Banks require intensive use of technology for operation which has been solved by on- premises systems, deployed locally on company’s own computer infrastructure. With the emergence of Fintech companies and its challenge to existing banking system forced banks to digitalise its operations. To know more about digital payments going in the BFSI sector, Srajan Agarwal of Elets News Network ( ENN) talked with Harish Madaan, Director, Industrial and Commercial Bank of China Limited.
Q. How is the international banking sector aligning itself with the economical advancement in the BFSI Sector.
Ans: Global economy is going through turbulent times. Earlier it was hit with covid induced slowdown which hampered growth and disrupted supply chain. Governments and Central banks across the globe responded with fiscal and monetary measures to support growth. As the pandemic is waning, growth revival brought demand back to economies supported by abundant liquidity pumped in by central banks. Since the supply chain is still not normalised, return of demand led to a spike in inflation.
Russia-Ukraine war has further exacerbated the inflationary scenario with the rise of commodity prices. In response, Central banks have started rolling back easy monetary policies and raising interest rates to tame inflation. Steep interest rate hikes would slow down growth. Some segments of the market believe that the US economy may enter into recession soon, though data prints like consumer spending, deposit balances and tight labor market have yet not shown any sign of recession.
Banks are very confident about the credit quality, but keeping in mind recessionary concerns they have started building capital buffers. Further, banks are focusing on increasing cost efficiency and productivity saving by investing in technologies. Rising interest rates will increase NIM for banks but their income will be hit by MTM losses in their investment portfolios.
Indian banks too feel that their asset quality concerns are waning. Banks are increasingly focusing on growth. As per RBI’s Financial Stability Report, global financial stability risk has risen but the Indian economy and domestic financial system would be strong and resilient on the back of robust domestic macroeconomic fundamentals. GNPA ratio for scheduled commercial banks has improved to 5.3 per cent as of March 2022 whereas Capital to Risk Weight Ratio (CRAR) has risen to a new high of 16.7 per cent. This reflects that banks are ready to support economic growth. Further, adoption of technology has supported the financial sector to increase its reach.
Q. What measures are you taking to increase credit allocation in the BFSI Sector?
Ans. RBI has projected that the Indian economy will grow at 7.2 per cent in the FY 2022- 23 despite the risk of global slowdown. Financial sector is a conduit to support growth in the economy by providing credit support. With the growth revival, credit off-take is picking up. India’s credit growth is touching 15 per cent in the first fortnight of July 2022 from the lows of 5 per cent during the pandemic. As per RBI Governor’s Monetary Policy Statement, India’s industrial capacity utilisation is 75 per cent that is higher than pre-pandemic level of 65 per cent. Higher capacity utilisation along with steady growth would start an investment cycle by private players. Hence we could see further uptick in credit growth. We are increasingly looking at good quality names in the BFSI sector to keep a diversified lending portfolio among financial services companies.
Q. How SaaS based solutions are helping BFSI sector in boosting the economy of the country?
Ans: Software as a Services (SaaS) allows customers to connect and use cloud based applications over the internet on a subscription basis. The entire stack is managed by the service provider.
Banks require intensive use of technology for operation which has been solved by on-premises systems, deployed locally on the company’s own computer infrastructure. With the emergence of Fintech companies and its challenge to the existing banking system forced banks to digitalise its operations. Cloud computing has become a key technology to develop new financial services to innovate and collaborate with third parties to compete in the digital context. It provides many advantages some are as given below:
1. Agility: While moving to cloud based solutions companies can focus more on their core business development by providing critical solutions to customers to serve them better. Banks can access the ancillary services and specialist functions via third parties and partners by extending the service with APIs.
2. Efficiency: With cloud transformation all data sets are integrated. Application of Artificial Intelligence (AI) and Machine learning (ML)on those data sets provides deeper understanding of customer’s behavior pattern hence would help companies to design customised solutions.
3. Remote Access: SaaS based models provide connectivity through the internet. Since the onset of the pandemic, companies are adopting work from home/ hybrid models. SaaS based solutions would provide a model to work from home by providing access to systems and data similar to office. Hence it will reduce overall cost to companies as well as provide business continuity.
4. Change in IT infrastructure Spending: Cloud based model would change the pattern of IT spending. Companies would move from capital expenditure to operational expenditures. It will take away upfront investments in IT to move to service based fee structure. Hence release initial capital for business growth and development. But companies still have to invest upfront on integration, connectivity and, migration to cloud.
Though there are lots of advantages accrue to the BFSI sector on adoption of SaaS, data security, ownership and regulations are the barriers for banks in India to adopt such technologies aggressively.
Q. Is promoting digital payment is an effective way to stop illegal transactions?
Ans: Before delving deeper into the discussion on digital payment as a medium to stop illegal transactions, I will first briefly explain digital payments and digital payments through digital currencies.
Digital Payments: Digital payments are transactions taking place via digital/online mode without physical exchange of money. Digital payment can be done through cards, UPI, mobile wallets, POS etc.
Digital Currency: Digital currency is like any other physical currency acts like a medium of exchange, store value etc. However, it is issued digitally rather than in physical form like currency notes.
Digitalisation of payment has boosted economies by money circulating in the banking system which helps in credit creation to support economic growth. It would also help the government to reach intended users to provide direct fund transfers. When individuals connect their accounts digitally, all incoming and outgoing funds from their account can be traced, hence would help to stop illegal transactions.
On the other hand, rise of private digital currencies has posed major threat to economic stability as it can be used as a vehicle for money laundering and terrorism financing. The intended misuse of private digital currencies and its rising popularity forced central banks to come up with Central Banks backed Digital Currencies (CBDC). As per the IMF Chief, technologies behind crypto-currencies can be harnessed to mitigate the intended misuse of digital currencies. With issuance of CBDC along with greater oversight by regulators would help to stop illegal transactions.
Q. What are the challenges faced by the banking sector during expansion of the economy around the globe?
Ans: In the business cycle there are four phases – expansion, peak, contraction and trough. Economic expansion refers to the period of GDP growth from trough to peak. During expansion there is rise in employment, consumer confidence, and discretionary spending. Stock prices rise as increase in demand and lower interest rates during the period lead to higher profits for companies. On an average expansionary phase last for 3-4 years.
During the expansionary phase, companies announce new project investment by anticipating future demand. Since overall mood is very bullish, there is a tendency to overestimate future cash flows as lower interest rates and higher demand accrue higher profits for companies. Consumers overestimate their future income which leads them to invest in real estate and other long term investments.What we have learnt from the previous cycles of growth, banks tend to lower their risk standard which leads to over lending to projects. In expansionary phase banks end up lending to projects which are over levered and provide less margin of safety. It is important for banks to continue to abide best lending practices and stay prudent.
With the reversal of business cycle and rising interest rate would make leveraged projects financially unviable. Lending by banks not supported by prudent risk practices may create an NPA cycle for banks. The current expansionary phase is threatened by rising inflation across the globe where Central Banks increasingly now have a single minded focus to tame inflation and are ready to sacrifice some growth output for the same.
Q. Cyber security is a major concern in the economic development. What are your views on this?
Ans: In present times with increase in digitalisation of businesses, threat from cyber crimes has increased. Cyber attacks can paralyse business activities and halt businesses. Cyber security refers to storage and transmission of data over the internet with security. Adoption of cloud computing and data analytics has increased the importance of data as input for product offerings. Further in the BFSI industry, data breach will increase reputation risk for organisations.
According to McAffe and the center for strategic and International studies, nearly 1 per cent of Global GDP is lost to cybercrimes which would be roughly valued around USD 600 Billion. With the rise of digital currencies as well as the prevalent grey market, monetisation of stolen data would not be much difficult. Any vulnerability in cyber security may put the risk of greater transfer of economic wealth.
Hence cyber security plays a very important role not only to protect companies and their cyber infrastructure but also the economic development and well being of the people and economies.