Cryptocurrency is currently directionless in India. The uncertainty has left investors, traders, stock exchanges and also start-ups working in the blockchain space puzzled. The government has formed an inter-ministerial group and there is a talk that the government will ban cryptocurrencies. Experts believe India will lose a big chunk of foreign investments if the government passes the cryptocurrency bill.
Cryptocurrency status in India
India has a total of seven exchanges for crypto trading and more than seven million people have invested in it. Also, around 200-250 startups are working in blockchain associated with the cryptocurrency segment. Currently, digital assets and cryptocurrencies have a global market capitalization of $ 1.5 trillion. People are finding cryptocurrency exciting due to the gigantic returns and also because it is an emerging asset class. But the Reserve Bank of India and the government have clarified that they are not in favour of cryptocurrencies or any private digital currency. But the Supreme Court quashing the RBI appeal have given new hope to cryptocurrencies. While the government is in the process of making a cryptocurrency decision very soon, experts believe India will lose foreign funds if it disallows the new currency.
Uncertainty over the fate of cryptocurrency industry continues as the Government is yet to take a final call on the banning and regulation of cryptocurrency.
Foreign investors
“The foreign investors from the US want to invest in India and not China. And if the government bans crypto, they will not come. This will see India losing large funds. Many other countries have passed cryptocurrency bills. Many countries have already added rules and regulations and allowed the cryptocurrency,” said Sankalp Shangari, an Angel Investor. In India, cryptocurrency stock exchanges have raised $5 million and the startups in this space are gaining interest from investors.
“Some of the largest global brands like Tesla Motors, BNY Mellon or even investors like Tim Draper maintain a portfolio of their wealth in crypto assets. They are also investors in India. If the Indian government takes a positive decision on crypto, FDI by global brands into India will increase. However, if the decision is negative, the same brands will pull out of India and go with countries that have friendly regulations. This will lead to massive job losses for India’s emerging economy and young population,” said, Atul Khekade, Co-founder, XinFin, XDC Network, which is building a platform for global trade finance. Cryptocurrency in other countries
Many countries including the US, Singapore, Malaysia, Indonesia, South Korea have framed regulations around cryptocurrency and allowed it. Foreign investors have pumped in funds in these countries as the prices of cryptocurrencies like Bitcoin and Ethereum are skyrocketing.
“Finding a balance and fair regulation around crypto-assets can make India’s economy and rupee stronger. It is not the other way. After the Covid catastrophe, the global economy needs more connectedness through digital trust. If one wants to make their country economically stronger, one has to connect to this new layer of trust and not disconnect itself from it. A disconnect from a new form of trust would be disastrous,” Khekade said.
“By banning cryptocurrencies, India may go backwards. We should understand that cryptocurrency and blockchain as technology have made huge progress in the last five years. Maybe even I would have said no to crypto then. But now the world is moving forward and India should stay behind,” Shangari said.
In India, cryptocurrency stock exchanges have raised $5 million and the startups in this space are gaining interest from investors.
Regulations over cryptocurrency
Cryptocurrency experts believe that banning cryptocurrency is very easy, but the government should think of regulating it. They also claim that cryptocurrency transactions are very transparent.
“Cryptocurrency transactions can be tracked online since they use blockchain technology, which is very transparent and practical for such usage. There have been various research reports that have data that unlawful activities are still funded through traditional cash. All cryptocurrency transactions can be tracked online. It is practically impossible for unlawful activities to be carried out using cryptocurrencies without getting caught,” Khekade added.
Being a regulator RBI wants to protect the interest of the large audience. The challenge with cryptocurrency is its volatility. It has been rising significantly compared to any asset class. While many have made money, there is always a fear, what if customers lose money.
Sovereign digital currency
“A sovereign digital currency wouldn’t solve India’s problem of sustaining its imports and exports to support India’s population. Digital assets and cryptocurrency technology can be used to act as payment obligation and cover collateral risk for millions of Atmanirbhar MSMEs entrepreneurs so that they can be more competitive in the global marketplace,” Khekade said.
Regulators across different jurisdictions are exploring how a central bank digital currency can be adopted.
Experts believe India already has the best payment system in the world. UPI is widely used by people in India. It is not clear why the government would want conflict with its own very successful system, they say. In terms of applications like global trade and finance, export funding that can support the Atmanirbhar Bharat initiative, the government should look at working with existing digital asset players and bring them under regulation. A sovereign digital currency wouldn’t solve India’s collateral problem to sustain its imports and exports to support India’s population.
In 1991, India had to physically transport half of India’s gold Reserves Bank of England to provide collateral to cover the risk for India’s import and exports. Digital assets and cryptocurrency technology can be used to act as payment obligation and cover collateral risk for millions of Atmanirbhar MSMEs entrepreneurs so that they can be more competitive in the global marketplace.
Global banks are tapping local talent and FinTechs in India to strengthen their global innovation capability across their presence in different regions. A centralised innovation team with local presence is a common methodology found across different global banks.
In an exciting panel discussion hosted last week on ‘Innovation In A Borderless Environment’ we explore how global banks are placed in developing their innovation capabilities.
Ash Malik, MD & Head-Technology Centres India, Deutsche Bank, said, “Deutsche Bank is a universal bank offering services from corporate banking to asset management across the globe and we believe in localization which means building deep expertise of the local market and reg environment on ground itself. We’ve regional SMEs in local markets globally aligned so we can provide support round the clock. In the first 6 months of 2020, Deutsche Bank transacted a record of $15 billion dollars of local issue currency and FX for clients across normal Asian market hours and this kind of intense customer focus led to Deutsche Bank being awarded crisis response year award in September.”
Malik explained that they have a local management structure which works closely with desks and play a critical role in establishing relationships with local government and regulators. Last year, DB became the first European bank to receive approval from SAFE Shanghai and to join its pilot payments rail and the objective is to expand cross border trade and simplify the payment process. DB customers now no longer have to perform onerous processes and instead connect to FX payments in seconds.
Malik adds, “Additionally we are partnering with FinTech companies across the region. Overall we’ve a global network of innovation teams across major centres and identify the adoption of strategic emerging technologies. We essentially do it for three key channels, a demand driven model where we co-innovate and collaborate with customers on ground, second, we’ve a scouting team and this team monitors key technologies and capabilities which bank considers strategic like cryptocurrency/blockchain which is going to be key for cross-border transaction this knowledge is used internally to innovate further and finally what we have is internal incubation where all employees in DB are given a platform to innovate.”
Rathnaprabha Manickavachagam, MD & Head-Innovation & Digital Transformation, India & Romania, Societe Generale, Global Solution Centre is driving innovation and digital transformation from India. She said, “We’ve a centralized innovation team headquartered in Paris which specifically looks at mergers and acquisitions like open banking models, collaboration with GAFAs, looking at a variety of ways for cross-border interaction. As they discover models, they work with 27 arms of the bank. Being an outpost in Asia, we’re extremely execution focused where we get different business use cases from businesses and give hands on solutions working with FinTechs and internal teams on emerging technologies. Major work is also delivered on value chain and product transformation.”
She explained how they interact with 16 innovation centres set-up across by Soc Gen, with additional smaller outposts in Singapore and Hong Kong. The innovation ecosystem is quite inter-linked across Soc Gen while we are connected on the strategy, we have a very good connection with extended teams of businesses in Asia, India and Romania, we can also work for the rest of the group in different regions.
She added, “We worked with 8 start-ups in Africa for our bank in the African region, we’ve that kind of mandate interlinked with strategic focus where businesses need help to improve product or topline or customer experience or introduce something new. The innovation set-up is centralized and local as well as convenience and strategic connects on specific projects.”
Ellis Wang, Sr EVP, Group Head of Technology, Transformation and Information at Mashreq Bank has executed a digital inside-out and outside-in strategy. He said, “Digital services became mainstream and we moved our applications to cloud to deliver seamless service. Our digital team is working on internal and external processes, by internally how we can adopt more digital to increase efficiency and reduce operational cost with higher STPs, more automation, etc. When we moved to cloud, we also explored allowing more touch points for our clients. Our innovation team is called ‘One Digital’ we also designed digital inside-out where we leverage APIs to service our clients for their requirements and different ecosystem services from e-commerce to insurance.”
At Mashreq Bank for Ellis the idea is to drive engagement by providing end-to-end service. He adds, “We also look at digital outside-in where we leverage external digital channels to target customers through these channels. We are preparing for hybrid operations. The One Digital team thinks about leveraging emerging tech to service corporate and retail customer base by knowing the customer base and tech.”
At Wells Fargo, Bharat Raizada, Lead-Chief Technology Office for India & Philippines has embraced cross-border capabilities over more than a decade ago and explains how as a part of global organisation innovation is being driven from India and Philippines.
Bharat said, “For innovation, there’s an organisation called Strategy Digital Platforms & Innovation which reports up to the CEO and is focused on driving innovation across organisation and driving value for customers. This SDI organisation works closely with all lines of businesses and has a presence in India and Philippines as well and we continue to work actively from a technology point of view to understand new innovation requirements from short and long term investment perspective.”
“There is a big play from quantum computing on how we can rapidly calculate risk on financial transactions as well as how we think of cryptography. How do we do interplay of data not only big data but small data too. A lot of the work gets done in India and Philippines,” adds Bharat.
The Reserve Bank of India (RBI) in March 2020 had put out Payment Aggregator and Payment guidelines that bars the merchants from storing card data of customers and disallows payment aggregators from storing customer card credentials within their database or the servers assessed by the merchant. PAs and merchants will have to most likely adhere to these guidelines by June 30, 2021
According to payment industry experts and executives that ETBFSI spoke to, this could potentially impact digital payments, particularly the card transactions. Further there are three key concerns viz. systemic risk due to technology build up, one size fits all approach, and customer inconvenience.
One-Size-Fits-All Approach Globally, payment companies and merchants storing card data have to be compliant with Payment Card Industry Data Security Standard (PCI-DSS). PCI-DSS is a set of requirements for all companies who process, store or transmit credit card information having to maintain a secure environment.
In that context the RBI in the PAPG Guidelines holds payment aggregators responsible to check PCI-DSS compliance of the infrastructure of merchants onboarded but doesn’t allow the merchants to save customer card and related data.
Experts believe this is a one-size-fits-all approach and will impact customer inconvenience.
“It makes the card payment experience worse for customers and it’s a step not in the right direction. In India we should encourage as many instruments as possible as the digitisation journey has just started. Somebody preferring a credit card shall be offered the same level of experience as somebody using UPI. In this case cards would’ve a terrible experience than any other instrument,” said a CEO of a large Payment Aggregator, on condition of anonymity.
He added, “Even today, first time digital payment consumers still use debit cards, because UPI requires a bit of understanding, onboarding, etc. Making that experience patchy and bad might not be in the right direction to encourage digital payments, because we can’t expect the consumer to every time add the sixteen digits of the card number and other details especially for recurring transactions.”
While PCI-DSS is a recognised standard world over across different jurisdiction, experts suggest if the RBI’s intention is to prevent data breach and leakage of card data, the regulator can add more things like data localisation and other measures with audits but doing away with it and one-size-fits-all wouldn’t make sense.
Mandar Kagade, Founder & Principal at Black Dot Public Policy Advisors said, “The restriction is broad-based and makes no distinction as to the merchants that have invested in the relevant PCI – DSS standards and the ones that haven’t. It applies a one-size-fits-all constraint to all merchants regardless of whether they are compliant of PCI- DSS and is thus inconsistent with RBI’s recognition of it hitherto.”
Mandar added, “Consistency in the regulatory voice is critical for the growth of the payments sector because payments sector participants and FinTechs will invest in technology relying on that consistency.”
Mandar suggests that payments sector participants that are PCI- DSS compliant should be allowed to continue to store card data “in-situ” and others that are not compliant, may be given a time window to on- ramp and upgrade.
According to Ashish Agarwal, Senior Director and Head – Public Policy at NASSCOM, it’s also a case to look at the applicability of the guidelines on international transactions.
Ashish said, “While it is one thing to make the PAPG guidelines applicable in case of domestic transactions, mandating them on international transactions has left the industry a bit puzzled. How will this be mandated with foreign merchants and foreign acquiring banks is not clear. Already consumers can control use of their cards for international as well as e-commerce transactions. So we want RBI to evaluate the application of this on cross border transactions a bit more and clarify how this is planned to be implemented.”
The Case of Tokenisation If the regulator doesn’t allow the merchants and payment aggregators to store the data on their server, tokenisation could be a way forward. Tokenisation is replacement of card details with an alternate code called “token” which is unique for a combination of card, token requestor and device. In a tokenised transaction the actual card details are not shared with the merchant during transaction processing and the transaction is processed based on the tokens.
Experts believe the industry isn’t ready to roll out full scale tokenisation as there are some limitations at ecosystem level. Currently the RBI has restricted the feature of tokenisation to mobile phones and tablets only.
The CEO of payments aggregator quoted above said, “Tokenisation is not adopted by the industry well, the purpose of tokenisation solves the purpose of not sending card details every-time to the network. But the issuing banks haven’t widely adopted so it’s not widely used.”
To increase the adoption of tokenisation the RBI will have to broaden the applicability to other devices like computer/laptop as well apart from mobile phone and tablets.
Ashish of NASSCOM added, “RBI will have to time the implementation of tokenisation to the ecosystem – we are talking about networks, banks, payment aggregators and merchants. Merchants can’t afford even a small window of disruption and they will be completely dependent on the payments infrastructure. As per our understanding, a minimum of six additional months are needed. The June deadline for PAP guidelines is not looking reasonable. Two things are needed – RBI needs to work with the industry for smooth roll out of tokenisation at scale and only after that the new PAPG should be enforced.”
Ashish also suggests that e-mandate on debit and credit cards, PAP guidelines and tokenisation are all deeply interconnected and without card on file at the end of merchants and PAs, e-mandates can be effectively implemented only through large scale tokenisation at the end of networks and banks, and with PAs maintaining the requisite infrastructure to connect all ecosystem players including merchants, banks and networks, in order to seamlessly transmit unique and merchant-specific tokens. Currently, however, PAs are not geared for that. RBI has set March 31 as the deadline for e-mandate and that needs to be tied into the overall tokenisation rollout plan.
Financial Fragility & Systemic Risk The restriction on storage of customer cards and related data could make the payments ecosystem systemically fragile as merchants and PAs will be constrained to call the Application Programming Interface (API) of the bank to authenticate the consumer every time for execution of the transaction.
Mandar added, “Significant build- up of technology debt at any one of the banks thus exposes the payments ecosystem to significant systemic failure risk albeit at a low probability, the very definition of ‘grey swan/ black swan’. The concentrated nature of the bank market amplifies this “grey swan / black swan risk.”
Q. How do you view the digital transformation journey of banks in India? Neal: If you see most digital transformations around the world, probably 99.99% of them won’t deliver on their promise, I’m not being contentious, it’s just that I have been long in this industry to see not a single software project being on time and on budget feature and that’s just the reality.
Digital transformation is not about software, 99.99% of it might not fail but might not live up to the expectation or the promises delivered by the consultancies who work in this space.
In many companies and banks over the years great IT capabilities have been built and CTO wanted to transform the architecture to make it more agile and open but got delayed due to budgets or prioritizing new products so it gets delayed and delayed and pushed back in creating agile architecture. The same story is with data, banks are brilliant in collecting data and lucky around data monetization. But historically, they’re bad at data and arrived towards the data monetization party too late. We’ve seen wonderful things with Big Techs and E-commerce giants partying on this free data they’ve got and how they’ve monetized.
Banks, by the time they realized and turned up for the party of data monetization, the police (referring to data privacy issues and scandals happened in the past) arrived and everyone is fearful and positioned as “we take care of your data”. While data is safe in banks but it’s lying and lost in disparate systems and nobody knows who owns the data. Banks should use and move the data within the systems and within the regulatory ambit to enrich the life of consumers and then the whole cycle of budget for the exercise repeats and the transformation exercises takes a back seat.
The biggest challenge with digital transformation is not the technology but the culture and people. Having worked across different organizations and industries, I know what good tech culture feels like. I never wanted to work with a bank, because I had been selling to banks for 20 odd years and I know the culture, the big difference between a tech company and a bank is the approach. Bank’s think from an ownership mindset over systems and its people but tech company’s entire model is partnerships. The second thing I noticed is banks are very hierarchical, micro-management, process based roles and I have never seen in any other organizations.
Thirdly, it’s around risk appetite. Banks are very funny, almost schizophrenic because their entire business model is monetizing risk but are skeptical of taking risks due to regulatory or compliance issues or culture. Capital Markets strive on risk, banks’ business is around pricing risk and Insurance companies model is avoiding risk, if you look at these three level it directly correlates to their innovation capabilities.
Banks need to experiment a lot, while it’s a regulated environment but it can start at small things, rigid processes won’t take it anywhere. Technology, Data & Culture is what will drive digital transformation and by the time banks realise it’s too late.
Digital Transformation should start at “Why are we doing this?” “What outcome do we want?” You don’t have to boil the ocean, just fix the bits and pieces which are going to make money. You don’t have to digitise everything, just digitise which is going to make money.
Do simple cultural transformation, you don’t need to get rid of your staff or hire Google employees. Get people the inspiration to try new things and give them the freedom to enjoy their work life.
On the Indian Banks: Banks in India are huge banks with huge staff bases, you can forgive them as compared to the banks in the West, because in India the smartphone churn came later but banks in western didn’t catch-up with the digital transformation even when they got smartphones quiet before India. The population in India is catching up quickly and banks in India have done a fairly good job.
I wouldn’t put India as the most innovative finance market from the bank perspective on what we are doing! I won’t put it in tier 1 innovation, but overall the ecosystem is doing well.
But I would put India on number one around putting up the national infrastructure Aadhar platform and UPI, etc. Regulators, FinTech & e-commerce have been doing a good job.
Q. How do you view Bank-FinTech collaborations? Neal: FinTechs started with competing banks but then eventually realised it’s too hard to go alone and in most of the cases customer acquisition cost and regulatory compliance is too high. Banks have distribution and FinTechs have tech and speed.
In any megatrend if you see, for e.g. e-commerce, The race between Amazon and Walmart, has merged in between from starting at extreme ends. That’s exactly what we are seeing between Banks and FinTechs. Banks are fintech-y and Fintechs are bank-y- more towards building hybrid models. (Neal explained this in a lighter tone)
FinTechs are agile, quick, focus on the client, think differently and don’t have historical roles and technology and quite a lot of it is not directly regulated. Banks are good at security, trust, products but slow, culture issues and expensive.
I know a lot of banks these days say they are FinTech companies that they magically transformed in such a short period of time but when I meet them they are “bankers”.
Questioning banks, Neal asks, do you want to be a bank or tech company? You’re not good at building softwares but as a bank you’re great at being resilient, safe, secured and reliant system and that’s the sweet spot for bank’s technology team and they’re really good at that and they should focus more on that and stuff which they own like digital banking platforms but if you want to do something new and interesting, in all fairness banks should partner with FinTechs and keep their capability with themselves.
That’s where the world is moving towards where you’ve many partners, for e.g. Neo-banking platforms in India. Banks should partner where it makes sense, usually around the UX, RegTech, SupTech, compliance. It takes an average 9-10 months to sell a technology solution to a bank, if you’re a small FinTech and you’ve got a small sales team, you’ve got to understand, is this going to be successful and qualify quickly, you’ve to understand why the bank is concerned if you don’t do pen testing. It’s changed quite a lot in recent times, banks do have a point. In fairness, banks don’t get hacked, I can’t recall any recent incident where someone hacked into and took all money, it doesn’t often happen because of bank’s control and FinTechs have to learn a lot in that.
Banks and FinTechs can build a nice symbiotic relationship and do things at which they’re good at.
Q. What are your views on neobanking entities? Neal: There are different models in this particular space, a bank rolling out a neobank like DigiBank by DBS Bank, even if it fails the bank can roll it back into its fold like how recently BBVA did it with Simple. The other model is building a digital bank from scratch like Standard Chartered did with Mox in Hong Kong, that’s quite an undertaking and there they’re looking at better operational metrics and it’s to be seen how it performs.
For banks doing this the DBS Bank way could be the right way to go which is a hybrid way essentially cutting your tech stack in half and keeping the backend stuff, put a bus or microservices layer and build net new code on top of that. All the front end stuff is new and over a period of time you can replace the stuff below as customers won’t know about it and at the same time bring changes in the culture.
At DigiBank, the bank staff were in a separate building, they had different reporting lines and slightly different roles but stationed more in an innovation lab kind of space.
The second model is getting a license from a regulator and building a bank from scratch like Xinja, Starling, etc. It’s a start-up; these things cost $50mn just for initial build for a full service bank. It’s funny how people tell me how successful these banks are and I’m like can you come back and tell me how successful they’re when they’ve lent some money or got some deposits. They’re essentially a prepaid card with a mobile application and that’s not a bank.
In fairness, I would not like to do that, it’s an expensive affair. The Xinja team was amazing but got blindsided by Covid-19, set high interest rates, the only way I have seen to succeed in a banking venture is to buy your clients, either buy them through free ATMs, free transactions, like In India, banks offer 7% deposit rates. Some way you’ve got to spend a lot of money to get people on your platform. These models kind of make money, Starling has turned profitable because they’ve a business model which works.
The third type are payment apps like Revolut, Monzo, etc. They do transactions, give flashy cards and everyone’s incredibly proud of their cards. We did one with Razer FinTech where if you tap a card the NFC is enough to light the Razer logo and these apps look to scale up on these transactions and hope they grow. Not all of them have been successful in terms of being profitable.
The fourth type, like neobanking platforms we’ve seen in India and in my mind that’s a brilliant play. You don’t need a license as you’re not storing the data. It goes directly to your partners core platform you’re managing the operations and I think that’s kind of great.
The final type which could be worrisome for traditional financial institutions is the neobanks created by e-commerce and tech companies giants because they’re good at technology and they’ve massive scale.
The top three banks according to me are WeBank (China), MYbank (China) and Kakao Bank (South Korea), because they’ve free distribution and tens of millions of clients, so the cost of customer acquisition is low and they’ve data for scoring.
I like the India model which is putting a wrapper on the bank and it’s a smashing idea. Building a digital bank from scratch is only for the brave but there’s money there as you’re doing the traditional bank model better. These ones like payment models we’re going to see lots of failures because the only way they work is by continuously pumping money.
India has taken the right path, some regulators have jumped on this too quickly in terms of Hong Kong and we might see how it will pan out. Singapore, it’s a tiny market but regulators are pushing as banks are refusing to innovate and taking it slow.
Essentially solving customer’s problems is the main idea, banks have been doing it the monolithic way and that’s what digital disruption is about. It’s not about technology, it’s about someone else solving your customer’s problem better than you and that’s digital disruption. Q. Any advice to the regulators? Neal: My advice to regulators is to read science fiction, what is playing out has already been defined, the future is defined. A lot of it is inevitable, regulators should read science fiction, understand tech megatrends because the way it rolls out affects how people operate in a society and how people will purchase products in future and they’ve a difficult job here.
Even if regulators have a team which thinks about future regulation based on future tech and societal trends you’ll be way ahead of the curve, things like blockchain, cloud-computing, we already have hands on it and we are still waiting for it.
While I did get blindsided by how crypto evolved but generally everything else is talked about and is inevitable. My guidance is around tech and societal trends, think about how regulations need to change in the future with fewer regulations.
The cost of regulatory burden for banks goes up and up every year and in fairness if you’re a regulator your job is to write regulation, if you don’t do that you don’t have a job while I do acknowledge Regulators do a fantastic job.
My point is, you keep adding layers on and on and if you write new stuff can’t you just take some other stuff away or simplify what you’ve done. Secondly, be clearer, it’s a challenge and you can’t be wrong as a regulator and they cannot be specific, and that leads to interpretation problems.
Regulators should use technology to enforce regulations, give out clarity and simplify things. In the last five years they’ve changed a lot and are doing a stellar job.
Private lender Federal Bank, headquartered in Kochi, is spearheading digital initiatives across the bank. The idea with digital strategy is to lower the cost and enhance revenues. The bank expects that in the next three years the digital channels will take care of around more than 50% of investments.
Jithesh PV, Head – Digital Banking at Federal Bank in an interaction with ETBFSI, shares his thoughts on the bank’s digital strategy, collaboration with FinTechs, their approach to open banking & how the digital initiatives are supported by a robust backend. Edited Excerpts:
1. What’s the digital banking strategy at Federal Bank? A P&L thought process behind it? We have a multi-pronged strategy for digital in Federal Bank, aligned with the business mantra, Branch Light Distribution Heavy. We have built the best in class digital platforms for our customers and migrating these customers to digital platforms to enable our branches to focus more on customer acquisition and income generation by cross-selling and upsell. We have rebuilt our Mobile Banking into an all in one app with payments, UPI, Investments, Loans, lifestyle, and many other services that allow even non-customers to download and use the app. We have also created an omnichannel platform for Corporate clients, with full-fledged features like Account Services, Supply Chain Finance, Cash Management Services, Payable Management, Receivable Management, Trade Finance, etc.
We have enabled an end to end Open Banking platform that helps the bank to grow inorganically with the help of partnerships. We are now empowering the first neo retail platform, first neo-SME platform, first neo-merchant platform and we are also building our neo-education platform.
All the initiatives are expected to bring revenue to the bank. Today around 86% of our transactions are happening through digital channels and this has helped the bank to focus more on customer acquisition and cross-sell through brick and mortar channels.
We hope that in the next three years, digital channels will take care of around more than 50% of investments, especially MF and also insurance sales. The partnerships will help the bank to garner more low-cost funds. Partnerships are also helping us to manage more sales of PL and Debit Card EMI. The whole digital strategy is focused on reducing costs and enhancing revenue.
2. What goes at the backend in creating a robust digital banking set-up? This is a continuous journey, and how best one can re-align the business and digital strategy in a fast-paced environment, holds the key.
In Financial services, there are multiple lines of businesses and P&L units. Today, Digital is the core of all of this, which cuts across multiple business lines and products.
We have created a separate centre of excellence for Digital to focus on innovation, R & D, enhancing the customer experience, etc while a 300 member IT team is supporting the entire technology platform and infrastructure. Dedicated teams for all critical services are available as a part of the IT infrastructure.
Support systems are also critical in this digital journey and we have a dedicated vertical for customer service-related aspects, a dedicated contact centre, and a back end operations team that manages all reconciliation and settlements. We have our own sophisticated contact centre and active Disaster Recovery sites in different geographical locations.
3. How’s the API Banking/Open Banking set-up evolving at Federal Bank? Banking is getting invisible and embedded in the lifestyle journeys of the customer. A robust API Banking platform provides us the required flexibility in being able to reach new customers and extend our products into various interfaces in a Digital-First world.
At a strategic level, it presents a potent and low-cost distribution channel, whose scale and dynamics can be efficiently managed. The suite of use cases and partnerships supported by API Banking is altering fundamental notions associated with traditional Banking and Federal Bank is leading the pack in this game.
4. How’s the Federal Bank collaborating with FinTechs? While we augment internal capabilities, we are also working very closely with the Fintech community in finding synergies that align with our business goals.
Technologically we have built a very flexible Open Banking Framework and processes that get continually fine-tuned.
This gives us the required agility to interface with partners, based on use-cases that are a strategic fit for us.
We are the preferred partner for Fintechs, which underlines our commitment to co-create and yet provide superior-tech capabilities and process abilities. We have co-created and scaled the largest Gold loan fintech in the country. We clock million+ daily merchant transactions via key partners that serve that segment. We are also working on some interesting NeoBank models, which are expected to take the market by storm.
In the quarter-ended September 2020, the GNPA ratio of scheduled commercial banks improved to 7.7% against 9.3% in the year-ago period. India’s banking sector did see a decrease in its gross non-performing assets (GNPA) owing to the moratorium offered by the Reserve Bank of India (RBI) and due to recoveries and higher write-offs by the multiple banks.
State Bank of India has recoveries worth of Rs 4,038 crore and written off loans to the tune of Rs 5,617 crore. Likewise, ICICI Bank has recovered Rs 1,945 crore, written-off Rs2,469 crore.
Bank
Recoveries
SBI
Rs 4,038 cr
Bank of India
Rs 1,172 cr
Bank of Baroda
Rs 1,642 cr
ICICI Bank
Rs 1,945 cr
Yes Bank
Rs 1,000 cr
Bank
Write-off
SBI
Rs 5,617 cr
PNB
Rs 4,555 cr
BoB
Rs 2,553 cr
ICICI Bank
Rs 2,469 cr
Axis Bank
Rs 1,812 cr
On an overall basis public sector banks accounting for 75% share of GNPAs of SCBs (scheduled commercial banks) experienced a drop in the GNPA ratio to 9.3% in the Q2FY21 against 11.6% in Q2FY20 and 9.8% in Q3FY20.
However, CARE Ratings in its latest report stated that the GNPAs would have been around 0.5% to 0.6% higher had moratorium accounts been classified as NPAs.
Even RBI in it’s Financial Stability Report for July 2020 had warned that the asset quality of the financial system could deteriorate sharply, caused by the lockdown-induced disruptions to both supply- and demand-side factors.
Will lending improve in 2021? As per the RBI’s weekly bulletin, bank credit deployment has already started to witness a decline. The credit growth decelerated to 5.8% and 5.7% during the last two fortnights, compared to last year’s level of 8.0% and 7.9%, respectively (as of November 22, 2019 and December 06, 2019).
Banks have been very selective with their credit portfolios. Sectoral deployment of bank credit has witnessed a downward trend in some crucial industries and sectors. Growth in bank credit to NBFCs declined mainly because of the base effect and risk aversion in banking system due to the COVID-19 pandemic. As for MSMEs, they did secure loans but at higher rates.
In an interview to ET Now, Suresh Ganapathy of Macquarie said, “Bank credit growth continues to languish, with similar trends observed in the NBFC space. There has been a fall in consumption demand, especially in home loans, auto and service segments; and decline in industry credit, primarily on account of risk aversion on the part of banks to lend to MSMEs.”
CRISIL expects the bank credit growth to plummet to a multi-decadal low of 0-1%. Krishnan Sitaraman, senior director at CRISIL, told ETBFSI, “This crisis is unprecedented and so will its economic fallout be, such as lower capex demand as well as lower discretionary spends, to name some. This slowdown credit offtake is significant across segments in the current fiscal. The corporate loan portfolio, which constitutes almost half of total credit, is expected to be the worst-hit, and de-grow this fiscal.” Hence, if the denominator (credit) doesn’t grow the fresh slippages will add to the NPAs, and the GNPA ratio will increase.
There is an improvement in the economy. GST and GDP numbers have shown some growth. The banks are seeing a rise in the credit applications but they are cautious. B Ramesh Babu, MD & CEO, Karur Vysya Bank told ETBFSI, “No one wants to press an accelerator button right now. Because how is it going to pan out no one knows. The current growth is a short term or long term no one knows. So wait and watch mode is preferable.”
Real picture is still awaited The liquidity surplus in the banking system has increased in the week ended January 1, 2021 to Rs 6.21 lakh crore from Rs 5.09 lakh crore in the week ago period. As per RBI data, banks have maintained a liquidity surplus for the last 19 months. “This can be attributed to the inflow of bank deposits surpassing the outflow of bank credit. The incremental bank deposits (over March 20) have grown by 6.7% till December 18, 2020 as against the bank credit growth of 1.7%. With bank deposits outweighing bank credit flows, the banking system would continue to see a sizeable liquidity surplus in the current week, too,” said Kavita Chacko, Senior Economist with CARE Ratings.
The various liquidity infusion measures being undertaken by the RBI — OMO purchases and, the LTRO and TLTRO — have also added to the liquidity surplus.
Experts view that the performance of financial sector would remain under pressure on account of lack of credit uptake, risk aversion, lower fee income and covid-related provisioning. With the overhang of stressed assets continuing, banks will continue to focus on improving their collection efficiency and an immediate turnaround in lending activity seems unlikely.
As the year draws to an end here’s a look at what shaped the BFSI sector in the year gone by:
RBI vs. Covid-19: The Reserve Bank of India came out with a slew of measures to safeguard the financial services sector and the overall economy against the virus triggered pandemic and the lockdowns.
Shaktikanta Das, RBI Governor, during one of his monetary policy announcements.
Since March, the RBI cut the repo rate by 115 basis points to 4%. It also purchased Rs 1.9 lakh crore of G-secs until September. These measures helped in reducing the interest rates in money and debt markets, and even got transmitted to bank lending rates. RBI also maintained an accommodative monetary policy stance, suggesting it could cut rates to inject money into the financial system whenever needed.
Moreover, the regulator provided instant relief to borrowers by wavering off EMIs on term loans for six months — March to August.
Bidding farewell: State Bank of India’s chairman Rajnish Kumar hung up his boots in 2020, after serving the bank in various capacities for almost 40 years, and the last three as its chairman. Kumar is credited with launching SBI’s digital platform YONO, whose valuation he’d estimated to be around $40 billion. Kumar’s vision for the bank was to transform it into a strong bank and at the top of the digital game. And he definitely succeeded at that. In October he was replaced by Dinesh Kumar Khara, previously a Managing Director at SBI.
Rajnish Kumar, Former Chairman, State Bank of India and Aditya Puri, Former MD & CEO, HDFC Bank
Aditya Puri, who was at the helm of HDFC Bank for 26 years, also retired in October to give way to Sashidhar Jagdishan. Puri was at Citi Bank when Deepak Parekh first offered him the job to pilot the newly formed HDFC Bank. Puri, a Chartered Accountant, became the first CEO of HDFC Bank in 1994. And in the past quarter century, he transformed the bank and made it the largest private sector lender of India. Puri is now a Senior Advisor at The Carlyle Group.
Failed banks: In March, RBI placed YES Bank under moratorium and restricted withdrawals to a maximum of Rs 50,000, sending its customers to a frenzy. Shares of the bank tanked to Rs 5.65 a piece, its lowest till date.
Yes Bank customers queue up to withdraw money when the bank was put under moratorium by the regulator
The bank ran into trouble following the RBI’s asset quality reviews in 2017 and 2018, which led to a sharp increase in its NPA ratio and significant governance lapses that led to a complete change of management. The bank subsequently struggled to address its capitalisation issues and get investors. Later, the bank was rescued by State Bank of India (SBI), six private sector banks, and a mortgage lender, who invested a total of Rs 10,000 crore the bank, helping it shore up its capital buffers after they dropped below the regulatory requirements. SBI’s then CFO Prashant Kumar was chosen to head the struggling lender.
Another bank that made headlines is Lakshmi Vilas Bank. In September, in an unprecedented move, shareholders voted against the seven out of a total of 11 members from the senior management including the interim MD & CEO, S, Sundar. According to reports the shareholders were unhappy with the rise in bad loans, value erosion and the future of the bank. The RBI then appointed three members to look after the daily affairs of the bank along with the remaining four senior officials of the bank.
The capital starved LVB was looking for potential mergers and began talks with IndiaBulls Housing Finance, but couldn’t get a nod from the RBI. Later this year, LVB announced merger talks with Clix Capital. But before anything could materialise, RBI put it under moratorium and later announced its merger with DBS Bank India.
Coronavirus health insurance policies : On the basis of guidelines issued by the Insurance Regulatory and Development Authority of India (IRDAI), most insurance companies rolled out their Corona Kavach and Corona Rakshak policies. These short-term policies will cover the treatment cost of the coronavirus disease and remain valid until March 31, 2021. The Corona Kavach policy will cover both individuals and families. The Corona Rakshak policy will only cover individuals.
IRDAI had asked insurers to roll out Covid-19 specific policies Corona Rakshak & Corona Kavach. Industry experts believe many first time buyers have purchased these policies and the sale of these policies has been good.
Above all, the industry accelerated digital adoption, leaving behind the face-to-face service, a dominant mode of distribution and business acquisition. Agents and distributors now interact with customers on video calls for selling products and customer engagement.
The awareness for insurance has gone up significantly towards the concept of protection, the primary reason why insurance exist. Industry experts believe this momentum is here to stay. Further, the industry is moving towards rolling out standardised insurance products like Aarogya Sanjeevani for health insurance, the regulator has also pushed for standardised term cover and travel insurance.
NBFC vs liquidity: NBFCs continued to struggle with liquidity and credit flow. They faced a dual challenge of growth and profitability. The percentage of customers availing the moratorium was relatively lower for NBFCs, while loans outstanding under moratorium were higher than those extended by banks, indicative of incipient stress, said a latest report by RBI. Moreover, the asset quality deteriorated as slippages rose in FY20. However, efforts were made by NBFCs to clean up their balance sheets, as reflected in their written-off and recovery ratios.
Meanwhile, amidst pervasive risk aversion, bank borrowings by NBFCs continued to grow at a robust pace as compared to market borrowings. As the RBI required NBFCs to adopt a Liquidity Risk Management Framework from December 2020, NBFCs gradually swapped their short-term borrowings for long-term borrowings with the aim of maintaining adequate liquidity.
RBI’s NUE: RBI took a leap towards establishing a new umbrella entity (NUE) for retail payments. This entity will set up, manage, and operate new payment systems in the retail space. It is tasked with operating payment systems such as ATMs, white-label PoS, Aadhaar-based payments, and remittance services. All NUEs will have to be interoperable with the National Payments Corporation of India (NPCI)— the umbrella entity that currently manages retail payments in India. However, they will be allowed to set themselves up as for-profit or not-for profit entities. Some big names are already in fray for licence.
