Darwinian adaptation beats lazy banking

Uday Kotak has highlighted that the cost of intermediation by banks in India is remarkably high at a time when household savings behaviour is pivoting rapidly towards equity ownership. Savers are becoming investors, and 'money in motion' is replacing 'lazy savings'. The differential in intermediation costs with, say, mutual funds, takes away the advantage of banks being intensely regulated. Banks in India have adapted to this reality by becoming financial supermarkets, offering, through their subsidiaries, a spectrum of services from insurance to wealth management. But this is not the way to go. Banking needs to become more competitive vis-a-vis other investment options available to savers. The latter are saving more as income levels rise, and have become more discerning about where their savings are parked.

The differentials Kotak is alluding to - regulatory and intermediatory - should converge as other financial services mature in the country. These have grown on the back of banking networks, but will eventually be able to distribute services on their own. Banks would, at that point, have no option but to innovate to hold on to customers. All financial services face disruption from digital platforms. Banks will have to lead in adaptation since they, through their holding structure, sit atop a portfolio of offerings. Both forms of adaptation, local as well as global, will accompany the rising financialisation of the country's economy, which imposes social obligations on banks such as inclusion and priority lending.

Technology will provide tools for banks to take on the challenges they are facing. The rise of private banking has been aided by computerisation that reduced dependence on bank branches. Since finance is becoming more decentralised, private banks can lower their handicap against large government-owned banks. Yet, Kotak's warning about lazy banking applies. Technology is also empowering bank customers to switch their money across a wide array of investment avenues with a few clicks. Let banking Darwinism prevail.