Transforming business models of banks

Banks are experiencing a tectonic shift in their asset-liability structure. Besides many, the key reason is compelling banks to borrow short and lend long due to a change in the pattern of resource inflows. The incremental credit deposit (CD) ratio is on the rise. The deposit growth has been trailing behind credit growth in the last three years. Deposit growth was 10.3 percent, 10.97 percent, and 14 percent during FY22, FY23, and FY24. The bank credit growth was at 13 percent, 17.3 percent, and 20 percent, surpassing deposit growth during the same period. Along with lower deposit growth, the Current Account and Savings Account (CASA) ratio is on the decline from 43.68 percent in FY22 to 39.95 percent by March 2024, as higher interest on term deposits is prompting customers to use term deposit products for placing savings.  

Banks are drawing on refinance wherever eligible to fund demand for credit, tapping RBI’s Liquidity Adjustment Facility (LAF) windows, and borrowing from money markets and raising funds through certificates of deposits (CDs) at higher interest rates to meet the liquidity needs. 

• The structural shift of ALM:

The depletion in the household savings, increasing financial and digital literacy, digital banking system providing ready access to bank accounts, demographic shift in customer profile with higher risk appetite, etc, are synchronising with the development of alternate investment avenues for better perceived risk-adjusted returns. These developments are contributing to protracted ALM mismatches, increasing spill over to interest rate risk, and even impeding growth in some banks. 

RBI data on the Maturity Profile of Select Liabilities/Assets also resonates with the new trend. The percentage of liability book (deposits and borrowings) of over 5 years was at 42.5 percent, far shorter than the corresponding asset book (loans and investments) of over 5 years, held at 57.5 percent in March 2024. Similarly, even the share of low-cost current and savings (CASA) deposits to total deposits is also in decline. As of March 2024, even on a strong base of 265 crore deposit accounts and 40 crore borrowers, deepening financial inclusion, digital payments churning higher volumes, deposit accretion is unable to keep pace. During monetary policy – April 9, 2025, the repo rate has been brought down by 25 basis points to 6 percent. Since the portion of loans linked to external benchmark repo rates is repriced down, banks have started resetting their deposit interest rates down. The interest rates on savings bank and term deposits are softening to protect the margins of banks. Such realignment of interest rates becomes a market-driven necessity. What is more important for banks is to consider recasting the business models to stay competitive.   

• Business Models of Banks: 

Even when the operating environment is changing, the business model (BM) continues to harp on mobilising deposits to balance lending and investment, subject to regulatory norms.  In the last decade or so, due to increasing interconnectedness with NBFCs, collaboration with FinTech, embedded financing, and app-based lending, several new features have been added to core and non-core businesses. The focus is shifting to garnering fee income from non-core businesses, strategic alliances, identifying strategies for managing the risks associated with interconnectedness, and outsourcing risks. 

Interoperable technology has enabled centralisation of many homogeneous activities to a remote location operating on assembly line principles for faster turnaround time. The shift in BM driven by change in market dynamics is not adequate unless it is fully customised by the banks, well aligned with the mix of evolving assets and liabilities, and its maturity profile. 

With intense competition from NBFCs, differentiated banks, and Fintech collaborations and the insurance sector recharged after Covid-19, the BM of banks needs to reshape to align with current realities to manage risks, develop resilience to adopt new lines of business, and address challenges. 

Banks should factor the impact of PESTLE, VUCA, and SWOT analysis built upon the power of new forms of technology such as big data, analytics, ML, DL, AI, agentic AI, GenAI, and quantum computing techniques. It is also important to test the efficacy of BM by using simulation and stress testing to align with the best feasible business combination and risk management practices. While freezing BM for say 5 years, its annual review will help to factor in risk events like the presently unleashed tariff war, which can change the business equation. 

• Way forward: 

The mandarins of the banking system have been harping on banks to work out new business strategies to aggressively mobilize resources, create avenues to expand credit to lift the credit-to-GDP ratio from the present 56 percent to 130 percent to meet the aspirations of Viksit Bharat–2047. With only 2 Indian Banks in the top 100 global banks, Indian banks are trailing far behind in terms of asset size in the global ranking. Banks should shore up their asset base and improve their risk appetite to get to a stronger footing. 

In the recent monetary policy RBI expanded the scope of Co-lending among regulated entities, refining the regulatory dimensions governing Gold Loans, and guidelines on partial credit enhancement are poised to be made more friendly for large borrowers to raise funds from the market.  Grasping the spirit of changing regulations, regulated entities should make the BM receptive to change. 

Banks should explore the use of AI tools to identify soft spots where blue ocean strategies could be applied to potentially create new avenues to lasting business solutions. Financial inclusion data should be analysed to find the aspirational districts that have more potential to grow and direct the resources to such geographies to optimise efforts. While regulations are based on ‘One size fits all’, the regulated entities can always align them to suit their SWOT and tap those appropriate business opportunities. The BM should be made flexible to tap the buoyancy in the economy. BM should fit the structural liquidity pattern and risk based pricing of assets and liability products for balanced growth and profitability to stay ahead in competition.

Given increasing expectations from the banking sector, BM needs to be revamped and reinvented, driven by new tools of technology to explore the emerging opportunities for growth and cope with risks. Regulations and government policies are set to be more supportive to enable banks to enforce a high standard of governance, risk, and compliance for funding growth and ensuring financial stability. BM has to be re-engineered with vision and fortitude, laying a firm foundation for steady growth while exploring blue ocean strategies to reinvent growth.