NBFCs set for bigger role, some could become banks in 5 years, says BCG's Saurabh Tripathi

Edited excerpts of the interview:

A few large foreign investment transactions have received the regulatory go-ahead possibly in record time. What does that signal to you?

The Indian regulators are being very proactive about taking certain decisions to permit new players or foreign capital into Indian banking and this is a very positive development. If Indian finance has to support Indian economy for Viksit Bharat 2047, it has to play a very big role. We need a lot of capital into the Indian banking industry and more innovation.

One of the ways to achieve it is to permit well-regulated, high quality financial institutions from across the world to find Indian banking a welcoming place. There has been a lot of interest from Japan. We also have a lot of interest from the Middle East and I hope that another transaction should get closed. We had a lot of investment from private equity into Indian banking and it's just a tip of the iceberg.

On non-banking finance companies, the Future of Finance 2025 report talks about how valuations are getting more attractive for NBFCs compared to banks. Will the trend continue?

There are two markets in the world where this idea is big — America and India. After the global banking crisis, policy makers created a new framework under which banks operate. It was more risk averse than it was previously and wanted banks to allocate higher risk capital for certain activities. As a consequence, it became viable for non-banks. America has had a huge rise in private credit, to the extent that in maybe a decade from now, private credit may have a higher share in commercial loan outstanding in than from banks.

India has a lot of customer segments which require different type of risk-management approach, collections approach, etc. A large part of additional risk is going to be taken by NBFCs. I would not be surprised if in five years, the policymakers in India are able to convince some of the leading non-banks to take a banking licence. These may be finance companies which are not conglomerate owned.

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How close in are we to adopting artificial intelligence in banking?

I have no hesitation to say that I see the AI guidelines or articulation of AI laid out in India as one of the best. It is not only talking about how financial institutions have to manage risks but the unique thing about this policy paper is that it makes clear that policy expects banks to experiment.

You're saying India is a lot more open and experimenting?

Yes. The policy shift is that when it comes to AI, expectation is to experiment and with an understanding that there is a reasonable chance that one or two mistakes will happen, provided you have got nice framework to address them.

India is the only large jurisdiction in the world where, over the last five years, productivity of the banking sector went down. Low-skilled headcount is onboarded in Indian banks and it is not creating the financial architecture of the future because it is very dependent upon manual processes.

Banking for future is a hugely straight through processing and minimal human intervention, to give customers a very good DIY (do it yourself) experience. Unless there is a strong policy push and more competition, it might not happen.

Banking is one of the largest employment generators. We can’t be okay with fewer entry level talent. The job of finance is to make Indian industry grow fast. In many parts of the world, the banking industry is being held back by this belief of banks jobs and development. That will be a very unfortunate mistake. Indian banking industry’s investment in technology has been half of what the rest of the world puts.

Global banks such as Morgan Stanley, JP Morgan and Citi are talking about stablecoins, while in India, there is still debate on effectiveness of the central bank digital currency (CBDC). The world also wants an alternative to the US dollar. How do see this play out?

There is manifestation of this broad set of assets called digital assets which is up for innovation. Most leading financial institutions are trying to understand how to go about it. India has already taken steps in that direction. I've made a case study to demonstrate it to my colleagues all over the world on the deployment of CBDCs for agricultural lending. Some of the risks in unsecured lending can be addressed. Europe and America are thinking hard about stablecoin versus the CBDC strategy.

India will also keep pace because we are going to have a global finance architecture very different from what it is today. We need to expedite our efforts to move beyond retail CBDC to something more substantive, which is tokenisation of real-world assets.

Indian banks are still heavily deposit dependent for liabilities. Processes are clunky and much of it is paperwork. Do you see this change?

In the next five years, the landscape of Indian banking will look very different. India is the one country where consumers want to go directly to stock market and they are circumventing the banks. This is a very big existential challenge to the banking industry.

If more consumers, whether the youth or senior citizens, start to appreciate that they can put money where they get more yield, this will fundamentally change the consumer behaviour. Banks will have to transform their business model from taking deposits and lending to a lot more advising model.

The balance sheet for lending will come from somewhere else but banks will be in the middle to make the deals happen and earn fees. As consumers want to invest in mutual funds or ETFs, banks will be the middle to provide advisory and earn fees.

Will tariffs play a make-or-break kind of role in capital inflows?

What has happened is going to affect investor sentiments, especially FDI in the country. But every crisis is silver lining and I feel there will be a counter to this narrative. It has spurred a round of discussions around deregulation in India, which we have not seen for a long time. On one hand, we may have some hesitation for capital but on the other, there will be a de-bottlenecking of the Indian economy to spur the growth.

Are we a self-sufficient and self-reliant domestic economy from a consumption standpoint?

No. We may have some issues with certain markets but we will be able to make up for it by having closer relationships with other markets. Our trade agreement with the UK is one example. I think it's a crisis of a type which will allow us to or force us to do things that we have hesitated from doing in the past.