Das assures RBI commitment to technology
Ten small finance banks (SFBs) have been operationalised under the Reserve Bank of India’s (RBI) licensing policies for universal banks and efforts to build a more competitive, efficient and heterogeneous banking structure in the country.
The SFBs would be regional rural banks and co-operative banks, which may specifically cater to the credit requirements of small borrowers, said RBI Governor Shaktikanta Das, disclosing the latest on SFBs.
Das sees SFBs as the third among the four distinct sets of changes in the banking landscapes emerging in the current decade.
The first of the four would be dominated by a few large Indian banks with domestic and international presence. Second, there will be several mid-sized banks with economy-wide presence, he told the Times Network India Economic Conclave 2021 held in New Delhi on 25 March 2021.
The fourth segment would consist of digital players who may act as service providers directly to customers or through banks as their agents or associates. In fact, digital players would increasingly emerge as critical pieces across all segments, he stressed.
The Governor also dwelled upon the interplay and synergies that could be exploited by these four segments while they compete with each other to move up the ladder. Each of these segments needs to comprehend the future needs of the society and respond to the growth in the Indian financial sector.
He also pointed out that the IT systems need to be developed to handle the exponential surge in the number of transactions. The example of Unified Payments Interface (UPI) which took three years’ (2017-2019) to register a monthly count of one billion transactions, but doubled to two billion a month in a short span of another year, clearly stands out.
This demonstrates the need for scalability of systems and platforms in such a way that it can be easily scaled up, not ‘incremental scalability’, but ‘exponential scalability’, he said.
India is on the way to becoming Asia’s top financial technology (FinTech) hub with 87% FinTech adoption rate as against the global average of 64%, Das highlighted. The FinTech market in India is expected to reach Rs.6.2 trillion by 2025 across diversified fields like digital payments, digital lending, peer-to-peer (P2P) lending, crowd funding, blockchain technology, distributed ledgers technology, big data, RegTech and SupTech, to name a few. The Finch market was valued at Rs.1.9 trillion in 2019.
In a world where the FinTech companies are leading in terms of the volume of digital transactions and playing a more active role in the banking and finance industry, it is important that the commercial banks adapt to the technological changes and work in tandem with these entities so that in future they are part of the ecosystem rather than competing with Fintech companies for business.
“A meaningful collaboration and co-existence in providing affordable and efficient value-added services would help both the worlds,” said Das.
‘While we are on Fintech and technology, it would be extremely relevant to touch upon the developments in our payment systems where India has shown remarkable progress in recent years.
“As the adage goes ‘the best way to predict the future is to create it’. This is our unwavering approach when it comes to the future of payment systems. With our commitment to foster innovation, and provide state-of-the-art and safe experience to users, we have placed ourselves in the forefront of payment systems on a global stage.
“India has emerged as one of the leaders when it comes to payment systems. Sustaining this position is both challenging and exciting,” he said.
The growth rate of Indian payment systems has been phenomenal, creating new records with each passing day. Digital payments volume in India increased at a compounded annual growth rate of over 55% in the past five years to 34.3 billion in 2019-20, almost six times from 5.9 billion in 2015-16.
“Retail payment systems such as the UPI and Aadhaar Enabled Payment Service (AePS) have changed the entire dynamics of retail payment systems as they are being used at every nook and corner of the country. Last year when many other nations were writing cheques to provide stimulus to the people, we, in India, processed 274 crore digital transactions to provide Direct Benefit Transfer (DBT) to the people straight into their bank accounts,” highlighted Das.
The RBI is intensively involved in developing an ecosystem, which would not only nurture the future technologies, but also stimulate the technological aspirations of the financial community, assured the Governor. On these lines, to enable the growth of FinTech in India, the RBI in August 2019 entered into the elite class of select few countries which have their very own regulatory sandbox ecosystem, where any regulated or unregulated entity can come and live test their innovative products or services in a controlled environment.
This is a collaboration between the regulator, the innovators, the financial service providers and the end users (customers) which would ensure that Indian consumers continue to receive the best in class financial services. The responses to the 1st Cohort on “Retail Payments” and the 2nd Cohort on “Cross Border Payments” were encouraging.
Additionally, the Reserve Bank has also created its own Innovation Hub (RBIH). This hub will collaborate with financial sector institutions, technology industry and academic institutions for exchange of ideas and development of prototypes related to financial innovations. The Bank for International Settlements (BIS) and several central banks have also set up such hubs to stay ahead of the curve in technology absorption.
“While doing all these, we need to be watchful of the risks associated with certain technological innovations,” he went on. “That being said, while we are working on introducing a digital version of the fiat currency, the RBI is also assessing the financial stability implications of introducing such a Central Bank Digital Currency (CBDC).”
“As the underlying technology is still developing, we are exploring ways for a clear, safe and legally certain settlement finality, which is most crucial for a secure and efficient payment system. It also needs to be appreciated that there are not many practical instances of operationalisation of CBDC across the world; this calls for utmost precaution so that we can produce a safe and robust model.”
With increased digitisation and development of FinTech, the traditional ways of credit evaluation are expected to be replaced by new-age credit evaluation methods that focus on a slew of non-financial and reliable transactional data. Many FinTech firms have already adopted such an approach but it is expected that in times to come, this may become more mainstream than remaining a niche, according to Das.
This will further facilitate the cause of financial inclusion. At the same time, however, it throws up a host of new challenges in terms of concerns of data privacy, consent, and security. Ethical behaviour of stakeholders in the payments value chain is important to surmount these concerns. Ability of financial sector entities to respond to these challenges may become a key factor in the determination of their competitive advantage.
In the dynamic world of financial services, and more so after the pandemic, FinTech is expected to challenge the financial sector with innovations and its exponential growth, believes Das.
Harnessing FinTech for customer services will effectively control costs and expand the banking and non-banking businesses. The increased use of digital payments brought about by COVID-19 could fuel a rise in digital lending in the current decade as companies accumulate consumer data and enhance credit analytics, he elaborated.
This in turn presents new and complex trade-offs between financial stability, competition and data protection; thereby, warranting new regulatory frameworks and novel ways of monitoring. It is imperative for the financial sector regulators to monitor global developments and formulate policy responses to the risks and the opportunities.
Going forward, banks need to address the financing needs of new sunrise sectors without undermining the traditional sectors of the economy, he told the conclave.
“This conclave gives us an opportunity to look back on what has been accomplished and deliberate on what still needs to be done,” said Das, reiterating that RBI is committed to use all policy tools to secure a robust recovery of the economy from the debilitating effects of the pandemic.
“The Reserve Bank remains devoted to build an enabling environment to develop the financial sector and create necessary preconditions for growth while preserving financial stability,” he underlined. #Fintech #technology #banking #finance #economy /fiinews.com
