Data Science: The Future of Banking in India's Dynamic Interest Landscape

Amid evolving financial trends, a Boston Consulting Group (BCG) study urges Indian banks to harness the power of data science. With savers eyeing mutual funds, pensions, and direct investments, banks face the pressing task of understanding depositor behavior to refine product offerings.

The study titled 'Interest Rate Sensitivity in Indian Banking: An Empirical Look and its Strategic Implications' emphasizes the need for improved deposit pricing strategies and liability analytics. Historically, the focus lagged on the liability side, but as competition intensifies, addressing this becomes pivotal.

BCG data reveals an era of one-way interest rate cycles may have ended, influenced by geopolitical disruptions and market shifts. Interest rate changes, particularly the repo rate, significantly impact key banking metrics, but transmission effects materialize over 12 to 24 months.

The report underscores that while lower rates aim at spurring lending, actual growth hinges on borrower sentiment and lenders' risk appetite. Instances from 2014-2016 showed that despite reduced rates, credit growth remained tepid, while 2022-2023 saw robust growth amid rising rates.

Public Sector Banks (PSBs) demonstrated greater responsiveness to rate changes compared to private counterparts. The analysis also highlights that interest rate shifts have minimal impact on deposit mobilization. Instead, competitive factors and bank outreach play a decisive role.

Net Interest Income (NII), a core earnings component, showed high sensitivity to interest rate variations. PSBs exhibited notable income boosts following rate hikes, contrasting with moderate effects on private banks' performance.

(With inputs from agencies.)