AI-Driven Unique And Unbiased Solutions Are The Way Forward, Says M. Balakrishnan

IDFC FIRST Bank has posted stellar results, and is looking at innovation, riding high on its digital capabilities. In a freewheeling interview with Nidhi Sinha, editor, Outlook Money, and Suchetana Ray, editor, Outlook Business, the bank’s executive director and chief operating officer Madhivanan Balakrishnan talks about how they use digital capabilities to enhance customer experience, where interest rates are headed, and its commitment towards issues of financial well-being, including the key issue of retirement planning

IDFC FIRST Bank has transformed itself into a digital-oriented retail bank and invested in digital capabilities. How have you helped reshape customers and how are they reshaping you as a bank?

We have been in banking for almost two-and-a-half decades, and there has been a dramatic change over this period. There was a time when people used to flood into branches, and the core idea was to open new branches and have more people to service them. Those days, innovation used to be around physical services like navigating people to the right counter, ensure prompt service etc.

Today, customers do not walk into branches. All of us have 100-150 apps on our phones because that’s the way people have started interacting. Today, your day-to-day life is driven by digital interface and apps as a way of interacting with various stakeholders, and it is equally applicable to banking. We have picked up that cue and worked on making it better.

While we are a very young bank and do not have a legacy in terms of the number of branches, infrastructure, etc., we are singularly focused on how to create that unique moment of experience for every transaction that our customers do and every advice or information that they get.

We address questions like: Can the mobile app be the most effective tool to access any of the banking services and not just payments? For example, can it help you access the customer service centre easily? Is there a mechanism to do things yourself by making it easy, say, by changing the interface and making the journeys more intuitive.

Banking is essentially a bunch of processes orchestrated to deliver an outcome, so the question is “how to integrate the front-end app with processes in the back-end that are seamless. I think as a bank, we are extremely savvy, and we try to keep pace with the fast-changing scenarios. That's why we'll see new versions coming in frequently and new experiences being enabled for customers.

We intend to virtually create a world around finance, so that our customers can be served easily anywhere, anytime. But, at the same time, we are also there physically—our branches, our customer service centres are there to help our customers whenever needed and to reassure them.

The future is going to be a unique and hybrid world, because in certain aspects, you need that human touch.

Equity investments got a digital push post Covid. But the current high interest rates seem to have made fixed deposits (FDs) a favourite again. Where are the interest rates headed now?

From the macroeconomic indicators that we have been looking at, things seem to be cooling down a bit. Even though we are all aware about how the tomato prices shot up and food inflation was sort of heating up a bit, prices are now cooling down with the country having received decent rain. Our house view is that this current interest regime will continue for some more time.

We’re not expecting an upward spike again. In that respect, I think the FD rates will stay put for some time. The current and savings account (CASA) ratios are heading southwards, but not on an absolute level. The volumes of deposits continue to inch upwards. With rates rising, people are happier to block their funds in FDs for now.

So, is it a good time to lock into FDs?

Certainly. On the debt side, it’s a good time to lock into FDs. On the flip side, even the equity markets are doing well and it’s not that equities are out of favour. It’s been a nice and calibrated growth at this point of time. And even though the overall global macroeconomic scenario can be considered mixed, given the situation in the developed markets, India seems to be in a good place. Both in terms of sentiments and performance, the Indian market is in a much better position.

We often see deposits rates not moving in sync with the repo rates in a rising interest rate scenario compared to the lending rates, in terms of proportion. Could you explain why that happens and what are the factors that banks consider during the rate-setting exercise?

We do our asset-liability meetings at a very high frequency, so that we are updated about the market dynamics and the resultant impact on the bank’s assets and liabilities.

In addition to the level of repo rates, deposits rates are also dependent on individual banks’  deposits mix (CASA versus term deposit composition), expected advances growth, funding requirements, and the market liquidity condition. Overall, deposit rates, typically, respond to the changes in policy rates with a lag due to the sticky nature of interest rates offered on CASA, while changes in term deposits rates happen much faster.

Further, on the assets side, it differs from bank to bank, and a lot of factors are considered like the portfolio mix the bank has, the fixed and variable rates, the average tenure of the loan, and so on.

Being a retail bank, we are well-balanced if we take care of the asset-liability mix in line with the tenure and other portfolio parameters. To my mind, with every reset in the interest rate on a variable basis, we are able to transmit the effect to our customers with a reasonable amount of efficiency.

There are certain banks which are able to transmit it very quickly, that’s because of the way the portfolios are structured. For instance, a bank which predominantly has a variable mortgage business, the transparency could be high. But if I’m doing a big chunk of consumer loans, which are primarily at fixed rates of interest, then we need to manage the mapping accordingly. As an industry, we have been keeping pace with transmissions compared to the earlier days.

Banks have always been seen as trustworthy institutions, especially by senior citizens, whose population is steadily increasing. The elderly population is projected to more than double by 2036 to 225 million and then reach 425 million by 2061, according to Census 2011. In this scenario, the conversation on retirement planning becomes extremely important. What are your thoughts on this?

While India has been very lucky to have a strong demographic dividend, wherein we have one of the largest young working population that resides here, I think many people are touching the age of 40. So, in another 20 years, there’s going to be a big skew in the 60-plus population.

Another aspect is that post Covid, people’s perception of their lives has undergone a big change. People have now become more careful, and they want to live a better and more balanced life. Given this change in behaviour and the reality of the demographic situation, I think retirement planning is very important.

While in the very old days, my parents and maybe their parents, used to save and then spend, now as India becomes a more dramatic and consumerist society, people borrow first to spend and then save. It is necessary that people in their 40s strike a balance between both these aspects—saving and spending—and plan their future better. It is very important that they appreciate that the earlier they start, the better it is for them as it lets compounding work its magic on their investments.

From a financial services perspective, there’s no single solution for everyone and its different strokes for different people, depending upon the individual’s life stage. It’s, therefore, important to make a conscious effort to plan for one’s retirement while still young.

Can financial literacy play a role in spreading awareness about the need to plan for retirement? What role can the government and financial institutions play?

Financial literacy can certainly play a huge role in empowering people.

The earlier generation was more traditional, but today’s generation is well exposed to the various options, such as digital apps and sites for managing their investments. Those in the age group of 40 years are reasonably well-educated and have a higher financial literacy level as compared to their previous generation. But planning is a complex topic. Given the multiple options available, decisions like how much you should allocate and where and when are very critical. Everybody would have heard and read about Warren Buffet and his disciplined way of long-term investing, but translating the same into your own life is very important.

I think banks, financial institutions, media organisations and the government should all play a very active role to ensure that we don’t end up like some of the developed countries where we have too much of debt in terms of pension management and similar liabilities.

What is your advice to individuals regarding retirement planning in terms of investment and other strategies?

People typically think about planning only after they attain a certain amount of net worth. That’s when they feel that I need an external advisor to come and tell me what to do with my money. They look at private bankers, wealth managers, or relationship managers, but there is confusion about whether that person is doing what’s good for the organisation or for the customer. I think this is where the concept of an app or a site works; it can tell you what you have, and what you need to have, let’s say five years down the line. I think your ability to plan becomes better when you realise that the concept of AI-driven decisions can be designed to be unbiased.

One can develop the ability to run models which can throw out solutions that are unique to you as an individual, after understanding your needs and risk-taking capability. So, digitisation tools, combined with robust models will play a big role. Banks with a huge amount of data at their disposal are at the forefront of this evolution along with the necessary advisory skills.

nidhi@outlookindia.com; suchetana@outlookindia.com