By S. S. Mundra, Deputy Governor, Reserve Bank of India
I would begin by quoting Brett King, the author of famous book ‘Bank 3.0’.
“Customers don’t use channel or products in isolation of one another. Everyday customers would interact with banks in various ways. They might wire money to a third party, visit ATM to withdraw cash, go online to check salary credit, pay an utility bill , use their credit card to purchase some goods from a retailer , fill out a personal loan application online, ring up the call center to see what their credit card balance is or report a lost card. More sophisticated they are, they may also trade some stocks, transfer some cash from their Euro A/c to USD a/c put up a lump sum in a Mutual Fund or sign up a home insurance policy online”.
The above statement denotes the diverse set of banking applications which technology can support In fact, there is a need of a single channel solution to multiple product offerings. It must, however, be remembered that technology is just an enabler and not a panacea for all ills. Most, if not all, Indian banks have invested heavily in web-based and mobile-based delivery solutions. Each of these channels is supported by a different vendor and each one uses different technology which increases complexity and involves cost. Further, technology is ever evolving and adoption of new technology for staying contemporaneous is a costly proposition. Hence, unless we are able to optimally exploit all the capabilities of the technology enabled delivery solutions, we could be looking at unproductive investments.
While there is a lot of euphoria around the adoption of mobile banking and mobile payments, the model has been relatively less successful barring a few countries where the right environmental factors existed. I am talking here about the delivery of financial and payment services by using the mobile device rather than its use as an access channel for internet banking etc. In the Indian context, an objective analysis would reveal various reasons for slow adoption. On the other hand, there are technical issues like type of handsets, variety of operating systems, encryption requirements, inter-operable platforms or the lack of it, absence of standardised communication structures, difficulty in downloading application, time lag in activation etc. These get accentuated by the operational difficulties in on-boarding merchants and customers and customer ownership issues. The interplay of these factors has stymied the deployment and adoption of mobile banking as an effective and widely accepted delivery channel. Issues of coordination and cooperation between banks and telcos, is another aspect which acts as either a driver or a barrier to the adoption of mobile banking. These issues need to be quickly resolved if the mobile has to serve as an influential delivery channel for distributing banking products and services in India.
Let me also highlight some opportunities that technology throws up. Take for example the results displayed on the Google search page which is personalized. Each time an individual runs a search at Google, the website collates details of the sites visited/links clicked by that individual and loads more of those websites his/her future searches. There are more ATM transactions than searches on the Google webpage at present. However, the kind of personalisation Google has achieved in its searches has not been attempted in the area of advertisement on ATMs.. This could be an area for the banks and their software vendors to work on in future so as to generate further sales leads.
Few Qs seeking As
Let me leave you with some questions that the banking profession and the bankers would need to find answers to ensure their relevance in the emerging landscape.
(i) Can there be a possibility of account number portability on similar lines as mobile number portability? So, if an individual is not happy with the service received at one bank, he can possibly opt for shifting his banking relationship, lock, stock and barrel to another bank. Of course, there could be issues around loan contracts etc. but there is no reason to believe that such challenges cannot be surmounted and pave the way for a massive disruption in the way banking is conducted today.
(ii) How long can the banks continue increasing their retail loan portfolio? Unless some means to pool and distribute these loans to other investors in the market is created, the retail lending pipeline can get chocked quite quickly.
(iii) How is crowd funding going to impact lending business of the banks in future? The amount of funds raised by crowd funding platforms worldwide has increased progressively from $ 1.5 bn in 2011 to $ 2.7 Bn in 2012 and further to $ 5.1 bn in 2013. I hear some of you say it is negligible in volume. The pace of growth however, is quite fast and combined with the peer-to-peer lending business this could create disruptions, at least for some of the players who operate in the same segment.
(iv) If Mobile Banking were to succeed, would plastic money still be needed? Basically there are two questions rolled in one. First, whether mobile banking can succeed and if that is the case what implications would it have for the future of ATMs and the debit cards that have been issued by banks. There is justifiably a growing need for reducing the reliance placed on cash by the system and hence, if more and more people moved to mobile/ internet based payments, the plastic cards and the investments made thus far, would be rendered useless unless put to more imaginative uses.
(v) What IFRS implementation would mean for the banking system? IFRS accounting could potentially overstate assets or overstate capital position. The question is how prudential regulation would exist alongside IFRS? Proposed impairment calculations under IFRS, accounting for interest income on Effective Interest Rate basis and presence of multiple systems for operations and accounting of different portfolios would mean that IT systems would have to be upgraded/realigned for IFRS migration. Banks would also need to overcome challenges around converging policies for financial accounting and tax accounting for preparation of financial statements. The banks would need to train their staff in various departments like credit, and treasury, etc. for acquiring proficiency in IFRS accounting.
(vi) Would the large corporates continue to borrow from the banks? Of late, the global markets, particularly the emerging market economies, have been flush with funds flowing in on account of variants of QEs launched by the Central Banks in the Advanced Economies. Many large corporate houses have been able to access funds at very cheap rates without needing to reach out to banks. The sustained deflationary trends in the Euro Area and Japan portend further bouts of QEs which can adversely impact the lending business of banks in the emerging markets. Further, the large corporates in developed countries normally access financial markets directly for their funding requirements rather than commercial banks. Hence, even while this time-specific event of QEs might fade away, as Indian economy and the financial markets mature, more and more large corporates could start bypassing banks for their funding requirements.
(vii) Would the pain from the loans restructured earlier return to haunt the banks? My understanding is that the prolonged global economic slowdown might have thrown off the projections made earlier at the time of restructuring the advances in the immediate aftermath of the crisis. As the moratorium period comes to a close, the banks would need to take a hard look at the techno-commercial viability of these projects and take the losses wherever the viability seems in jeopardy. Timely decisions, including for recall/recovery of the loan, wherever the financial prospects are unviable, would be critical.
Let me also give a perspective on the global regulatory reforms and how it might impact the Indian banks. Basel III norms have been announced and set to be implemented as per the indicated timeline, with the liquidity regime already kicking in from January 1, 2015. So you are well-versed with the new regulatory phrases-leverage, capital conservation buffers, counter-cyclical capital buffers etc. The D-SIBs guidelines have also been announced and the list of banks considered systemically important in the domestic context would be unveiled in August 2015. Besides, being subjected to stricter capital and liquidity buffers, these banks may also be nudged to prepare detailed ‘recovery and resolution plans’. Negotiations are also on at the Financial Stability Board level for implementation of a TLAC (Total Loss Absorbency Capital) framework for the banks identified as G-SIBs. The essence of all the above discussion is that the banks would need to substantially augment their capital bases to stay in the business. The question is where do you find such capital?