Banking needs to revisit role

Disintermediation Driven By Retail Participation & Financial Awareness Healthy For Financial System

- ASHVIN PAREKH

If one were to analyze the gradual reduction of bank deposits and credit outflows, there could be a larger phenomenon at play. Against the backdrop of some core trends—including the shift from physical to financial assets, the rise of retail investors, the role of technology and fintechs, the gradual distancing by corporates from banking lending, and the growth of the corporate bond market as well as the primary market for equity and debt instruments—the banking system will have to re-examine its role.

We are witnessing clear disintermediation as household savings are progressively flowing from banks into capital markets and corporates are tapping equity and debt markets instead of depending solely on banks. This typically exerts downward pressure on banks' profits and the quality of their assets. The first major impact is the reduction of net interest margins, a major source of income for banks. The second impact is the gradual loss of high-value customers, followed by increased competition and pricing pressure.

Banks, as we have witnessed in the past five years, have increasingly become slower in interest rate transmission of policy rates to protect their net interest margins. To arrest the profit decline, banks can pursue fee-based and advisory services, agency businesses, and digital financial products, leading to the gradual shift towards alternative revenue streams.