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Improving the health of bank by going Digital

Improving the Health of a Bank by going Digital

The Indian banking sector is going through a major change right now. With the pandemic continuing to affect the normal life of the customer, the economic health of the country has gone down drastically. And while banks do seem like an indestructible institution from the outside, it may not always be so. Hence, it is vital for everyone to understand the digital tools that will help them assess the health of their banks.
The best place to start would be to look at the statements of the bank, namely, the balance sheet, Cash flow statement, and the P&L sheet. Here are a few generic ratios that would change dramatically by going digital.

  • Launching and scaling up Digital Savings Platform (like Kotak811)
  • Launching and scaling up SME Current Accounts Platforms, which is now supported by RBI’s new KYC policy
  • Partnering with Retail as well as SME Neobanking platforms
  • Simplifying the account opening processes in branches with digital interventions
  • Deep partnerships with Employers, Accounting Platforms
  • Partnering with Prepaid players
1.CASA Ratio

CASA Ratio stands for Current Account Savings Account Ratio. It is the ratio of deposits in current and saving accounts to total deposits. Since, the savings accounts of the banks are interest-bearing accounts, a higher CASA ratio indicates a lower cost of funds. Banks that maintain a higher CASA often have a high Net interest margin. Banks can improve their CASA ratio by focusing on the following digital initiatives:

2.Net Interest Income

This metric tells us the net interest the bank earns through its operations. It is calculated by finding the difference between the interest income a bank earns from
it’s lending activities and the interest it pays to depositors. This metric is usually affected by the type of assets and liabilities a bank holds, the type of interest rates
(fixed or floating), and the quality of its loan portfolio. Banks would be able to increase this income by digital initiatives like:

  • Launching Digital Journeys for unsecured as well as secured lending
  • Simplifying the lending processes in branches with digital interventions
  • Launching pre-approved lending products for cross-sell
  • Partnering with lending fintechs on a risk-sharing basis
  • Partnering with e-commerce players (and other similar entities) for embedded finance
  • Increasing co-lending opportunities as an initiator as well as investor
3.Net Interest Margin

Another metric that is closely related to the Net Interest Income is the Net Interest Margin. Net interest margin is the ratio of net interest income to the average earning assets. It is a profitability metric that indicates that a bank invests efficiently. This metric is also Indirectly affected by the monetary and policy of the
country as it gives an indication of whether consumers would borrow or save.

Digital initiatives included in CASA ratio as well as Net Interest Income would help in improving this margin. In addition, it would be great if banks could improve their Risk-Based Pricing Models to help in servicing multiple risk segments.

4.Non-Performing Assets:

NPA is a loan or advance for which principal or interest payment remained overdue for 90 days, It has been a major cause of worry for the banks during this covid period. Although Indian banks reported a decline in the number of bad loans in the December quarter, the number is bound to increase with the second wave of Covid
hitting the country hard. In order to combat the effects of this increase, banks have now increased the
amount of money kept as provisions.
Apart from the RBI is also setting up a ‘Bad Bank’ in order to help banks get rid of their NPAs. A ‘bad bank’ is a bank that buys the bad loans of other lenders and helps them clean up their balance sheets.

Key digital initiatives that may help in reducing NPAs include:

  • Deploying Robust underwriting tools with access to alternate data
  • Enhancing Collections platforms
  • Implementation of early warning systems, which would pull data from nontraditional sources as well
  • Implementing recovery processes
5.Cost Income Ratio

The ratio of the operating costs incurred by the bank to its net operating income is a good measure to understand how efficiently the company is being run. If the statements of the bank show a high-cost income ratio, it is important to explore further to understand where the cost is coming from. To take an example, the bank may be burning money in its customer acquisition process. In order to combat this, the customer could implement an effective organic marketing strategy and try to improve its customer retention through improved customer service. The bank can also leverage its existing customer base to try and cross-sell or up-sell its products. With digital transformation playing a key role in the future of banking, banks have to be ready with their digital strategies to survive the future.
In order to analyze this, we have to understand how active the bank is on the digital front. Understanding the bank’s capability to leverage its customer data will also, provide us with a clear view of how effectively the bank is engaging its customers.

Here are a few Non-traditional ratios to look at:

While the above-mentioned ratios provide is with a good look at the bank from a traditional standpoint, it is no longer enough.

1.Digital Disbursement ratio

This is a financial measure that is calculated by dividing the number of loans disbursed via digital channels of the bank vs the total number of Loans Disbursed. It shows us how strong the bank’s digital platforms and partnerships are.
The key components required to set up a Digital Bank are-

  • Innovation with digital products & services
  • Redefining the existing operating model
  • Transforming the organization into a digital-driven organization
  • Leveraging the power of available customer data
  • Reinventing the customer journeys
  • A thorough understanding of these components is required to successfully set up and operate a Digital Bank.

The approach to set up a digital bank is known as “EEE” the term introduced and coined by The Digital Fifth. The journey starts with

  • Extend- Extending Digital on an incremental basis
  • Expand- Expanding Digital as Line of Business
  • Excel- Digital as a New Bank and New identity
2.Partner Ratios

These ratios indicate the robustness of the partnership models employed by the bank. With the rise of open banking and the usage of APIs to improve business models, Banks have adopted a new collaborative approach to forge a partnership with Fintechs. Banks are now leveraging the reach and technical capabilities that the fintechs provide to improve their customer base and efficiency. By understanding the ratio of disbursement that a bank makes through its partner channels vs the number of disbursements through its own channels, we can assess how fintech-friendly the bank is.

3.Ratio of Accounts Opened Digitally

This is a very critical ratio, especially during the current pandemic state. Most banks today follow a Phygital model in their account opening journey. Despite boasting digital account opening services, banks often rely on their tab-based/ branch-based infrastructure to completely onboard customers. And with the current pandemic making this nearly impossible, the ability of a bank to onboard a customer through an entirely digital process is critical for their survival. This is calculated by dividing the number of CASA accounts sourced via digital channels of the bank vs the total number of CASA accounts sourced. It shows us how strong the bank’s digital platforms and partnerships are on the liabilities side.

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