial intelligence and machine learning not only in loan underwriting, but also in customer onboarding, cross-selling, servicing, and fraud management, it added.