By Bikash Narayan Mishra
Indian banks are all set to chart a new course. As India aspires to be a $5 trillion economy in the next three years and touch $7 trillion by 2030, the banking system needs to be strong and resilient so that it can power the economy and absorb unanticipated global shocks.
A decade ago, we had the monumental problem of non-performing assets in banks. We also had the twin balance sheet issues impacting both banks and corporates. But the reforms initiated by the government and the Reserve Bank of India ensured that the banking sector got on track. The Bankruptcy Law, Asset Quality Review initiated by RBI in 2015, setting up of the National Asset Reconstruction Company or NARCL in 2021 were some of the far reaching measures that builded capacities and addressed the issues plaguing the banking sector.
On the back of these reforms, banks have made a turn around. In FY 24, India’s banking sector net profit crossed Rs 3 lakh crore for the first time ever. Recently S & P Global ratings revised their rating outlooks on six Indian Banks; including two Public Sector Banks(PSBs) from “stable” to “positive.” A recent report by SBI research further points out that contrary to popular perceptions, the performance of PSBs are much better compared to private and foreign banks.
Globally, the dictum is that banks should build up provisioning and capital buffers in good times, which can be used for absorbing losses in a downturn. Already various rating agencies and the regulator have sounded a word of caution for rapid growth in unsecured personal loans portfolio, practices in gold loan portfolio and new challenges like growing reliance on algo credit models. As lenders move towards more digital banking, developing specific sector capabilities, offering tailored products, are some areas where special focus is required to build long term capacities and address the ever evolving challenges.
Diligence: Bank Frauds
The RBI’s FY24 annual report indicates. that the number of fraud cases reported in FY24 were 36,075, up nearly 300 per cent from the 9,046 cases reported in FY22. While, the amount involved has fallen from Rs 45,358 crore to Rs 13,930 crore, it indicates that many retail customers are now susceptible to frauds as against large borrowers gaming the banking system. The RBI’s analysis also shows that while small value card/internet frauds contributed maximum to the number of frauds reported by the private sector banks, the frauds in public sector banks were mainly in loan portfolios.
While the RBI has proposed to set up a Digital Payments Intelligence Platform which will harness advanced technologies to mitigate payment fraud risks, it is imperative that banks individually set up resilient processes and systems for enhanced operational and cyber risk management. PSBs in view of frauds largely in loan portfolios, should look at standardizing, and expedite assessment of willful default and fraud cases.
Deposit: Resource Crunch
Founder of Kotak Mahindra Bank, Uday Kotak, recently said that India is transforming into a nation of investors from a nation of savers. Reports too, indicate that within financial savings, a shift away from bank deposits to equities and insurance was seen till FY24. The mutual fund industry continues to do exceedingly well and has grown at over 37 percent during 2023-24. The AAUM (Average Assets under management) has reached nearly INR 59 trillion which is 90 percent of total saving deposit of all scheduled commercial banks in the country. While it is all set to overtake the saving portfolio during 2024-25 it may overtake entire CASA portfolio in the following year.
Banks need to recalibrate their approach towards attracting deposits. Maybe they need to set up their own MF subsidiary like SBI, which with a turn over Rs 10 trillion AAUM is the biggest MF house in the country. Lenders should also focus on opening demat accounts and trading platforms to have floats and earn non-interest income. Recently, SBI chairman made a case for tax relief on the income earned from interest, adding that the move would help the banks boost their savings, which can be used to fund projects. The industry collectively should seek similar interventions from the government.
Diversity: AI and HR
While we move towards more algo based lending, we also should focus on strengthening data governance and analytics functions. The opacity of AI & ML (Machine Learning) algorithms can pose challenges, especially in financial decision making. There is a strong need for banks to ensure that AI models are transparent, understandable and can be scrutinized for biases & errors.
At the same time there is a need to strengthen our existing staff, and an important step towards the same is to increase and balance gender representation. As the government with its various schemes looks at broadening penetration of banking solutions for beneficiaries of women-focused programs banks need to promote gender diversity in the workplace with a special focus on the proportion of female employees in senior management. This should be augmented by a well drawn succession planning process which should include role-requirement mapping.
(The author, Bikash Narayan Mishra, is a senior advisor with Indian Banks’ Association. Views expressed are personal)
