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“Advances in digital banking will not eliminate the branch, they will allow for more creative ways to help clients achieve financial well-being.”
Digital Banking was first introduced in India in 1988 when RBI set-up a committee on computerization of banks headed by Dr. C. Rangarajan. There has been a rapid change in the working of banks in India since then. Starting with the MICR based cheque processing to ATMs to E-banking to Mobile Banking to the evolution of ‘Anywhere Banking” today. More technologies are lined up to be implemented to make banking experience totally different.
In 1947, the banking sector collectively had more than Rs.1000 crores deposits in over 5000 branches. Out of the total 654 banks in the country, 38 banks failed in 1947 and 45 banks failed in 1948. In 1949, The Banking Companies Act was passed to deal with these failures but it was not adequately equipped to deal with the situation. In 1969, 14 private banks were nationalized to serve the economy in a better way. The LPG (Liberalisation-Privatisation-Globalisation) policy in 1991 allowed private players to come in and interest rates were gradually freed. It was in 1998 that the Narsimham Committee was set up for Banking Sector Reforms. The committee came up with recommendations for autonomy in the banking sector, the 4-Tier banking structure in the country, raising prescribed Capital Adequacy norms and entry of foreign banks. However, all the recommendations were not implemented immediately but the committee proved to be a major event in Banking Sector Reforms in the country.
Currently, there are 27 public sector banks in the country including SBI (and its 5 Associate Banks). In the private sector, there are 22 banks including the new banks formed after 1991. Due to the rising NPAs in the country, several mergers are being proposed in the banking sector with the number of banks reducing over the years. Hence, there should be a smaller number of banks rather than a hollow pipe of numerous banks.
Over the years, the need for credit in MSMEs is increasing. However, the credit allocation to the small firms has not been up to the mark. According to RBI, MSMEs have faced a decline in lending for more than 2 years since 2015. Moreover, the Micro-Units Development and Refinance Agency (MUDRA) scheme which aims to provide credit for expanding existing small business hasn’t been successful either. The loans are majorly extended to well-performing sectors.
One might refer to the term NPAs as bad loans and will surely sight the problems in the agricultural and corporate sector. However, there’s more explanation of this. Out of the total NPAs in the country which has crossed 10 lakh crores lately, more than 70% are from the corporate sector. On the other hand, farmers have been recorded to default on 8% of the total NPAs.
Another interesting statistic is that the primary sector has defaulted on 6% of the total amount borrowed. Indian farmers have protested for easing their repayment guidelines and for a waiver in some cases. One might argue that the nation’s wealth shouldn’t be degraded by such waivers. Although, most of the farmers are willing to pay back their loans, but are not able to. The reasons being lack of infrastructure, monsoon failures, non-implementation of Minimum Support Prices for their crops and numerous uncontrollable factors. The farmers’ march in Mumbai, the protests against anti-farmer policies in the national capital are some of the recent examples.
The other side of the coin is entirely different, the corporate sector in most of the cases has been found to default due to intentional mismanagement of funds. The worrying part is that only 12 companies constitute more than 25% NPAs in the country. The banks hope for a lower haircut and about 5 among these 12 have been settled after strategic acquisitions.
People tend to interchangeably use the words NPAs and frauds in the banking sector. However, there is a line that differentiates the two. An NPA may or may not be intentional and the borrower might want to pay back but isn’t able to. On the other hand, a fraud is an intentional act by the borrower where there is a scam of funds involved. Such frauds might include Accounting Frauds, Demand Draft Fraud, Uninsured Deposits, Bill Discounting Fraud, Fraudulent Loans, Cheque Kiting, and the list continues. The recent PNB case where fake Letter of Undertakings worth Rs. 11,000 crores were issued is the most relevant example. Other examples include Vijay Mallya accused of defrauding a consortium of lenders for Rs.9,000 crores and Rotomac Global accused of allegedly cheating a consortium of 7 lenders for Rs. 3700 Crores.
Approximately 69% of India’s population resides in rural areas. Lately, there have been some ambitious targets by the government like access to bank accounts to all the households of the country. But even if everyone gets access to a bank account, many villages do not have adequate branches and ATMs to feed the market in rural areas. Currently, the banking sector does not have the infrastructure to reach out to the market at the bottom of the pyramid (BOP). Many economists state that the infrastructure will always be inadequate owing to a large population. But there is a need for better supervision and monitoring framework.
Any situation which is a challenge to all can be an opportunity to an innovator. Targeting the poor is difficult for any industry and innovations are required to penetrate the rural market. A similar opportunity was seen by Citibank when it first started its $25 deposit-based banking services, called Suvidha, in Bangalore. In the first year itself, Citibank enrolled 1,50,000 customers. Currently, many banks offer similar services to consumers in rural as well as urban areas.
The opportunity that is waiting to be exploited is digital banking in rural areas. Currently, people are not really equipped with the latest technology in rural areas, but this is the opportunity for innovations. The dominant logic of the banks that the rural population does not want to be equipped with the technology must be kept aside in order to come up with some innovative way to use these opportunities.
Today, many banks and financial organizations have accepted the potential of blockchain technology owing to the overwhelming popularity of cryptocurrencies and wide dissemination of blockchain recently. According to Accenture, the world banking sector will save up to $20 billion by 2022 by implementing blockchain. Banks like Kotak Mahindra Bank, Axis Bank, and Yes Bank have partnered with global blockchain firm, Ripple to provide near-instant cross border remittances. Currently, these remittances take anywhere between half a day to 3 days and banks are hoping to reduce the transaction times and the costs too will reduce by 10-40%.
Blockchain also provides a high level of safety in storing and transmitting data, eases the KYC process, has an open and transparent yet secure infrastructure, is decentralized and lowers the operation costs. For example, a “private key” is needed to access data from blockchain nodes and whenever a request is made using this key, blockchain records it and NSE gets to know about it; thus, flagging the potential illegal downloads. Blockchain is not just a dreamy idea and is being implemented successfully as cited above and its further implementation in financial institutions is sure to increase.
P2P lending is a method of debt financing that enables individuals to borrow and lend money without using an official financial institution as an intermediary. As per RBI, P2P lending service providers are classified as NBFCs and currently comprises seven platforms. Although P2P lending removes the middlemen from the process, it involves more time, effort and risk than the conventional methods. The underlying principle is “high return, high risk”. A lender’s potential return would depend on how much risk he/she is willing to take. Higher risks mean higher default rates.
Considering these things, RBI has taken cautious steps in this direction and has capped the exposure that a potential lender can take at 10 lakhs. Also, P2P NBFCs cannot lend for more than 36 months. The trend of default rates in India will be clearer after a lending cycle i.e. in about two years. The current regulations will allow the market to shape during this period and depending on how things turn out in the future, RBI might loosen some regulations. Overall, the situation for this market is optimistic with some caution.
AI is a fast evolving and go-to technology for companies across the world to personalize experiences. The banking sector is one of the first adopters of this technology and is exploring and implementing technology in various ways. The fundamental applications of AI include bringing smarter chatbots for customer service currently used by HDFC Bank, SBI, ICICI and Axis Bank, personalizing services for individuals and placing AI robot for self-service at banks. For example, Canara Bank has placed two AI robots named Mitra and Candi at their branch in Bengaluru. Some common uses of AI in banks are:
This showcases that AI is not used only for customer support and has a wider range of applications in the industry. For example – payment companies use AI to analyze user’s payment patterns and then prompts the user to the preferred payment tool that best suits a purchase during checkout. Implementation of this technology comes with challenges. One key challenge is the availability of the right data as any vulnerability arising from unverified information is a serious concern for business. Another key concern is the diverse and multilingual population of India with 150+ languages. A significant amount of progress is required on the NLP front in order to effectively reach a wider range of the population. One more key issue is that AI technology is a threat to the redundant employees in the banking sector and mass adoption of AI may lead to grave unemployment. Thus, for successful and effective implementation of AI, identification of right cases for use of AI with the help of experts and data scientists will be the key for the Indian banking sector.
Dr. Viral V. Acharya, Deputy Governor, RBI, says: “A bank is something one can bank upon.”
Dr. Viral V. Acharya aims to improve the banking sector and is of the opinion that capital allocation can be done in better ways as compared to the current situation. He aims to minimize the amount of capital government injects and is of the belief that the private sector should take responsibility. He also points out that there is no need for many Public Sector Banks in the country. The system will be better if there are fewer but healthier banks in the country. So, he reiterates on mergers on various public sector banks in the country.
Another recommendation is the tough Prompt Corrective Action (PCA) guidelines for banks not performing up to the mark. This will ensure the migration of deposits from such banks to healthier banks. The main point to be noted in this regard is to encourage the private sector to come to rescue the Public Sector Banks. This will ultimately mean that the amount that the government needs to inject will be reduced and hence it can preserve its hard-earned fiscal discipline.
The banks are also advised by RBI to conduct Insolvency proceedings on their own. The banks are to take advantage of Insolvency and Bankruptcy Code (IBC) to improve performance on a sustained basis. The banks should be able to manage their bad loans and remain competitive as the bad loan recovery through other routes is not up to mark.
The implementation of IBC will help the banks in credit appraisal and loan monitoring systems in order to minimize the risk of unfortunate lending in the future.