Banks’ low profitability, weak asset quality pose difficulty in boosting digitisation: S&P

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New Delhi: S&P Global Ratings said India’s banking system’s low profitability and weak asset quality present some difficulties in significantly boosting digitalisation for several state-owned and smaller private-sector banks.

In its report titled ‘Tech Disruption in retail banking: Top tier banks lead the change’, S&P said India’s digital disruption, however, poses a relatively low risk to its top-tier banks’ longstanding market position.

“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,” S&P said.

It said 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 year-ago period.

“We expect this shift in consumer preferences 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 added.

It said many banks in India have been quick to embrace new technologies to cater to a vast and growing, young, tech-savvy customer base.

“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,” S&P Global Ratings credit analyst Deepali Seth-Chhabria said.

Some non-bank 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 customer onboarding, cross-selling, servicing, and fraud management, S&P said.

In India, mobile payment users are shifting away from e-wallets towards UPI, which dominated the payments market with 51 per cent share in the total number of transactions in October 2020, it added.

Unlike e-wallets, UPI does not lead to deposits moving out of the banking system. That allows India’s banking system to maintain an edge in the payment system.

“Collaborations between traditional banks in India and fintech companies are likely to increase. At the same time, we believe traditional banks require considerable investments to upgrade legacy systems,” S&P added.