The expansion of digital banking in India has significantly enhanced the customer experience in terms of the ease, speed, and cost of gaining access to financial products, shares Sujan Hajra, Chief Economist and Executive Director, Anand Rathi Shares & Stock Brokers, in an exclusive interaction with Srajan Agarwal of Elets News Network (ENN)
The Reserve Bank of India (RBI) plays a crucial role in shaping the Indian economy through its policies. In your opinion, what are some of the notable policy measures implemented by the RBI in the past year, and how have they influenced the BFSI sector and overall economic growth?
The Reserve Bank of India, like most of the world’s other central banks, has employed aggressive monetary policy tightening measures to control inflation over the past year. To accomplish this, the Reserve Bank of India simultaneously raised policy rates and took steps to reduce systemic liquidity. By increasing the structure of interest rates, monetary tightening reduces demand and, consequently, growth. However, the growth sacrifice remains primarily short-term. By controlling inflation, the Reserve Bank of India has contributed to lowering inflation and enhancing long-term growth and sustainability. With inflation within the Reserve Bank of India’s tolerance zone, the recent monetary tightening has ceased. If this situation persists, the RBI will shift its policy’s emphasis from inflation control to growth promotion.
As commercial banks transmit the rate hikes by the central bank in the early stages of monetary policy tightening, the assets side of the bank’s balance sheet is immediately repriced because most bank loans are at variable rates. In contrast, fixed deposits, which dominate banks’ liabilities, have a much longer tenure, and are consequently repriced over a longer period. Consequently, the net interest margin of banks has increased over the past year, enhancing bank profitability. Moreover, monetary tightening has ensured that economic growth will continue to be sustainable. Consequently, the asset quality of the banking system either remained stable or improved, reducing the need for loan loss provisions. This also increased the profitability of banks.
In recent times, we have witnessed a surge in the adoption of digital banking and fintech services in India. How do you see this transformation impacting the BFSI sector in terms of customer experience, financial inclusion, and regulatory challenges?
The expansion of digital banking in India has significantly enhanced the customer experience in terms of the ease, speed, and cost of gaining access to financial products. The combination of the JanDhan bank account, the Aadhar card, and mobile phone connectivity has made it easier to comply with the Know Your Customer (KYC) requirements, thereby expanding the reach of organised finance. This resolved some of the regulatory challenges in meeting KYC requirements for a large number of Indians, operating in the unorganised sector with limited proof of identity and other necessary documents for opening a bank account.
Digitalisation has also simplified the processes of credit evaluation, information authentication, and credit monitoring. From the geotagging of real estate to the authentication of official email addresses, the use of big data, Artificial Intelligence, and Machine Learning has made client profiling and monitoring significantly faster and more accurate, thereby strengthening the rule-based decision making of banks and other financial institutions. Digital interface has also enabled financial institutions to expand their geographic reach without an extensive branch network. These procedures have accelerated the decision-making process, decreased operating expenses for financial institutions, and decreased transaction costs for clients.
Global economic trends have a substantial impact on the Indian economy. Could you provide an analysis of the current state of the global economy and its potential implications for the BFSI sector in India? Are there any specific risks or opportunities that you believe are worth highlighting?
Currently, the global economy is transitioning from a situation characterised by extremely high inflation and monetary policy rate to one that is more normal. Simultaneously, the global growth rate is slowing considerably, and despite some reduction, geopolitical uncertainty remains elevated. As India is interconnected with the global economy via multiple channels, such as cross-border movement of goods and services, capital flows, technology flows, and bilateral and multilateral cooperations, it cannot remain completely immune to global developments.
India is impacted by a global growth slowdown, high-interest rates, geopolitical unpredictability, and significant investor sentiment fluctuations. Yet, with improved domestic macroeconomic and corporate fundamentals, India continues to be the world’s fastest-growing major economy. Similarly, the Indian financial system faces a challenging environment, but it is faring much better than its global counterparts.
Both the United States and Europe have experienced significant banking sector crises in 2023. The banking system in North America and Europe was impacted by the combination of regulatory forbearance, continuous deterioration of profit and loss accounts and balance sheets for some European banks, and the negative impact of a rapid increase in interest rates, including bond yields. While there have been some indirect effects of these events on the Indian banking system, the limited direct exposure of the Indian banking system to the affected banks and India’s stringent regulatory regime have largely prevented a significant spillover of the advanced country banking sector crisis into India’s BFSI sector.
India has been making efforts to attract Foreign Direct Investment (FDI) in the BFSI sector. From your perspective, what are the key factors that international investors consider when evaluating opportunities in the Indian BFSI market? How can the government and industry stakeholders further enhance India’s attractiveness as an investment destination?
India has taken a number of steps to attract foreign direct investment. This includes enhancing the ease of doing business in the country, expanding the scope of foreign direct investment in India via the automatic route for the majority of sectors, and extending national treatment to foreign companies in nearly all areas of economic activity. There has been a substantial increase in foreign direct investment into India as a result. On an annualised and gross basis, India is currently attracting close to $100 billion in FDI. A couple of decades ago, India ranked 15th among the most preferred countries for foreign direct investment. Now, it is among the top five.
In India, as in the majority of other nations, investment in the BFSI sector by both domestic and foreign entities is regulated more strictly. This is necessary because various types of financial institutions have direct or indirect access to public funds and protection of public funds is a matter of paramount national importance. In addition, financial stability plays a significant role in the context of macroeconomic stability as a whole. A completely open-door policy towards foreign direct investment in the BFSI sector is not possible in any country, including India, given these circumstances.
In spite of this, attracting foreign investment in the sector under effective regulation and after adequate due diligence remains crucial, particularly for companies and markets that utilise new technologies. To attract foreign investment in the sector, it is essential to improve the conditions for doing business, including the simplification of procedural rules, the transparency of regulatory requirements, and the prompt processing of entry applications.
Sustainable finance and environmental, social, and governance (ESG) factors have gained significant attention in recent years. How do you see the incorporation of ESG principles in the BFSI sector in India? What role can financial institutions play in promoting sustainable and responsible investments while balancing the needs of various stakeholders?
While ESG standards have gained prominence in recent years, the BFSI industry in India routinely incorporates many aspects of these standards as a matter of course. For instance, environmental clearance is required for the establishment or expansion of nearly all industries. The evaluation of credit by banks and other financial institutions requires the examination of such clearances.
Similarly, priority sector lending norms for the banking sector place a significant emphasis on lending to socially desirable sectors, such as micro, small, and medium-sized businesses, disadvantaged segments of the population, and underdeveloped regions of the country. Similarly, before extending any financial product, the credit evaluation process utilised by financial institutions considers the implementation of social norms, such as the absence of child labour, in an industrial unit.
However, it is essential to recognise that financial institutions, including banks, are managed according to commercial principles. While it is the responsibility of these institutions to adhere to the rules and regulations established by the competent authorities, these institutions cannot independently define sustainable development or other ESG-related concepts.
Despite this, some financial institutions are independently incorporating sustainable development principles into their operations. As part of green initiatives, for instance, many financial institutions are digitising their operations to reduce paper usage and putting limits to energy consumption. Similarly, certain institutions have begun allocating a portion of their financing activities to sustainable developments such as green energy, resource preservation, and the empowerment and upliftment of socially disadvantaged segments of the population. Numerous financial institutions fund comparable activities as part of their corporate social responsibility initiatives.
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