Shaktikanta Das: Banking landscape in the 21st century
Speech by Mr Shaktikanta Das, Governor of the Reserve Bank of India, at the Mint's Annual
Banking Conclave, 2020 on the theme "Indian banking sector: The $5 trillion economy challenge",
Mumbai, 24 February 2020.
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It is indeed a matter of great pleasure for me to be here today in the Annual Banking Conclave
of the Mint. I am told that this is the 13th edition of Conclave in what has become a prestigious
annual event attracting the best and brightest minds of the finance and banking industry. This
Conclave provides an important platform to all stakeholders in India's financial and banking
sector for assessing where we stand today and preparing ourselves for where we want to
reach tomorrow.
2. Several issues facing the Indian banking sector have occupied the attention of policy makers
in the last few years. Being a regulator and supervisor of banks, the Reserve Bank stands
committed to ensuring a sound and robust banking system in the country. Emergence of new
business models and new technology and its application in banking and finance have thrown up
new opportunities. With the aim of taking a deeper look at India's banking sector in the context
of these new developments, the topic that I have chosen for my talk today is "Banking
Landscape in the 21st Century".
3. Finance and banking have emerged as engines of global economic growth. It is argued, and
in my opinion rightly so, that technology has played a pivotal role in the proliferation of financial
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services . Cheques, wire transfers, ATMs and credit cards were important innovations of such
nature. Fast forward to more recent times, it seems that we are already witnessing yet another
paradigm shift in banking on the back of a technological revolution that promises better
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customer experience, risk management and returns to shareholders . Given this environment,
it becomes extremely important to understand what it entails for the banking sector and how we
can prepare ourselves for the times ahead. Against this background, let me now begin with
discussing trends in global banking and then I shall dwell on some recent trends in Indian
banking, new dimensions of banking and way forward.
I. Global Banking: Emerging Regulatory Trends
4. The global financial crisis represents a watershed for the banking sector. It exposed the
inherent vulnerabilities of an otherwise formidable international financial system. The crisis
paved the way for an overhaul of the regulatory framework, long lasting changes to the
economic and financial environment, and shifts in the competitive landscape of financial
services industry.
5. International standard setting bodies like the Basel Committee on Banking Supervision
(BCBS) and the Financial Stability Board (FSB) were prompt in addressing the shortcomings of
the pre-crisis regulatory framework. Consequently, many regulatory norms including leverage,
liquidity and capital adequacy were reviewed as part of the Basel-III reforms aimed at making
the global financial system more resilient. To address liquidity risk, new instruments such as
the Liquidity Coverage Ratio (LCR) and the Net Stable Funding Ratio (NSFR) were introduced,
supplemented by large exposures framework capping large and risky exposures. Aimed at
addressing the "Too Big to Fail (TBTF)" problem, the FSB phased in the Total Loss Absorbing
Capacity (TLAC) for the Global Systemically Important Banks (G-SIBs) to rebuild their capital
buffers. Various jurisdictions also adopted other key reforms initiated by the FSB, such as
sound resolution regimes for financial institutions and effective supervision of compensation
practices. Regarding non-bank financial intermediation (NBFI), the FSB has been conducting
annual monitoring exercises since 2011. Broadly, it has been observed that, several aspects of
non-bank financial intermediation which contributed to the financial crisis have considerably
declined.
6. Given the initiatives taken by the international bodies, policy makers across jurisdictions have
been fortifying their regulatory frameworks. These policies are expected to pay back in the
medium to long run by enhancing the soundness and resilience of the global banking system.
More recently, with the global growth slowdown that began in 2018, credit growth, being
procyclical, has decelerated across major economies. This, in turn, has adversely affected
bank profitability. Despite distinct improvement in asset quality, structural weaknesses like
continued overreliance on investment in government securities in the Euro area and wholesale
funding in many advanced economies remain. Nevertheless, capital position of banks has
improved consistently in major advanced and emerging market economies on the back of
various regulatory reforms introduced after the global financial crisis.
II. Indian Scenario
7. At the Reserve Bank of India, we have largely complied with Basel standards in terms of
countercyclical capital buffer (CCCB); capital requirements for central counter-parties (CCPs);
leverage ratio framework; Liquidity Coverage Ratio(LCR); Net Stable Funding Ratio (NSFR);
Domestic-Systemically Important Banks (D-SIBs) requirements; and a Supervisory framework
for measuring and controlling large exposures. On the resolution front, some progress has
been made in terms of the notification issued by the Central Government under section 227 of
the IBC. We may, however, expect to have an integrated framework for resolution of financial
firms operating in India in the near future. The implementation of this reform is of particular
importance for having a resilient financial system in India.
8. In terms of recent progress, the Indian banking sector is slowly turning around on the back of
improvements in asset quality with enhanced resolutions through the Insolvency and
Bankruptcy Code (IBC). Despite the recent decline in impaired assets and a significant
improvement in provisioning, profitability of the banking sector remains fragile. Capital position
of banks has, however, improved on account of recapitalisation of public sector banks by the
Government and capital raising efforts by private sector banks. Nevertheless, the sector
continues to encounter challenges from events like those around the telecom sector.
9. Consequently, the overhang of non-performing assets (NPAs) remains relatively high which
is weighing on credit growth. Also, in view of subdued profitability and deleveraging by certain
corporates, risk-averse banks have shifted their focus away from large infrastructure and
industrial loans towards retail loans. This diversification strategy, while helpful as a risk
mitigation tool, has its own limitations. Further, sector specific pockets of stress need policy
attention. At the same time, proper due diligence and risk pricing in lending is of prime
importance so that the health of the banking sector is not compromised while ensuring
adequate flow of credit to productive sectors of the economy.
10. The banking stability indicator, as reported in RBI's Financial Stability Report of December
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2019 , shows an improvement. Timely mitigation measures like faster resolution, better
recovery, etc., need to be continued to bring down the gross non-performing assets (GNPA)
ratios of all scheduled commercial banks (SCBs). While lower rate of credit growth limits the
size of the denominator for measuring GNPA, risks arising out of global and domestic
economic conditions and geo-political developments persist.
III. New Dimensions of Banking
Emerging Structure of Banking
11. While global banking system is still in the process of addressing the gaps exposed by
global financial crisis, new issues have surfaced and challenged the very core of the traditional
banking business. Globally, banks are facing increasing competition from non-traditional
players, which are taking advantage of digital innovation. Banking structures across the globe
are adapting to these new impulses.
12. Numerous FinTech startups have formed, spanning the banking and financial services
industry. They have entered the payments and remittance space in the sphere of peer-to-peer
lending, crowd-funding, trade finance, insurance, account aggregation and wealth
management. Through collaboration with FinTech players, several banks are applying a hybrid
model where mobile services interact with banking services.
13. Banks are not only facing competition from Fintech companies but also from large
technology companies (BigTechs) which are entering into financial services industry in a big
way. Building on the advantages of the reinforcing nature of their data-network activities, some
BigTechs are venturing into payments, money management, insurance and lending activities.
At present, financial services are only a small part of their business globally. But given their size
and reach, their entry into financial services has the potential to bring about rapid transformation
of the financial sector landscape. It may, of course, bring many potential benefits. Using big
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data, BigTechs can assess the riskiness of borrowers, reducing the need for collateral .
Hence, their low-cost structure business can easily be scaled up to provide basic financial
services to the unbanked population.
14. These developments pose a challenge to banks as well as banking regulators. Banks have
to imbibe these new technology and business practices to remain competitive. Banking
regulators, on the other hand, have to focus on achieving a balance between promoting
innovation and applying a measured/proportional supervisory and regulatory framework. All
these mean that the future of banking will not be a continuation of the past. We would see a
very different banking sector, in terms of structure and business model, in the coming years.
15. So, what would be a possible scenario in India? Distinct segments of banking institutions
may emerge in the coming years. The first segment may consist of large Indian banks with
domestic and international presence. This process will be augmented by the merger of Public
Sector Banks (PSBs). The second segment is likely to comprise several mid-sized banking
institutions including niche banks with economy-wide presence. The third segment may
encompass smaller private sector banks, small finance banks, regional rural banks and
cooperative banks, which may specifically cater to the credit requirements of small borrowers in
the unorganised sector in rural/local areas. The fourth segment may consist of digital players
who may act as service providers directly to customers or through banks by acting as their
agents or associates. The reoriented banking system will of course be characterised by a
continuum of banks. The banking space would also include both traditional players with strong
customer base and new technology led players.
16. In the context of the emerging scenario, a properly worked out consolidation of public sector
banks can generate synergies in allocation of workforce and branches as well as streamlining
of operations to meet the future challenges. The focus has to be on ushering in significant
improvements in efficiency and rationalisation of scarce capital to meet the capital adequacy
requirements. Investments in technology and skill building has to be stepped up. Bigger and
agile banks may be able to reposition themselves with better branding exercises, backed by
improved technology, skills and business models.
17. Ultimately, the strength of a banking system depends on the strength of its corporate
governance that fosters a robust and ethics-driven compliance culture. In this context, the
Reserve Bank has been issuing instructions on corporate governance. For example, the
compensation guidelines for whole time directors, CEOs and material risk takers of banks have
also been substantially modified. Large-scale divergences and frauds observed across banks
raises questions on the role and effective utilisation of internal control systems within banks to
identify areas of emerging risks. The RBI has issued the revised guidelines on the concurrent
audit system in banks, drawing from the recommendations of the Expert Committee under Shri
Y.H. Malegam. The guidelines are aimed at strengthening the internal control functions enjoining
greater responsibility on the audit committees of the Boards while providing them greater
leeway. Besides, RBI would also issue draft guidelines on corporate governance in banks, as
indicated in our annual report and reiterated in the report on trends and progress of banking in
India 2018-19 published in August 2019 and December 2019 respectively.
Digital Disruptions
18. Besides structural changes, digital disruptions will continue to transform the banking sector.
Initiatives undertaken by the Government, the Reserve Bank and the industry have led to a
radical shift towards ubiquitous digitization, which has provided an impetus to adoption of
technology. There is a unique confluence of several positives like demographic dividend, JAM
trinity, etc., that would further support rapid digitisation of financial services in India.
19. With inroads into their traditional businesses, banks are expanding into newer areas such
as insurance, asset management, brokerage and other services. It is heartening to note that
the mindset of banks is changing and they no longer view FinTech firms as disruptive. This
change in approach has provided the financial services sector a sense of security. There is
evidence that Fintech companies are acting as enablers in the banking ecosystem. Banks are
relying on a number of strategies to embrace technological innovation; ranging from investing in
FinTech companies and founding their own FinTech subsidiaries, to collaborating with Fintech
companies. Banks and non-banks are partnering to offer the combination of trust and
innovation to the Indian consumer. This "best of both worlds" approach has resulted in
tremendous growth in the number of digital payments, which is expected to continue. These
strategies can effectively ensure that banks retain market share, as customers increasingly
value more efficient and cost-effective services.
20. In the light of these developments, conventional banking is making way for next-generation
banking with a focus on digitisation and modernisation. The need for brick and mortar branches
is being reviewed continuously as digitisation has literally brought banking to one's fingertips,
obviating the need to physically visit a bank branch for most of the banking services.
21. The movement towards digital payments has also been facilitated by introduction of fast
payment systems, such as Immediate Payment Service (IMPS) and Unified Payment Interface
(UPI), which provide immediate credit to beneficiaries and are available round the clock. The
extent of digital penetration can be gauged from the fact that, each day on an average, the
payment systems in India process more than 10 crore transactions of nearly INR 6 lakh crore.
Today, digital payments account for around 97 per cent of daily payment system transactions in
terms of volume. This has been made possible with an accelerated growth of over 50 per cent
in the volume of digital payment transactions in the last five years.
22. The Reserve Bank has recently started operating its retail payment system, viz., National
Electronic Funds Transfer (NEFT) on a 24x7 basis. This is a game changer and places India
among very few countries which provide this facility. The Bank for International Settlements
(BIS), in a recently published paper, has indicated that the UPI framework of India can become
an international model to facilitate quick and seamless payments not only within countries but
even across countries. There is considerable interest at International fora to understand and
learn from our experience in furthering digital payments and we are very glad to share and
collaborate. The National Payments Corporation of India (NPCI) has also decided to set up a
subsidiary to focus on taking the UPI model to other countries which will help enhance global
outreach of India's payment systems. With a view to encourage competition and further
innovation in the retail payments space, we have also placed on our website a draft framework
of a pan-India New Umbrella Entity (NUE) for retail payment systems for public comments.
Strengthening Regulation and Supervision
23. In the context of ever expanding dimensions of the banking sector in the 21st century, we
need to be aware of the extensive regulatory and supervisory reforms essential for ensuring
stability and inclusiveness of the banking sector. It has been RBI's endeavor to constantly
improve the efficacy of its supervisory and regulatory functions, so that the resilience of the
regulated financial entities can be enhanced. A number of steps have been taken in the recent
past in this regard. In particular, we have reorganised the supervisory and the regulatory
departments of the Reserve Bank with the aim to improve coordination and allocate resources
more optimally. From a supervisory perspective, this will augment the identification of systemic
and idiosyncratic risks which will help us build synergy between off-site and on-site supervision
teams.
24. We are also following a calibrated supervisory approach to bring in required modularity and
scalability, to better focus on risky practices and institutions and to deploy an appropriate range
of tools and technology to achieve our supervisory objectives. We are focusing on a sharper
and more forward-looking off-site surveillance framework as an aid to our on-site supervision. A
Sup-tech initiative is being implemented as a part of the integrated compliance management
and tracking system. This will facilitate transparent and efficient monitoring of all pending
compliances of supervised entities through a web-based interface, automate the inspection
planning process and cyber incident reporting, and ensure seamless collection of data.
Thematic studies will be undertaken across banks and other financial sector entities. New
elements of supervision will also be introduced from time to time. The proposed Research and
Policy Division and Risk Specialists Division will assist in this process.
25. Appropriately recognising the systemic importance of non-banking financial companies
(NBFCs) and their inter-linkages with the financial system, the Reserve Bank has taken
necessary steps to ameliorate the concerns relating to their asset quality and liquidity. The
amendment to the Reserve Bank of India Act 1934, effective August 1, 2019, has further
empowered the Reserve Bank to constructively intervene in the operations of NBFCs. The
asset-liability management (ALM) position and other relevant aspects of top 50 NBFCs are
being closely monitored, which covers all NBFCs with asset size above ₹5000 crores. The ALM
of top 51-100 NBFCs is also being examined by the respective regional offices of the Reserve
Bank.
26. In addition to the four pillars of supervision viz. on-site inspection, off-site surveillance,
market intelligence and reports of Statutory Auditors (SAs), a fifth pillar of supervision in the
form of periodic interaction with all the stakeholders - including statutory auditors, credit rating
agencies, credit information companies, mutual funds and banks having large exposures to
NBFCs - has been instituted to have a clearer understanding of the emerging risks and
developments in the sector so that critical information is available, whenever required.
27. As regards the co-operative banking segment, we have developed a robust stress-testing
framework for urban cooperative banks (UCBs). It also acts as an early warning system for
cooperative banks with the purpose of timely identification of weak banks for appropriate action.
This is a shift from reactive to pro-active supervisory approach, intended to ensure surveillance
of vulnerabilities in UCBs on an ongoing basis. Moreover, as on December 31, 2019, more than
90 per cent of these banks are now on Core Banking Solution (CBS), although efforts are still
required to standardize the solutions and have robust set of internal controls implemented in
the CBS for improved outcomes. The CAMELS (Capital, Asset Quality, Management, Earnings,
Liquidity and Systems and Control) supervisory rating methodology for UCBs has also been
comprehensively revised. We have also taken steps to bring UCBs under the CRILC reporting
framework and issued draft guidelines on exposure norms to mitigate credit concentration risk
and enhancement in Priority Sector lending targets to further financial inclusion. To improve
governance, we have issued guidelines on constitution of Board of Management (BOM) for
UCBs with deposit size of Rs. 100 crores and above while making it voluntary for adoption by
other smaller UCBs. Further, in order to have appropriate regulatory powers for RBI in respect
of co-operative banks, almost on par with those over banking companies, certain amendments
in the Banking Regulation Act, 1949 have been proposed.
IV. Way Forward
28. The changing landscape of the banking industry will unfold in the backdrop of a strong
regulatory and supervisory regime with increased intensity and tech-enabled supervision of
banks. The challenge before banks is to make the best use of technology and innovation to
bring down intermediation costs while protecting their bottom lines. Further, Artificial Intelligence
(AI), Machine Learning (ML) and Big Data are becoming central to financial services innovation.
They can also help in fraud detection and in identifying better ways of monitoring use of funds
by borrowers, track suspicious transactions, etc. by processing large datasets.
29. One of the challenges for policy makers, especially in countries like India, is to ensure that
new innovations in banking sector serve the customer by reducing the cost of financial services
and enhancing the range and access to products in a manner that is safe. Advanced analytics
and real-time monitoring of emerging cybersecurity risks will be critical in detecting potential
threats and enabling pre-emptive action.
30. As the Indian banking sector is propelled forward to a higher orbit, banks would have to
strive hard to remain relevant in the changed economic environment by reworking their
business strategies, designing products with the customer in mind and focusing on improving
the efficiency of their services. The possibilities are enormous. We should be seized of the
issues and act in time.
1
Arner, D. W., Barberis, J., & Buckley, R. P. (2015). The Evolution of Fintech: A New Post-crisis Paradigm.
Georgetown Journal of International Law, 47, 1271.
2
Gupta, A., & Xia, C. (2018). A Paradigm Shift in Banking: Unfolding Asia's FinTech Adventures'. Banking and
Finance Issues in Emerging Markets (International Symposia in Economic Theory and Econometrics, Volume
25).
3
www.rbi.org.in/Scripts/PublicationReportDetails.aspx?UrlPage=&ID=946
4
Bank for International Settlements (2019), 'Annual Economic Report', June.