The truth is that inclusion banking is not a viable business yet

The contours of Indian banking are changing. The domestic factors would be larger drivers to what the banking sector would look like in 2020. At the policy level, the government is largely guided by its inability to fund the capital requirements of the public banking sector. Hence the attempt to reduce the banking intermediation and create alternate sources for corporates to fund their growth and the infrastructure requirements at the state level.

The development of an independent public debt management organisation and empowering the capital markets regulator seem to be the outcome of such a policy stance. At the regulations level, we are seeing the emergence of additional structures including small finance and payments banks. The capital burn by public sector banking on financial inclusion has encouraged the regulator to push the agenda to create these structures.

In addition, the rising expectations of customers from the banking system, emergence of technology with the growth of smartphones in the country and the changing shape of intermediation are also changing the contours of the Indian banking system.

The creation of an independent public debt management organisation and the new reforms to push the medium and large corporates to raise their funds from the capital markets by development of corporate debt market are worthy of some praise.

The devil like most of our reforms, however, lies in the details. The critical requirement to take this reform forward is to create the capacity parallel to the banking regulator's office to manage risks and to arrest any slide in market failures is far from available at this point in time with any other organisation. It will have to be developed. Significantly, the domestic and the overseas investors will come to the market only if they see the market being regulated by a regulator with credentials as sound as that of the banking regulator in the country today.

The new regulations associated with new structures will have to be seen before an estimation of the extent to which it can take the burden from the existing universal banking evolves. At the core of this switch lies the underlying truth that inclusion banking is not a viable business as yet. My mind is very clear in this regard. Had the inclusion business been a profitable one, the existing universal banking structure would have gone ahead and occupied that space. The experiment may work out well if the new entrants develop fresh approaches to acquire and deliver services to the customers.

The new structures have also the competition from the existing universal banking to worry about. A high order of cross subsidiarisation allows universal banking to price its products highly unscientifically. The banking regulator is at its wits' end on approaches to pricing and periodically attempts to tweak the approach in base rate calculations. For small finance and payments banks, such a luxury is not available.

Technology in banking will continue to play a larger role at the operational and tactical level. The emergence of a large and growing population of smartphones and devices and also the availability of wi-fi and e-banking will change the shape of banking as we go along. Unlike in many other countries, we have linked our ecommerce to debit cards. Reforms including RuPay and creation of capacities to handle and service transactions to support the banking structure will continue to grow. So will the expectations of the customers. The turnaround time of transactions and cost reduction will play a larger role in this reform.

In conclusion, I believe that the pace of changes rather than the changes themselves will underpin the new banking order as we will see in 2020.

The author is managing partner, Ashvin Parekh Advisory Services LLP. Views are personal