India is likely to emerge as the third largest economy by 2031 and the third largest banking hub by 2040, experts have predicted. The government has consistently strived to promote financial inclusion through various initiatives targeted to bring the country’s underbanked population within the banking gamut.
Traditionally, banks have intermediated between the savers and the investors, offering safety for their funds and some returns to the former and pricing the risks for the latter, covering their operational and other costs, earning their margins and profits in the process. The main goal of these disruptive companies, and their drive towards innovation, is leveraging technology in order to meet the financial needs of customers and deliver experiences that can’t be found elsewhere. Banks, on the other hand, need to cater to a wide audience to function — their offers can be varied, but not niche — and a major concern of theirs, due to the critical role of banking, is risk management. Banks must push back legacy solutions and adopt emerging technologies.
Need to adapt digitisation fast
On the digitisation front, India is doing really well. It has many financial technology companies in the payment space and in the distribution of financial services products. One successful innovation has been the Unified Payments Interface, or UPI, developed by the National Payments Corporation of India. Regulated by the Central Bank, it’s an instant real-time payment system allowing mobile users to transfer funds between banks.
At all banks, digital is becoming core to all banking services as well as the lending business. Currently, for example, 67 per cent of transactions at the State Bank of India are conducted through digital channels. As a part of the Digital India initiative, the government has mandated an open API policy, known as India Stack, giving third-party providers access to the proprietary software for five key programmes: Aadhaar (the Government’s biometric identity database), e–KYC, e–signing, privacy-protected data sharing and the UPI.There are multiple benefits of digital banking such as:
Improved accountability: Since each transaction has a record and is easy to track, the transactions become transparent. With transparency follows accountability. These two together create a safe and secure banking space for the citizens of the country.
Wider reach of banking services: In the past, banking was considered only for the affluent and educated working class. Rural India, which is a larger part of the population, did not have adequate access to banking services. However, the scenario has completely transformed in the last few years. The rural as well as the urban customers, who were not proficient with the banking domain are also using digital payments to a large extent.
Convenience: The convenience of digital banking is noteworthy. Payments and receipts can be made with a click of a button from anywhere with a fully secured gateway. Furthermore, apart from receipts and payments, other digitisation technologies have eased out the bank’s compliances and smoothened the service rendering process.
The Start-up age: Indian start-ups in just four months in 2021 raised approximately $7.8 billion, despite the second Covid-19 wave last year. India is leading the start-up space globally. With several start-ups coming up and growing each day, it is only natural and crucial for the banks, which usually fund these start-ups, to become equally tech–reliant.
Significant reforms this year
The banking sector is set to witness significant reforms in the coming year with privatisation of public sector banks and strategic disinvestment of IDBI Bank on the agenda of the government for 2022. Going by the numbers, the banking sector has done reasonably well in 2021, notwithstanding the impact of the second wave of the pandemic.
Pursuant to the government’s 4R strategy of recognition, resolution, recapitalisation and reforms, non-performing assets (NPAs) of the banking sector have declined to ₹8,35,051 crore as of March 31, 2021.
As per the financial stability report (FSR) released by Reserve Bank of India (RBI) in July 2021, macro-stress tests, on the basis of regression modelling, indicate that the gross non-performing asset (GNPA) ratio of scheduled commercial banks (SCBs), under the baseline scenario, may increase from 7.48 per cent in March 2021 to 9.8 per cent by March 2022. Recently, RBI announced that the GNPA ratio of scheduled commercial banks is likely to increase to 9.5 per cent in September 2022 from 6.9 per cent in September 2021 in a severe stress scenario.
In the report, the central bank noted that the scheduled commercial banks would, however, have sufficient capital, both at the aggregate and individual levels, even under stress conditions.Emerging signs of stress in micro, small and medium enterprises (MSME) as also in the microfinance segment call for close monitoring of these portfolios going forward, it said.
Many government functionaries have compared the new PSE policy akin to the landmark reforms carried out since 1991.
Unveiling the PSE policy in Budget 2021-22, Finance Minister Nirmala Sitharaman had said that barring four strategic areas, PSEs in other sectors will be divested.
In line with the PSE policy, the Finance Minister had in the Budget also announced the privatisation of two PSBs as part of disinvestment drive to garner Rs 1.75 lakh crore.
The Banking Laws (Amendment) Bill, which may be introduced in the upcoming Budget session, is expected to help bring down the minimum government holding in the PSBs from 51 per cent to 26 per cent.
Government think-tank NITI Aayog has already suggested two banks and one insurance company to Core Group of Secretaries on Disinvestment for privatisation. According to sources, Central Bank of India and Indian Overseas Bank are likely candidates for the privatisation. Recently, in a reply to Parliament, Sitharaman had said the Cabinet has not taken any decision on privatisation of two PSBs.
Inflation, Omicron major risks
Inflation and Covid-19 new variant Omicron pose major challenges to the Indian economy.
In the RBI’s latest Systemic Risk Survey (SRS), all broad categories of risks to the financial system — global; macroeconomic; financial market; institutional; and general - were perceived as ‘medium’ in magnitude, but risks arising on account of global and financial markets were rated higher than the rest.
“Commodity prices, domestic inflation, equity price volatility, asset quality deterioration, credit growth and cyber disruptions were rated as the major risks,” according to the 24th issue of the FSR released by the RBI.
The Central Bank noted that the global economic recovery has been losing momentum in the second half of 2021 in the face of resurfacing Covid-19 infections, the new variant Omicron, supply disruptions and bottlenecks, elevated inflationary levels and shifts in monetary policy stances and actions across advanced economies and emerging market economies.
On the domestic front, progress in vaccination has enabled the recovery to regain traction after the debilitating second wave of the pandemic, notwithstanding signs of slowing pace more recently; the corporate sector is gaining strength and bank credit growth is improving.
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