Opinion SBI chairman writes: The banking sector is leading the journey towards an Atmanirbhar Bharat

Fast pace of technological change and structural transformation of the economy can create regulatory blind spots and vulnerabilities, challenging the standards and methods taken for granted over the years

October 7, 2023 05:15 PM IST First published on: Oct 6, 2023 at 07:19 AM IST

The growing optimism over India across the world today is indicative of a premium being placed on the country’s governance structures and its policy apparatus. The government’s policies have enabled the country to become a hub of innovation. Today, in several parts of the country, ideas are being incubated that are leading to the production of novel public goods for people all over the world. Nowhere perhaps are the winds of change so strong as in the banking and financial sector. It has been at the forefront of the transformative journey of the world’s largest democracy.

The past 25 years have seen high growth and stability, notwithstanding several episodes of stress — from the dotcom bubble, to the September 11 attacks, the 2008 financial crisis, the European debt crisis, the Covid-19 pandemic and the Russia-Ukraine War. These emergencies have tested the limits of human knowledge.

India’s banking and financial sector has not been untouched by these forces. The last decade has been particularly challenging. The Covid-19 pandemic caused widespread devastation of lives and livelihoods. The war in Ukraine has compounded the situation.

Over the last 75 years, banking in India has matured into a vibrant sector. The reforms over the past 30 years have been a critical enabler. Consolidation in the public sector banking space, the emergence of private banks, specialised non-banking financial companies (NBFCs) and the emerging fintech ecosystem have increased the diversity quotient of the financial sector and made it inclusive. Banks have left behind the legacy issues of non-performing assets (NPAs) and weathered most exogenous shocks. Internal accruals have become a source of growth capital. With credit costs bottoming out, it is expected that loan growth will be healthy in the coming years.

From following the bricks-and-mortar model, banks in India today are at the cutting edge of technology adoption. Universal coverage of banking through Jan Dhan and the widespread use of technology to deliver financial services through digital channels have transformed finance. Products like mobile banking applications, retail electronic fund transfers, UPI, Aadhaar e-KYC, Bharat Bill Payment System, scan and pay and digital pre-paid instruments have transformed traditional branch banking. The emergence of public financial platforms is going to give further impetus to banking services.

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The Indian banking system is currently moving towards a knowledge-based regime, enabled by AI and cognitive computing across all business functions and processes. The deployment of AI-enabled capabilities can help banks to personalise customer engagement and increase their ability to develop a deeper understanding of customers.

As times change, so does the business environment. This is true for banking as well. Change opens up a new set of opportunities and challenges. The fast pace of technological change and the structural transformation of the economy create regulatory blind spots and vulnerabilities, challenging the standards and methods taken for granted over the years.

If digitalisation has opened new channels of delivering financial services and creating product differentiation, it has also opened several concerns — from the mushrooming of unregulated digital lending apps to crypto-currencies and cyber-attacks. Ease of banking now comes with added responsibility to ensure the availability of critical support infrastructure for a secured payment settlement system, ATMs, internet/ mobile banking, dealing with cyber security risks, and addressing customer grievances — all these ensure that banking services continue uninterrupted.

Climate change has emerged as a major challenge for banks. The associated “equal but differentiated responsibility” of every nation has given rise to many initiatives which will drive the decarbonisation efforts. This opens up new business opportunities in renewables, city gas distribution, green hydrogen and trade in green goods to meet the challenge of net-zero transition. Banks are expected to be major financiers in the fight against climate change. Risk management practices of banks have to account for this new risk, more so when methodological and data challenges are significant.

In addition to technology, the main differentiator for success in the coming years will be the quality of human resources. With a dynamic and rapidly changing environment, the skill gap is widening. To address this, banks and financial institutions have to attract, train and retain talent. There is today a greater need for employees to be flexible, agile, open to new technologies and proactively pick up new skills to remain useful. Consequently, upskilling and reskilling of human resources is a sine qua non to face the emerging challenges. This is where capacity building will play a major role in the financial sector.

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Apart from training, the financial services sector has to invest in research and be open to accepting and developing out-of-box ideas for seamless service delivery and hyper-personalisation of products. Banks and financial institutions will have to consider in-house data science labs or sandbox environments to test out innovative ideas.

Finally, the recent events in the US banking system have highlighted why the governance structure is the backbone of an institution. While external financial stability has not greatly impacted Indian banking, there is no room for complacency. As we strive to become a developed country by 2047, financial institutions will need extraordinary amounts of financial resources to support growth to realise our visions for a brighter tomorrow. Raising these resources would not be a constraint for financial intermediaries with robust governance frameworks as they can command a governance premium. In fact, governance becomes even more important if banks have to insulate themselves from the cost of climate risk.

I am optimistic about the Indian banking system’s ability to catalyse change. Our growth-centric mindset and our demographics have provided us with a once-in-a-century moment to capitalise on our innate strengths. The Indian financial sector is coming out of a challenging decade which saw several crises including the pandemic. It has learnt and grown from these experiences and is fairly sound, much more resilient and equipped to play its role in an era of proactive policy. With a large domestic orientation, banks will perform well as long as the fundamentals of the Indian economy remain robust. Recent policy initiatives of the government such as the Insolvency and Bankruptcy Code and the creation of NaBFID and NARCL have addressed market failures by creating institutions which provide stability to the banking sector in the long run. The banking sector is leading the journey towards an Atmanirbhar Bharat, for equitable and sustainable development benefiting all. This is akin to the success of India’s Chandrayaan-3, that signifies the judicious blending of innovation and technical excellence for the benefit of humankind.

The writer is chairman, State Bank of India