BFSI Sector in India: A Journey of Growth, Disruption & Financial Inclusion through Fintech

Chapter 1: Historical Evolution of the BFSI Sector in India:

  • Indigenous banking systems & practices.
  • Introduction of modern banking institutions during the colonial era.
  • Birth of indigenous banks in the early 20th century.
  • Nationalization of banks in 1969 & its impact on inclusive growth.
  • Technological advancements & computerization in the 1980s.
  • Economic liberalization & entry of private sector banks in the 1990s.
  • Rise of insurance as a vital component of the sector.

Once upon a time, in the vast & diverse land of India, the seeds of the BFSI (Banking, Financial Services & Insurance) sector were sown. The roots of this sector can be traced back to ancient times when indigenous banking systems & financial practices thrived. In those days, the community would come together to support each other’s financial needs, fostering a sense of trust & solidarity.

The first bank in India was The Madras Bank which was founded in 1683 & the Bank of Hindostan was the first Western-style commercial bank to open in India in 1770. It was the first bank in Calcutta to be managed by Europeans. It was dissolved between 1830 & 1832.

Bank of Hindostan - Sixteen Sicca Rupees
Bank of Hindostan - Sixteen Sicca Rupees


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    As time went by, the banking landscape in India began to evolve. During the colonial era, the British introduced modern banking institutions, marking the advent of formal banking in the country. The establishment of the Bank of Calcutta on the 2nd of June 1806 (later renamed as Bank of Bengal on 2nd Jan 1809), followed by the Bank of Bombay & the Bank of Madras, laid the foundation for a structured banking system.

    The early 20th century witnessed the birth of indigenous banks, such as Punjab National Bank & Canara Bank, which aimed to serve the needs of the Indian population. These banks were instrumental in supporting India’s growing economy & providing financial services to various sectors.

    Post-independence, the Indian government recognized the significance of a robust banking system in fostering economic development & ensuring financial stability. The year 1969 marked a significant milestone in the history of the banking sector in India, as the government nationalized 14 major banks, aiming to bring banking services closer to the masses & promote inclusive growth. With the nationalization of banks, the reach of banking services expanded rapidly. Branches were established in remote villages & banking facilities became accessible to the common people. The sector played a pivotal role in channeling funds to key sectors like agriculture, industry & infrastructure, contributing to the country’s overall progress.

    As the Indian economy continued to grow, the banking sector embraced technological advancements. The introduction of computerization in the 1980s brought about a paradigm shift in banking operations. Manual processes gave way to automated systems, enhancing efficiency & customer service. The 1990s marked a turning point in the sector’s history with economic liberalization. The government initiated reforms to foster competition, attract foreign investments & strengthen the banking system. This led to the entry of private sector banks, which brought innovation, customer-centric services & a new wave of competition to the industry.

    In the 21st century, the BFSI sector witnessed the emergence of insurance as a vital component. Insurance companies expanded their presence, offering life, health & general insurance products to meet the growing demand for risk mitigation & financial protection.

    Timeline of the historical evolution of the Banking Sector in India
    Timeline of the historical evolution of the Banking Sector in India

    Chapter 2: The Rise of Fintech & its Transformative Impact:

    • Definition & significance of fintech.
    • Fintech revolutionizing traditional financial services.
    • Introduction of digital payments & the Unified Payments Interface (UPI).
    • The surge in cashless transactions & financial digitization.
    • Promoting financial inclusion through mobile banking & digital wallets.
    • Role of fintech in reshaping lending practices & peer-to-peer lending platforms.

    However, the real game-changer in the history of the banking sector in India came with the rise of fintech. Technological advancements, coupled with a burgeoning startup ecosystem, paved the way for fintech companies to disrupt traditional financial services. These innovators leveraged digital platforms, mobile technology & data analytics to provide seamless & personalized financial solutions to customers.

    Fintech revolutionized the sector, transforming the way people transact, borrow, invest & manage their finances. Digital payments gained momentum, with the introduction of the Unified Payments Interface (UPI) as a game-changing platform. The ease &  convenience of digital transactions led to a massive surge in cashless payments, driving financial digitization across the country.

    • Digital payment transactions have expanded dramatically, from 2,071 crore transactions in FY 2017-18 to 8,840 crore transactions in FY 2021-22.

    (Source: RBI, NPCI & banks)

    • Various simple & convenient modes of digital payments, such as Bharat Interface for Money-Unified Payments Interface (BHIM-UPI), Immediate Payment Service (IMPS) & National Electronic Toll Collection (NETC), have grown significantly in the last five years, transforming the digital payment ecosystem by increasing both person-to-person (P2P) & person-to-merchant (P2M) payments.
    • BHIM UPI has emerged as citizens’ favorite payment mechanism, with 803.6 crore digital payment transactions worth 12.98 lakh crore conducted in January 2023.

    (Source: PIB)

    The total number of digital payment transactions undertaken during the last five financial years & the current financial year are as under:

    Note: Digital payment modes considered are BHIM-UPI, IMPS, NACH, AePS, NETC, debit cards, credit cards, NEFT, RTGS, PPI & others.
    Note: Digital payment modes considered are BHIM-UPI, IMPS, NACH, AePS, NETC, debit cards, credit cards, NEFT, RTGS, PPI & others

    The total value of digital payments during the last five financial years & in the current financial year are as under:

    Note: Digital payment modes considered are BHIM-UPI, IMPS, NACH, AePS, NETC, debit cards, credit cards, NEFT, RTGS, PPI & others.
    Note: Digital payment modes considered are BHIM-UPI, IMPS, NACH, AePS, NETC, debit cards, credit cards, NEFT, RTGS, PPI & others.

    This represents a significant increase, highlighting the growing acceptance of digital payments & the impact of fintech in reshaping the BFSI landscape.

    Furthermore, fintech companies played a crucial role in promoting financial inclusion. Through mobile banking, digital wallets & microfinance platforms, they extended financial services to countryside areas & enabled individuals & small businesses to access credit, make payments & improve their financial well-being.

    Moreover, fintech has revolutionized lending practices in India. Peer-to-peer lending platforms have emerged as an alternative to traditional lending institutions, providing borrowers with easier access to credit & investors with attractive investment opportunities.

    Chapter 3: Embracing Digital Transformation in the BFSI Sector:

    • Traditional BFSI players investing in digital infrastructure.
    • Adoption of artificial intelligence, machine learning & data analytics.
    • Enhancing customer experiences & streamlining processes.
    • Digital onboarding of customers & virtual assistants for support.
    • Impact of the recent past years on accelerating digital adoption.

    The BFSI sector in India has recognized the need to embrace digital transformation to stay competitive & meet the evolving demands of customers. This has led to several key developments:

    Traditional banks & financial institutions investing heavily in upgrading their digital infrastructure. They are modernizing their core banking systems, enhancing online & mobile banking platforms & improving cybersecurity measures. These investments are aimed at providing customers with seamless & secure digital banking experiences.

    Artificial intelligence (AI), machine learning (ML) & data analytics are being leveraged by the BFSI sector to gain valuable insights & enhance decision-making processes. Banks are utilizing AI-powered chatbots & virtual assistants to provide instant customer support & personalized services. ML algorithms are used for fraud detection, risk assessment & credit scoring, improving operational efficiency & reducing manual errors.

    Fintech Blog

    Digital transformation has paved the way for enhanced customer experiences. Banks are focusing on creating user-friendly interfaces, providing personalized recommendations & offering 24/7 access to banking services. Customers can perform a wide range of transactions online, such as fund transfers, bill payments & account management. This shift to digital channels has significantly reduced the need for physical visits to branches, streamlining processes & saving time for both customers & banks.

    Digital onboarding of customers using Video KYC Solutions & virtual assistants for support has simplified the account opening procedures for customers. Through online portals & mobile apps, individuals can complete the entire account opening process remotely, eliminating the need for physical paperwork & branch visits. Additionally, virtual assistants & chatbots are being deployed to handle routine customer queries, providing immediate assistance & improving response times.

    In recent past years acted as a catalyst for digital adoption in the BFSI sector. With social measures in place, customers increasingly relied on digital channels for their banking needs. Banks rapidly scaled up their digital capabilities to meet the surge in demand for online services. Digital payment solutions, such as UPI & mobile wallets, witnessed significant growth during this period. This highlighted the importance of robust digital infrastructure & accelerated the pace of digital transformation in the BFSI sector.

    Overall, the BFSI sector’s embrace of digital transformation has led to improved customer experiences, streamlined processes & increased access to financial services. The adoption of technologies like AI-driven Credit UnderwritingBank Statement Analyser, ML & data analytics has enhanced operational efficiency & enabled better risk management. As the sector continues to evolve, the integration of digital technologies will play a crucial role in shaping its future.

    Chapter 4: Current Trends & Future Outlook:

    • Continued focus on digitalization, AI & blockchain.
    • Open banking frameworks & collaborations between traditional institutions & fintech startups.
    • Regulatory frameworks to foster innovation & ensure consumer protection.
    • Expected growth & disruption in the BFSI sector.
    • Opportunities for further financial inclusion & technological advancements.
    The BFSI sector in India is witnessing several notable trends & holds promising prospects for the future:
    • In addition to cooperative credit institutions, the Indian banking system includes 12 public sectors, 22 private sectors, 46 foreign, 56 regional rural, 1485 urban cooperatives & 96,000 rural cooperative banks.
    • The total number of ATMs in India as of Sep 2021 was 2,13,145, with 47.5% located in rural & semi-urban regions.
    • Bank assets rose in all industries in 2020–2022. In 2022, the total assets of the banking industry (including both public & private sector banks) rose to US$ 2.67 trillion.
    • Bank credit grew at a CAGR of 0.62% from FY16 to FY22. Total credit extensions reached US$ 1,532.31 billion as of FY22. Deposits increased at a CAGR of 10.92% from FY16 to FY22, reaching US$ 2.12 trillion by FY22. As of November 4, 2022, bank deposits totaled Rs. 173.70 trillion (2.12 trillion USD).
    • In March 2020, the SCBs’ Gross Non-Performing Assets ratio (GNPA) was 8.2%; in September 2022, it reached a seven-year low of 5.0%.

    (Source: PIB)

    Growth In Deposits

    Growth In Deposits
    Growth In Deposits

    These data show that the BFSI sector in India has been growing steadily in recent years. Digitalization will remain a key priority for the BFSI sector. Banks & financial institutions will continue to invest in upgrading their digital infrastructure, enhancing online banking services & providing seamless customer experiences. The adoption of AI & machine learning will further drive automation, data analytics, & personalized services. Additionally, blockchain technology is gaining traction for secure & transparent transactions, enabling faster & more efficient processes.

    Open banking is gaining momentum in India, fostering collaboration between traditional BFSI players & fintech startups. Open banking frameworks enable secure data sharing between banks & third-party providers, leading to the development of innovative products & services. Traditional institutions are partnering with fintech startups to leverage their technological expertise, agility & customer-centric solutions. This collaboration is expected to fuel innovation, enhance customer experiences & expand the range of financial services offered.

    Regulators in India are actively working towards creating an enabling environment for innovation in the BFSI sector. Regulatory sandboxes & guidelines are being developed to facilitate experimentation with new technologies & business models. Simultaneously, consumer protection measures are being strengthened to ensure transparency, data privacy & security. Regulators are working closely with industry stakeholders to strike a balance between innovation & risk mitigation.

    The BFSI sector in India is poised for significant growth & disruption in the coming years. Factors such as increasing internet penetration, smartphone adoption & government initiatives like Digital India & Jan Dhan Yojana are driving financial inclusion & expanding the customer base. Fintech startups are challenging traditional players with their innovative offerings, reshaping the competitive landscape. The sector will witness further digitization, evolving customer expectations & new business models that leverage technology.

    • India has seen a boom in fintech & microfinancing in recent years. Due to a five-fold growth in digital disbursements, India’s digital lending, which stood at US$ 75 billion in FY18, is predicted to increase to US$ 1 trillion in the coming time.
    • The Indian fintech sector has so far (January 2017–July 2022) garnered US$ 29 billion in financing across 2,084 agreements, making up 14% of the world’s funding & placing second in terms of deal volume.
    • India’s fintech business is anticipated to grow to 6.2 trillion rupees (US$ 83.48 billion) by 2025.

    The BFSI sector presents ample opportunities for advancing financial inclusion & leveraging technology for societal impact. Fintech solutions can bridge the gap in financial services for underserved populations, enabling access to credit, insurance & savings products. Technology can also play a crucial role in addressing challenges related to identity verification, fraud prevention & cybersecurity. The Adoption of emerging technologies like biometrics, the Internet of Things (IoT) & decentralized finance (DeFi) can unlock new avenues for financial inclusion & innovation.

    The journey of the BFSI sector in India has been nothing short of remarkable. From its historical roots in indigenous banking practices to the modernization brought about by colonial influences, the sector has continuously evolved to meet the changing needs of the nation. The nationalization of banks in 1969 & subsequent economic liberalization paved the way for inclusive growth & expansion of financial services to the masses.

    The BFSI sector plays a crucial role in India’s progress & development. It acts as a backbone for the economy, providing essential financial services, facilitating investment, promoting savings & channeling funds for productive purposes. The sector’s stability & efficiency are key to ensuring economic stability & supporting various sectors such as agriculture, industry & services.

    Looking ahead, the future of the BFSI sector in India appears bright & promising. The sector is poised for continued growth & transformation, driven by technology & innovation. The ongoing focus on digitalization, artificial intelligence & blockchain will further enhance customer experiences, streamline processes & enable the development of innovative financial solutions. Open banking frameworks & collaborations between traditional institutions & fintech startups will lead to the emergence of new business models & a broader range of financial services.

    While challenges & risks exist, such as ensuring data security, privacy & regulatory compliance, the overall outlook for the BFSI sector remains optimistic. The sector is well-positioned to leverage technology, adapt to changing customer preferences & drive financial inclusion. By embracing innovation, fostering collaboration & addressing societal needs, the BFSI sector will continue to be a catalyst for economic growth & empowerment in India.

    In conclusion, the journey of the BFSI sector in India, from its historical roots to the present-day landscape, showcases the sector’s resilience & adaptability. As a critical driver of the nation’s progress, the sector will continue to evolve, leveraging technology & innovation to meet the evolving needs of the Indian population. With a strong foundation & an optimistic outlook, the BFSI sector is poised to shape a prosperous future for India.