India is the only market with falling bank employee productivity and decreasing operating leverage: BCG’s Saurabh Tripathi

Saurabh Tripathi

India stands out globally as the only country where banking productivity, especially in non-interest income, has improved over the past decade, even as other markets face stagnation. Yet this productivity uptick masks a deeper issue: rising operational costs, said BCG Senior Partner Saurabh Tripathi.

In an interaction with Moneycontrol, while discussing the BCG report, he said Indian banks have underinvested in technology and continue to rely heavily on manual processes, which raises risks and inefficiency.

The report, 'The AI Reckoning in Banking' outlines how artificial intelligence — especially generative and agentic AI — is fundamentally transforming the banking industry.

Tripathi added that while Indian banks are benefitting from emerging trends like mutual fund distribution and insurance sales, much of the fee income is volume-driven and not rooted in differentiated, high-value services. Edited excerpts:

The report suggests that global banks are losing ground to non-bank financial institutions and digital attackers. How are Indian banks positioned?

India is not immune to these global trends, and disruption is inevitable here too. It’s been more aggressive in the West and in China so far, but it’s coming to India. That said, this isn’t a threat, it’s a good thing. Disruptors improve customer experience and lower costs, pushing traditional banks to innovate. India has seen some disruption, but we could benefit from even more competition, especially from new and well-regulated players, including foreign banks. Globally, many countries are issuing digital-only bank licences to increase competition. In India, productivity in banking has actually gone down in the last decade. Costs as a percentage of assets have increased, indicating a need for more aggressive use of technology and innovation. There's a massive opportunity in India for more competition, innovation, and disruption.

Despite credit growth, this quarter's earnings for many Indian banks were underwhelming. Is this just a temporary margin reset, or something deeper heading into FY26?

This is a short-term blip. Specific segments like retail credit and microcredit have seen underperformance. But our report looks at decade-long trends, not quarterly results. Over the decade, Indian banks have failed to keep up with global productivity benchmarks. They rely too much on manual processes and paperwork, making them less efficient and more exposed to operational risks. The bigger issue is systemic. Manual operations introduce risks and inefficiencies. For India to become a developed economy over the next 20 years, financial services must become far more efficient.

The report points out that India is the only country with increasing non-interest income productivity, but also the only one with rising cost growth over 10 years. Why?

Globally, banks have invested heavily in technology, which has driven down costs. Indian banks have consistently invested only about half as much as their global peers. While some argue this is due to lower tech costs in India, that’s no longer a valid explanation. The result is a less productive system. Private banks have added huge numbers of low-wage, low-satisfaction jobs, high attrition roles that reflect manpower-driven, not technology-driven, growth. But banking isn’t meant to create employment. Its role is to enable other sectors to grow. Now, as digitisation hits saturation globally, the next wave of productivity will come from GenAI and AI-driven business models. That’s where India needs to leapfrog.

Fee income is structurally declining worldwide, but Indian banks are still showing growth through MF distribution and insurance. Is that growth sustainable?

Globally, fee income has been declining, but India is an exception. This is driven by consumer trends: more people are investing in mutual funds and insurance, with banks serving as key distribution channels. While this is positive, it’s largely volume-driven and not based on differentiated services. Investors highly value fee income, even more than net interest margins, because it reflects customer willingness to pay for service. Banks that rely only on margin income are riskier due to rate volatility. Sustained fee income means banks must build advisory capabilities and develop new services. It’s a key differentiator for high-performing banks globally.

You mention the rise of the "originate-to-distribute" model. It is already in place, but in the long run, can this work in a regulated market like India?

Indian savers are increasingly investing in capital markets directly, such as mutual funds, AIFs, equities, and soon, credit funds. This shifts the role of banks: instead of holding loans on their balance sheets, they can originate loans and distribute them to private credit providers. This model is profitable and necessary. Globally, we anticipate that by 2035, about 50 percent of commercial credit in the US will come from private credit. While India may not reach that level, the trend is inevitable. Indian banks need to build these capabilities now to remain competitive.

Operating costs have surged in private banks recently. What’s behind this spike, and what lies ahead?

There’s been a reset in retail lending and microfinance segments, causing short-term cost spikes. But the bigger issue is structural. If the cost structure remains manual and labour-intensive, it won’t scale. The only sustainable solution is digitisation and technology enablement. Without this, growth will require more people, leading to more mistakes, more controls, and ultimately more cost. AI, including agentic and GenAI tools, can streamline back-office, customer service, and even branch operations. India is one of the few countries still increasing branch counts, which needs correction.

Reports suggest India may revise its foreign investment rules. What would be the impact on the banking sector?

Many well-regulated global financial institutions are looking for long-term growth markets. India fits the bill, but we need to provide them with regulatory stability, long-term returns, and control. There is some progress, but we need more. India has many “old private sector” banks that are inefficient and not scalable. Infusions of capital, technology, and talent are necessary. Otherwise, we’ll remain reliant on a few large private banks and constrained public sector banks. Foreign capital could transform this landscape.

Your report also shows banks with strong deposit franchises enjoy better valuations. How does this play out in India?

This is true globally and in India. Strong, stable deposit franchises are the bedrock of high-performing banks. Banks dependent on flighty deposits, like Silicon Valley Bank, are fragile. That said, even midsized banks can thrive if they focus on high-quality customer service and deposit products. The report outlines several strategies to build this advantage.

Is the microfinance cycle peaking?

We expect a correction this year, along with operational shifts in how MFIs work. The joint liability model has served India well, but we now have the tools, Aadhaar, bank accounts, credit bureaus, to shift toward individual, data-driven lending. That transformation has already begun and must continue.