Financial services in India experience dramatic transformation

THE banking sector in India, the world's fastest-growing major economy, is poised to witness remarkable changes, especially with billions of rupees being invested in new technologies by both private and public sector lenders. In a country where millions of people did not have bank accounts, there has been a major transformation. The Global Findex database of the World Bank noted that in South Asia, the share of adults with an account rose by 23 percentage points, to 70 per cent.
"Progress was driven by India, where a government policy to increase financial inclusion through biometric identification pushed the share with an account up to 80 per cent, with big gains among women and poorer adults," it added.
Jim Yong Kim, the outgoing president of the World Bank Group, referred to the 'great strides' being made around the world in connecting people to formal financial services. "Financial inclusion allows people to save for family needs, borrow to support a business, or build a cushion against an emergency," he said recently. "Having access to financial services is a critical step towards reducing both poverty and inequality, and new data on mobile phone ownership and internet access show unprecedented opportunities to use technology to achieve universal financial inclusion."
Shaktikanta Das, the new Governor of the Reserve Bank of India (RBI), points out that the Indian banking sector had emerged largely unscathed in the aftermath of the global financial crisis.

On the cusp of transformation
"However, headwinds from international and domestic economic developments posed challenges to the banking sector in recent years," he said. "Indian banking system is on the cusp of a transformation, aided by recent policy measures to reduce vulnerabilities and improve its financial health."
According to Das, several initiatives are underway to strengthen the regulatory and accounting frameworks aimed at increasing the resilience of the institutions. Recent initiatives by the RBI are aimed at ensuring better and timely recognition of stressed assets, sufficient provisioning and an efficient resolution process.

"Recent supervisory data suggests that these efforts are bearing some results and incipient signs of improvement in asset quality of banks are emerging," added Das. "After reaching a peak of 11.5 per cent in March 2018, the gross non-performing asset ratio improved to 10.8 per cent in September 2018. As per the current assessment of the Reserve Bank, the ratio may further improve to 10.3 per cent by March 2019."

Pushing ahead with reforms
The central bank aims to continue pushing ahead with reforms in the sector and does not plan to impose restrictions that could curb their operations. Das says that the RBI is looking at the kind of governance reforms that can be introduced to improve the working of banks. "We do not want to create a framework that imposes restrictions or throttles the functioning of banks," he adds.
The RBI would not like to put impediments on the working of banks, but would allow them sufficient commercial flexibility and create an environment where banks not only emerge from the NPA (non-performing assets) mess, but also expand rapidly. Many nationalised banks in India were crippled by bad loans. The total gross of NPA of Indian banks is a whopping Rs10 trillion and 11 of 21 PSU banks are under the central bank's Prompt Corrective Action. Many public-sector banks are coming out of the crisis and are looking at modernisation and catering to the new customers who are opening accounts.
Private and public sector banks are investing huge sums in upgrading their infrastructure, especially information technology. With major changes in the offing, the RBI is planning a regulatory sandbox for financial technology.
'Innovation labs'
An expert group has already given its report to the RBI. "Financial services, including banking services, are at the cusp of a revolutionary change driven by technological and digital innovations," said the report. "A rapidly growing number of financial entities and technology firms are experimenting with related technological and financial solutions as well as new products in the financial services field, which either modifies the way financial intermediation takes place or leads to disintermediation."
The central bank has also suggested the establishment of 'innovation labs' for both the banking and insurance sectors. In fact, even the Securities and Exchange Board of India (SEBI) is planning to ?come up with a sandbox policy for the development of fintech for the capital markets.
Ajay Tyagi, Chairman, SEBI, said the regulator is examining whether any changes in laws are required in terms of its dispensation. Citing tech experts, he said artificial intelligence and blockchain would fundamentally alter the shape of the capital markets in India and the rest of the world. "They have made inroads in the area of high frequency and algorithmic trading and some bits of fund management as well," remarked Tyagi. "They would find increasing applications in areas of capital market that require rapid data and information processing."

Surge in digital transactions
The dramatic transformation in the financial services sector, where even ordinary hawkers and shopkeepers are accepting online payments through apps such as Bhim or Google Pay, has seen a surge in digital transactions. Many in the banking sector are already heralding the 'Digital Darwinism' era, where technology and society are evolving faster than businesses. The RBI, said governor Das, "is also cognisant of the fact that deepening of digital payment systems will facilitate greater access to institutional finance by the informal sector, furthering the cause of financial inclusion.

"We have very recently constituted a High-Level Committee on Deepening of Digital Payments with Nandan Nilekani as Chairman to suggest measures for increasing digitisation of payments and enhance financial inclusion through digitisation." Of course, the RBI is cautious while giving the go-ahead for new tools and payment systems. Das asserted that the central bank is "committed to play a role as the monetary authority for maintaining mandated price stability objective, while keeping in mind the objective of growth... we will take necessary steps to maintain financial stability and to facilitate enabling conditions for sustainable and robust growth."

- nithin@khaleejtimes.com