Changing paradigms of financial landscape in India

29 Nov 2023 , 09:25 AM

How the financial landscape in India is changing

The financial sector in India and the financial markets are undergoing a sea change at this juncture. In a recent speech at the FIBAC, jointly organized by the IBA and FICCI in Mumbai, the RBI deputy governor, Rajeshwar Rao, outlined some of the key changes that have already impacted the financial sector in India and how the coming years will see a lot of these changes accelerate and also intensify. The changes in the financial sector and the financial markets are likely to give risk to a number of risks, many of which will be ephemeral in nature, but many would also be structural and tough to contend with. In his speech at the FIBAC, Rajeshwar Rao outlined several key changes happening in the financial sector, how it will change the colour of the financial sector in future and what could be its implications. 

How the banking paradigm is changing

In India, and across the world, the business models of banks have evolved rapidly in tune with the changing times. Today, there is a much greater focus on risk management, not only of apparent risks but also of latent risks. Today, banks are not facing competition from PSU banks, private banks, or foreign banks. Their depending is coming from large NBFCs, fintech companies and others that are using technology as a leverage to rapidly scale up their financial sector business. It only means that traditional rules of the game will change, new rules will get written and a new approach will be called for by the players.

1. As we have mentioned in other places, there will be a lot of emphasis on prudential risk management. The financial market is entering a phase where financial crises will not be gradual, but could hit suddenly. Hence the banks and other financial players have to be equipped with the necessary insurance to get over such a situation. We will talk more about this point later. 

    

2. The young and the intellectually hungry Gen-X and the Gen-Z are likely to come up with stringent customer service demands on banking. That is already happening and will only get more acute in the coming years. In fact, the future of banking cannot be imagined without visualizing the needs of post Generation Z consumers. One clue for banks is that this generation is likely to consume financial service in the same way that they consume other products and service. It will have to offer choice, speed, convenience and surely a technological taste to it. Let us now turn to the more micro shifts likely in Indian banking in the coming years.

    

3. Like it or not, banks will have to transition from a sectoral approach to an ecosystem approach. What exactly does that mean? It will not be like a banking company using technology. In contrast, it will be a technology or quasi-technology company that has banking as its incidental business. The pace may not be what is estimated but one thing is certain that banking will no longer be the exclusive realm of banks. Already, the equivalent of a SAAS model in banking is being talked about. Banking-as-a-Service (BaaS) model is making silent inroads, and banks are already operating as part of the larger ecosystem. More importantly, banks and NBFCs are now proactively partnering with fintech companies for innovative delivery of financial products and solutions. 

    

4. Banking has already become personalized in the last few years, but the change we will see in the coming years will be that banking is going to become hyper-personalised. What exactly does that mean? Today, a retailer has access to a large customer franchise, so banks will leverage such customer franchises to push their loan products. The model of distribution is likely to change drastically. The customer may not have to visit a bank branch to avail a home loan. Also, most of the online transaction would be robotically assisted, removing the need for manual intervention altogether. It is likely to hasten the delivery of financial solutions substantially. 

    

5. Going ahead, the financial sector is likely to undertake business segmentation based on customer preferences rather than based on sectors. The nucleus of the banking operation will shift from the bank to the customer. The focus shifts from customer needs to anticipated customer needs to customer delight. Typical target banking groups would be MSMEs, Women, Senior Citizens, millennials, etc; but in reality, the classifications could be a lot more granular in most cases. It is customer demand and customer needs that will drive innovation in Indian banking in the coming years.

    

6. The biggest change in banking will be in the traditional break-up of assets and liabilities, which could actually undergo drastic changes. Currently, the balance sheet of Indian Banks is dominated by loans on the assets side and deposits in liabilities side. We could expect transformation of composition of bank balance sheets during the forthcoming decade, driven by the natural progression of the Indian economy. This transformation will be further propelled by the widespread integration of technology into business operations and decision-making. Banks could also see a lot more of off-balance sheet financing risks and so the risk management will have to shift in a drastic way. That is because, the customer preferences are likely to shift from age old passive saving products like fixed deposits and saving accounts to more esoteric market-linked investment products. Risk sharing and risk distribution is likely to get more intense in the coming years. 

How should Indian banking manage these big shifts?

Obviously, any shift has to be managed; and it has to be managed effectively. It is not just the RBI, but even the top management of the banks must revisit risk management from a 360-degree perspective. Today banking risk management is focused more on NPAs, net NPAs, provisions and asset liability mismatches. For the bank, the active monitoring of deposit concentration and diversification of funding sources could become key deliverables.

A less spoken aspect of Indian banking is the vulnerability of banks to cyber risks. Banks sit on mountains of valuable personal data and they need to prevent cyber risks strongly. The risks to the consumer have also increased. There are instances of frauds and data breaches on a regular basis now; not only in India but even abroad. Customer face threat from technology induced frauds such like fraudulent apps, breach of privacy, phishing, and deep fakes. The lates risk is from Dark Patterns, which are the design interfaces and tactics used to trick users into desired behaviour. The recent trend towards high cost P2P loans was one such example. 

The key to the banking of the future will be all about winning the customer segmentation paradigm. For instance, there is an urgent need to provide safe and friendly tech-banking to senior citizens. Indian banks are still not friendly towards different abled people, but that also needs to change as banking increasingly becomes the centrepiece of the India growth story. Above all, new paradigms in banking means new risks and that means being proactive and having a distinct and innovative approach to risk management. 

What are key takeaways from the banking shift debate?

The focus of the future cold shift from banks to banking. While banks, regulated by the RBI, will continue to be driven by traditional rules of prudence and conservatism, there is more in the anvil as far as delivery of services is concerned. As Rajeshwar Rao summed it up succinctly, “Banks will continue to be the primary drivers of India’s growth story. However, the trajectory that the banks would adopt during this transition will determine how the banking landscape will look in the next decade.” It will also decide which are the banks that will survive and thrive in the future.