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the bAnkinG sector is in the throes oF MAssive chAnGe
The banking sector in the throes of massive change
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AS PER the Reserve Bank of India (RBI), India’s banking sector is sufficiently capitalised and well-regulated.The financial and economic conditions in the country are far stable as compared to any other country in the world. Credit, market and liquidity risk studies suggest that Indian banks are generally resilient and have withstood the global downturn well. The RBI has also pushed for the creation of a ‘Bad bank’ to alienate illiquid and risky assets held by banks and financial institutions or a group of banks. The implementation of such ideas will help banks to clean up their balance sheets by transferring their bad loans so that they can focus on their core business of taking deposits and lending money. Of late, RBI has introduced “The Payments Vision 2025” with the core theme of ‘E-Payments for Everyone, Everywhere, every time’ (4Es) and aims to provide every user with safe, secure, fast, convenient, accessible and affordable e-payment options. The activities will be taken up during the period up to 2025 and will be pivoted on five anchor goalposts of Integrity, Inclusion, Innovation, Institutionalisation and Internationalisation. India with a 1,416 million population in 2022 currently has around 658 million active internet users, a figure which is estimated to surpass 900 million users by 2025.This means 6.7 million new internet users every month, who will be exposed to cybercrime’s penetration in the banking system. The year 2020 saw 4,047 cases of online banking fraud; 2,160 cases of ATM fraud;1,194 credit/debit card frauds; and 1,093 OTP frauds. The most prevalent mode of RBI’s proactive measures are preparing the ground for a robust financial system, driven by technology and innovation banking frauds is Phishing; Spear Phishing; Spoofing; Vishing; Skimming; Smishing; SIM Swap. However other modes of fraud are also evolving, like scam through QR code scan and impersonation on social media. With the huge on-boarding of people to digital banking, backed by a spurt in internet penetration in different parts of the country, it is important to have a more secure digital environment with high rate of awareness on digital and financial literacy. The current plan of RBI for ‘Payments Vision 2025’ is to drive financial inclusion to the bottom of the pyramid. Juxtaposed with the current banking cybercrime scenario, this calls for a vigilant cyber fraud cell and a foolproof cyber security system with high level of awareness among those recently on boarded to the system. The Reserve Bank of India (RBI) has opened the fourth cohort under the Regulatory Sandbox (RS) for ‘Prevention and Mitigation of Financial Frauds’ to support the Payments Vision 2025 initiatives and gain Fintech’s support to have a more secure environment. However, the results will be delivered over time.
Alongside these advancements, the Reserve Bank’s regulatory approach has been realigned to support and foster all such innovations. The
regulatory guidelines for account aggregators and peer-to-peer lending operators are indicative of a proactive regulatory approach. An enabling framework for the Regulatory Sandbox has been in place for the last three years. The Reserve Bank Innovation Hub (RBIH) has also been set up by the RBI to catalyse innovations in the Fintech sector. RBI is now moving towards the introduction of a central bank digital currency (CBDC). The objective of the Regulatory Sandbox (RS) is to foster responsible innovation in financial services, foundation of a vibrant, resilient and well-functioning financial sector. In line with this goal and in order to manage capital, bad loans intensity and regional factors more efficiently, along with a motive to spearhead digital advancements, the Government of India (GOI) has consolidated 10 public sector banks (PSBs) into 4 banks, along with other mergers & acquisitions. As per reports from Deloitte, since the pandemic began, around 72% of the banks have undertaken restructuring
promote efficiency and bring benefits to consumers. It is a formal regulatory programme for market participants to litmus test new products, services or business models with customers in a live environment, subject to certain safeguards and oversight. The proposed financial service to be launched under the RS should include new or emerging technology, or use of existing technology in an innovative way and should address a problem and bring benefits to consumers. The central bank has so far concluded three RS, i.e.,on ‘Retail Payments’, ‘Cross Border Payments’ and ‘MSME Lending’,with good participation and effective development and results. A paradigm shift in Banking due to the technological revolution in the sphere of financial services is one of the biggest disruptions the financial ecosystem is undergoing amidst Mergers and Acquisitions (M&As) in the sector. It goes without saying that the edifice of growth and development in modern. economies is built on the initiatives. The restructuring initiatives are mainly focused on fostering nearterm developments, leading to M&As. However, the restructuring initiatives were more for digital transformation purposes than cost cutting. Over the past eight quarters, 13 banks with more than $10 bn in assets have been sold and removed from the candidate pool. But on the plus side, the period has seen a rise in the total number of banks with more than $10bn in assets. A continuation of this trend will drive future deal volumes, whereas stalled loan growth, soaring deposits that keep complicating net interest margin improvements and mergers will lead to problems. Loan growth in the industry over the past two years has been just 5.8%. Scrutinising a bit deeper, consumer lending is up 2.4%, real estate lending has grown 4.9%,and C&I lending is up only 1.2% during this period. The primary source of loan growth in the banking industry during this period has been lending to nondepository financial institutions.It is further striking to note that during the same period,
Regulatory Sandbox (RS) seeks to foster innovation in financial services, promote efficiency and bring benefits to consumers
domestic deposits have grown by more than 35%, along with 12% rise in cash holdings during 2019-21.The downward shift in net interest margins (NIMs) from 2019 to 2021 makes it challenging for banks to achieve the types of returns their stakeholders expect. Margins at this level put pressure on the management to leverage an M&A partnership to improve the financial future of the enterprise. Hence, banks with a differentiated lending pipeline and innovative product offerings clearly have a valuation advantage in a market thirsty for loan origination, especially with a surplus of deposit with them. Therefore, it is important to realise the need of the hour as has been highlighted by Shaktikanta Das,Governor, RBI: “The trend of technology driven changes in the financial services sector will continue in the future. Participants and players in this sector will have to strive hard to remain relevant in the ever-changing economic environment by continuously improving the quality of their governance; reworking their business strategies and business models; designing products and services with the customer in mind; ensuring operational resilience and risk management; and focusing on more efficient products and services by leveraging on technology. The possibilities are immense only if we are ready to embrace them while meeting the challenges.”
(The article was edited by Premchand Kankaria, Chair, Banking, Finance & Insurance Committee, FTCCI, and prepared by Lokesh Fatehpuria, Joint Director, FTCCI. The data has been sourced from various government and private websites and articles giving a brief about the sector and industry)
