By Rahul Kabra
Since the dawn of independence, the Indian Banking Sector has seen major changes over the years. With a plethora of reforms and changes in the governance structure, this sector has evolved a lot in this period. At present, there is a consensus that the state of Indian banking is among the biggest challenges facing the country in accelerating investments and growth.
Asset Quality, especially of Public Sector Banks(PSBs) has deteriorated drastically in the recent past. With factors like indiscriminate lending to industries and poor underwriting of risk, the recovery of Non-Performing Assets has become a mammoth task.
One might refer to the term NPAs as bad loans and will surely sight the problems primarily in the agricultural and corporate sector. However, there’s more explanation to this. Out of the total NPAs in the country which has crossed 10 lakh crores lately, more than 70% are from the corporate sector. The primary sector has comparatively just defaulted on 6% of the total amount borrowed.
Protesting for ease in repayment guidelines and a waiver, farmers have been recorded to default on 8% of the total NPAs. Given the falling agricultural productivity in the rural areas, the climate change-induced crop failures, non-implementation of Minimum Support Prices for their crops and lack of infrastructure, the problem of NPAs has further compounded over the years.
This deteriorating quality of assets leads to an inadequacy of capital and thus in effect restrict lending operations. Banks need to mandatorily maintain a minimum capital adequacy ratio for stability, consequently a rise in the amount of NPAs lead to a contraction in debt, thus shifting the the focus of banks to credit risk management.
The words NPA and scams have been used synonymously at various places. However, the difference is that an NPA may or may not be intentional where the borrower might want to pay back but isn’t able to whereas a scam is an intentional act by the borrower. 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. With numerous scams taking place and coming out in the eyes of the public, stringent control measures must be adopted with effective supervision.
Approximately 69% of India’s population resides in rural areas. Lately, numerous schemes have been introduced by the government for financial inclusion and to provide social security to the deprived sections of society. Schemes like Pradhan Mantri Jan Dhan Yojna which aims at providing a bank account to every poor in the country have been quite successful. Policy interventions such as opening bank branches in unbanked villages and financial literacy initiatives have been undertaken over the years by the RBI. However, the banking sector still lacks the infrastructure to reach out to the market at the bottom of the pyramid (BOP). Lack of access to insurance facilities and institutional support persists in many states like Madhya Pradesh and Haryana. Many economists state that the infrastructure will always be inadequate owing to a large population. However, there is a need for better supervision and monitoring framework and steps need to be taken on a micro-regional level.
1.Artificial Intelligence and Big Data
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 enhancing customer service by smarter chatbots like 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.
AI helps a great deal in fraud detection, risk management, wealth management of masses and automation in back-office processing. It is clear that AI 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 best suited for thierpurchase during checkout. Implementation of this technology comes with challenges. 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.
India’s centralised banking system can benefit a great deal from the blockchain technology as it will not only help banks automate their inter-organisation processes but also substantially improve their existing operating systems. There will be minimum intervention required of regulating bodies in the banking processes, while for banks themselves, monitoring assets and performing compliance-related tasks will become much simpler, quicker, and efficient as compared to the current systems.
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. Banks like 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. With this technology, banks hope to to reduce the transaction times to near instant and QA costs by 10-40%.
Blockchain has an open and transparent yet secure infrastructure. It also provides a high level of safety in data management, eases the KYC process, and lowers the operation costs. If implemented successfully, it will greatly help the financial institutions.
3.Peer-to-Peer (P2P) Lending
A method of debt financing which 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. 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 3 years. 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 looks optimistic with some caution.
4.Targeting Markets at Bottom of Pyramid(BOP)
Given the potential in the rural market of the country and difficulty in targeting the poor, innovations are required to penetrate the rural market. The opportunity that is waiting to be exploited is digital banking in rural areas. Due to the absence of bank branches, tribal and rural communities tend to have the least access to financial systems and thus are not able to enjoy the
benefits of financial inclusion. The dominant logic of the banks that the rural population does not want to be equipped with the technology must be kept aside to come up with some innovative way to use these opportunities.
A similar opportunity was seen by Citibank who first started its $25 deposit-based banking services, called Suvidha, in Bangalore. In the first year itself, Citibank enrolled 1,50,000 customers.
With major improvements to be done in the banking sector, the system requires strict measures for effective results. Capital allocation needs to be done in better ways and mergers of various public sector banks will help in strengthening the banking system of the country. Moreover, efficient management of bad loans and a proper loan monitoring system will help in improving the asset quality of banks and minimising the risk of loan lending.
Rahul Kabra is a business analyst at Vistas News