Banking Renaissance: Inclusion, Innovation & Implementation - S. S. Mundra

Shri Arun Tiwari, Chairman, Union Bank of India; Dr. Rajan Saxena, Vice-Chancellor, Narsee Monjee Institute of Management Studies (NMIMS); Dr. Shamsuddin Ahmed, Dean; Dr. Vrinda Kamat, Professor and Programme Chairperson (MBA Banking); Shri. C. B. Ramamurthy; faculty and students of the School of Business Management, NMIMS University; distinguished invitees, members of the print and electronic media, ladies and gentlemen! At the outset, let me commend the NMIMS for imparting excellent education and practical knowhow to its students thereby equipping them to take on leadership roles in various organisations. Institutions such as the NMIMS are playing a key role in developing skilled and capable manpower and are, consequently, serving the nation. 2. It is, therefore, a pleasure for me to be amidst these budding management professionals this morning to deliver the opening address at the seventh Annual Banking Conference “Bank on it, 2014” organised by the NMIMS University. I observe that the Conference has hosted some illustrious speakers in the past and deliberated upon various pertinent issues impacting the banking system. 3. Before I get down to the theme of the Conference, let me begin by quoting two famous Americans. “It is well enough that people of the nation do not understand our banking and money system, for if they did, I believe there would be a revolution before tomorrow morning.” - Henry Ford, founder of the Ford Motor Company “I sincerely believe that banking establishments are more dangerous than standing armies, and that the principle of spending money to be paid by posterity, under the name of funding, is but swindling futurity on a large scale.” – Thomas Jefferson, the principal author of the Declaration of Independence (1776), and the third President of the United States Now that you know what some of the leading statesmen of the world have to say about banks and the banking system, I am not sure whether we should attempt to spread greater awareness about them and risk a revolution! Also imagine these comments came at a time when the credit card, mortgage loan and other personal loans were not even known. However, as a career banker with over thirty five years of experience in banking, I would like to comfort you that the bankers and the banking profession is not as iniquitous, as these two gentlemen would like the world to believe. Why the call for Banking Renaissance? 4. On a more serious note, let me now turn to the theme for the Conference, which is “Banking Renaissance: Inclusion, Innovation & Implementation”. As you might know, the word ‘Renaissance’ has a French origin meaning re- 'back, again' + naissance 'birth' (from Latin nascentia, from nasci 'be born'). Renaissance refers to a period which witnessed a revival of European art and literature under the influence of classical models in the 14th–16th centuries. Another dictionary meaning of renaissance is ‘a revival of or renewed interest in something’. 5. I am not too sure in what context has the word ‘Renaissance’ been referred to in the theme of this Conference. Obviously, you could not be talking of revival of interest in classical mould of banking and about innovation in the same breath. Likewise, I am not too sure whether it has something to do with a revival of or a renewed interest in banking, as I don’t think the interest of the society in banking, more so, in a developing economy like ours, has ever waned. My understanding of the theme for the Conference is that we probably need to deliberate about the innovative measures needed in our banking sector which would render it more inclusive, vibrant, productive, efficient and above all, customer-centric. Therefore, in my address today, I would speak with this basic presumption and I do hope that I am not veering away from the theme. Evolution of banking 6. But before I get into the subject proper, just to set the context, I would like to briefly highlight how the modern day banking has evolved. Banking, in the form that we know today, might have evolved during the 17th century. However, even in ancient Mesopotamia, all the modern banking practices such as deposits, interest, loans and letters of credit seem to have existed. The practice of safe-keeping and savings also seem to have been in existence in the temple of Babylon as early as 2000 B.C. Closer home, Kautilya, in his Arthashastra written in about 300 B.C., has also mentioned about the existence of powerful guilds of merchant bankers who received deposits, and advanced loans and issued hundis (letters of transfer). In the modern times, an experienced Scottish goldsmith, William Paterson, is credited with the idea of setting up a national bank in Britain in 1688, which gave birth to the Bank of England. The modern day banking, in its simplest form, is meant to facilitate financial intermediation between the savers and the borrowers. It also seeks to act as a safe place to store money and earn some return in the process, as also a place to seek simple financial solutions to individual problems. The advent of technology in modern times has heralded three distinct phases in banking: a) Computerisation of back office processes during the 1980s, b) Facilitating higher customer convenience during the 1990s and c) Enabling lifestyle/life stage banking during the 2000s. Thus, over time, the banks have witnessed significant changes in their outlook and have emerged as financial supermarkets offering a range of complex financial products and services on a round the clock basis, duly customised to the needs of their customers through multiple delivery channels. 7. RBI, as the regulator of banks in India, has increasingly deregulated the sector and has allowed the market players to develop products and services best suited to their customers. As a result, both in terms of products & services and delivery channels, there has not been any dearth of innovations. On the product front, the innovations have led to emergence of complex offerings like swaps, derivatives and securitisation, while on the other hand, the delivery channel is no more limited to brick and mortar branches, but has spread to modern, technology-driven channels like ATMs, mobile, internet and the social media, besides the Business Correspondent model. Thus, over the years, there has been tremendous amount of progress and innovations in the sector. However, these developments have, simultaneously, raised certain pertinent questions: Whom have these innovations benefited? Are these product offerings demand driven? Have the banks addressed the ‘suitability and appropriateness’ question? Have the charges for various services been made transparent and non-discriminatory? Why banks are still a place where ordinary mortals fear to tread? Why has a large section of the society remained financially excluded despite sincere efforts of the regulator as well as the policy makers? 8. Having an insider’s view of India’s financial system, first as a commercial banker and now as a central banker, I intend to use this opportunity today to share my perspectives on the approach adopted by RBI as the regulator of Indian banks for making the Indian banking sector more inclusive and relevant to a large cross-section of the Indian economy and society. I shall also delve on the challenges which the banking system is encountering in realising the goal of universal financial inclusion and the innovation and reforms that may be necessary to overcome some of these challenges. I also wish to emphasize that having bright and innovative ideas do not have any meaning until and unless they are acted upon. I, therefore, compliment the organisers for including ‘implementation’ as an element of the theme for the conference, as I believe that rigor in implementation is extremely important for realisation of the dream of universal access to financial services and products. Why is Financial Inclusion necessary? 9. The ILO Declaration of Philadelphia in 1944 proclaimed that “Poverty anywhere is a threat to prosperity everywhere.” It is universally agreed now that Financial Inclusion helps build domestic savings, bolster household, domestic and financial sector resilience and stimulate business and entrepreneurial activity, while exclusion leads to increasing inequality, impediments to growth and development. Thus, financial inclusion is an important tool for poverty alleviation as it not only connects individuals to the formal financial system, but also inculcates savings habit among them. Hence, Financial Inclusion or inclusive banking is a precursor for inclusive and sustainable economic growth. Financial Exclusion: Dimension of the problem 10. An accusation that has come to be levied against the banking sector in the aftermath of the Financial Crisis is that it has failed to be ‘inclusive’. Let me tell you that the Indian banking system is not alone in failing the ‘inclusion’ test. It is only the degree of exclusion that varies between different jurisdictions. The Financial Inclusion Action Plan (FIAP) developed by the G20 Global Partnership for Financial Inclusion mentions that the universal financial inclusion initiative requires bringing the 2.5 billion people (or about half the working age population) currently excluded, into the formal financial system. 11. That brings us to the question how inclusive is the Indian financial system? Census 2011 gives us some answers. Out of 24.67 crore households in the country, only about 14.48 crore or 58.70 per cent households had access to banking services. Further, of the 16.78 crore rural households only about 9.14 crore or 54.46 per cent households were availing of banking services. But that is only one aspect of the financial exclusion story. The statistics on number of individuals or households that are credit-linked makes for an even more gloomy reading. The World Bank Findex Survey (2012) points out that only about 35 per cent of Indian adults had access to a formal bank account and a meager 8 per cent borrowed formally in the last 12 months. If we were to broaden the canvas and examine the exclusion in the other financial segments of insurance and securities market, the situation is far worse. Initial Efforts at Financial Inclusion 12. Having recognised early the social and economic imperatives of broader financial inclusion, both Government and the Reserve Bank have pursued this goal over the last several decades, but with limited success. Starting with the nationalisation of banks, priority sector lending requirements, launching of Lead Bank Scheme, establishment of Regional Rural Banks (RRBs), Service Area Approach, Self-Help Group-Bank Linkage Programme- all these innovative programmes were launched with the aim of taking banking services to the masses. Starting in 1990s, however, the focus shifted to strengthening financial institutions as part of financial sector reforms. Despite all the above efforts, the extent of financial exclusion has remained staggering. Why did these efforts fail? 13. The target driven approach to social banking could be counted as one of the main reasons for the failure of these efforts as these initiatives could never become part of the business strategies of banks. The banks were more interested in somehow trying to meet the lending targets, mostly at subsidised rates of interest, or with subsidy from the Government under various government directed schemes. The banks never treated social banking as a viable and profitable business proposition. They always worked under the presumption that the poor can neither pay normal interest rates nor could they earn enough without subsidies; while in reality the poor continued to pay exorbitant interest rates to informal sources of finance. For any activity to become sustainable and scalable it has to be viable. Regrettably, there has never been a concerted effort on the part of the banking system to identify specific business opportunities within these groups and to develop viable business models to realise them. I would like to reiterate our firm belief that banking for poor is viable and scalable only on commercial lines, of course, without an exploitative intent. Reform Era Setback 14. During the period starting mid 1980s and till about 2005, the regulatory focus shifted to consolidation and profitability of banks. Since social initiatives, as argued earlier, were not integrated with business plans and were thought of as non-viable, they were the first casualties. A number of rural branches were closed down or merged or were shifted to semi-urban areas as they were considered unviable. Excessive Reliance on Public Sector Banks 15. The thrust of social initiatives has always been on the public sector banks while the private sector banks and foreign banks have not been given adequate social obligations. Besides, too many authorities involved in pursuing financial inclusion also, at times, resulted in dissipation of structured and planned efforts. Absence of Technology 16. In the absence of appropriate enabling technology, reaching far flung areas of the country without a brick and mortar structure, proved to be a difficult and expensive ordeal. What has changed now? 17. In the last few years, it has been realised that for financial inclusion to become a reality, there has to be a sustainable business and delivery model. Further, availability of technology as an enabler has now created avenues for developing cost effective solutions for the mammoth task of providing banking services to six lakh plus villages in the country. The lessons learnt from the initial attempts at promoting financial inclusion have also proved to be vital inputs in recalibrating our financial inclusion strategy. The RBI's Approach to Financial Inclusion 18. The failure to achieve meaningful progress in financial inclusion forced the regulators and policy makers to have a rethink on the approach. It began with defining what Financial Inclusion actually meant and where should the energies be focused. RBI has defined Financial Inclusion as “the process of ensuring access to appropriate financial products and services needed by all sections of the society in general and vulnerable groups such as weaker sections and low income groups in particular, at an affordable cost in a fair and transparent manner by regulated, mainstream institutional players”. Thus, financial inclusion has two fold objectives: To connect the excluded with the formal banking system in order to help them gain an understanding of the financial services available and equipping them with the confidence to make informed financial decisions. Providing door step banking services to all the six lakh villages and meeting their life cycle financial needs through appropriate savings, credit, remittance and insurance products. Planned and Structured Approach 19. RBI has been following a planned and structured approach to address the twin issues of demand and supply of financial services. The efforts have been aimed at creating an enabling environment for the banks. Wide-ranging strategies from a relaxation of regulatory guidelines to provision of new products and supportive measures have been adopted to achieve sustainable and scalable Financial Inclusion. Bank- Led Model & Leveraging Technology 20. RBI has advocated a bank-led model for financial inclusion with thrust on leveraging technology. We firmly believe that the success of FI initiatives greatly depends on technology which would enable emergence of cost efficient delivery models. Though we have advocated the use of technology, we are agnostic to the platform to be used for pursuing financial inclusion objectives. Banks have been accorded the freedom to adopt solutions which can be easily scaled up and customised as per their requirements. Recent innovations under Financial Inclusion 21. RBI has not been found wanting insofar as experimenting with innovative solutions to further the cause of financial inclusion is concerned. However, we have always believed that innovation does not mean developing complex solutions to simple problems. Also, innovation need not always involve cutting edge technology. Hence, some of the innovative practices we have encouraged banks to follow, merely involves making small adaptations and a change in mindset. Let me explain some of these initiatives. a) Business Correspondent/ Business Facilitator Model 22. Beginning January 2006, Reserve Bank has permitted banks to utilise the services of non-governmental organisations (NGOs), micro-finance institutions (other than Non-Banking Financial Companies) and other civil society organisations as intermediaries in providing financial and banking services through the use of Business Facilitator and Business Correspondent (BC) models with an objective of solving the list mile connectivity issue. Banks were encouraged to connect the BC network with their Core Banking Solutions (CBS) and also to develop offline solutions to overcome the network connectivity issues experienced in some areas. As the uptime of the equipments was of paramount importance, the banks were advised to ensure that equipment and technology used by BCs are of high standards. Interoperability of BCs at the retail outlets or sub agents of BCs has also been permitted, provided the transactions were carried out on-line, on CBS. The list of entities that can be appointed as BCs has also been expanded substantially over time. b) Simplified branch authorisation 23. RBI has considerably relaxed the branch opening norms for banks whereby they do not require prior RBI permission for opening branches in centres with population less than 1 lakh. To further step up the opening of branches in unbanked centres, banks were mandated to open at least 25 per cent of their new branches in unbanked rural centres. Banks have also been advised to consider frontloading (prioritising) the opening of branches in unbanked rural centres over a three year cycle co-terminus with their Financial Inclusion Plans. c) Combination of Branch and BC Structure to deliver Financial Inclusion- ICT Based Accounts - through BCs 24. RBI has been advocating a combination of Brick and Mortar structure and the BC network to extend financial inclusion, especially in geographically dispersed areas. In order to provide efficient and cost-effective banking services in the unbanked and remote corners of the country, RBI directed commercial banks to provide ICT based banking services – through BCs. These ICT enabled banking services have CBS connectivity to provide all banking services including deposit and withdrawal of money in the financially excluded regions. The use of smart cards, hand held devices / POS machines along with bio-metric authentication facilitates digitisation of Financial Inclusion process. d) Opening of Basic Saving Bank Deposit Accounts (No-frills accounts) 25. On the products side, banks were directed to make available Basic Savings Bank Deposit Accounts (BSBDAs) for all individuals with zero minimum balance and facility of ATM card/Debit card, effectively making opening of a basic savings account a fundamental right for every eligible Indian citizen. Further, banks were also advised to provide in-built overdrafts in such basic savings accounts so as to meet the emergency credit needs of the customer and prevent them from having to approach money lenders in distress situations. The provision for entrepreneurial credit has also been simplified in the form of KCC for farm sector households and GCC for non-farm sector households. e) Relaxed KYC norms 26. One of the major constraints faced by the people in getting linked to the formal financial system was the strict Know Your Customer (KYC) norms prescribed for opening bank accounts. To facilitate easy opening of accounts, especially for small customers, the KYC guidelines have been simplified to the extent that these accounts can be opened by way of a self-certification in the presence of bank officials. Further, to leverage upon the UIDAI initiative, RBI has allowed ‘Aadhaar’, to be used as one of the eligible documents for meeting the KYC requirements for opening a bank account. Very recently, the RBI has also allowed banks to use the E-Aadhaar facility provided by UIDAI for KYC purposes. f) Pricing of advances freed 27. Banks have been provided the freedom to decide the pricing of loans given to customers with a view to ensuring the economic viability of banks’ Financial Inclusion initiatives. Financial Literacy as a facilitator of Financial Inclusion 28. As financial markets are becoming increasingly complex with serious problems of information asymmetry, the need for financial literacy and education has become even more acute. Besides, there is a general lack of awareness among the financially excluded population about the benefits of being connected to the formal financial system. This highlights the importance of the task of promoting financial literacy, which faces numerous challenges in a country like India, on account of wide disparities in literacy levels, social/ economic development, widespread use of regional languages, etc. Recognising the importance of financial literacy as the stepping stone towards financial inclusion, Reserve Bank has taken several steps in recent times for promoting financial literacy. ‘Project Financial Literacy’ aims at disseminating information regarding the central bank and general banking concepts to various target groups (which includes school and college-going children and the rural/urban poor). Implementation: Issues and Challenges 29. Let me now dwell upon some implementation challenges that need to be overcome if the goal of attaining universal financial inclusion has to be achieved. a) Believing in Financial Inclusion as a viable business 30. There is still a widespread belief that if the poor have to be provided financial services, it must be done in a subsidised manner or as an act of charity. And this belief has kept the poor bereft of these services while keeping the regime of rationing, queuing and patronage alive. Contrary to common perception, financial inclusion is a potentially viable business proposition because of the huge untapped market that it seeks to bring into the fold of banking services. Financial Inclusion, prima facie, needs to be viewed as “money at the bottom of the pyramid” and in order to tap this opportunity, banks would need to have in place an appropriate business and delivery model in line with their business strategy and comparative advantage. If the banks start believing in this business, they would be able to innovate and, in the process, start reaping the benefits of economies of scale. This will ultimately create an environment of competitiveness amongst banks which will benefit the unbanked population. b) Monitoring performance 31. Along with the implementation efforts, the monitoring of the performance to access the impact is also very crucial. The impact assessment helps in initiating policies and removing barriers to Financial Inclusion. We have encouraged banks to adopt a structured and planned approach to financial inclusion with commitment at the highest levels, through preparation of Board approved Financial Inclusion Plans (FIPs). A structured and comprehensive monitoring mechanism for evaluating banks’ performance vis-à-vis their targets has also been put in place. c) Leveraging the banking network for extending social benefits: Direct Benefit Transfer 32. The introduction of direct benefit transfer by validating the identity of the beneficiary through Aadhaar will help facilitate delivery of social welfare benefits by direct credit to the bank accounts of beneficiaries. The government, in future, has plans of routing all social security payments through the banking network using the Aadhaar based platform as a unique financial address for transferring financial benefits to the accounts of beneficiaries. Besides providing timely delivery of benefits at the door step of beneficiaries, it would save Government the administrative cost involved in delivering cash to the intended beneficiaries and help minimise the chances of leakages in the system. Banks must initiate steps to proactively open bank accounts for all eligible individuals and seed these accounts with Aadhaar numbers for ensuring smooth flow of the social security benefits through the banking channel. Pradhan Mantri Jan Dhan Yojana (PMJDY) 33. Pradhan Mantri Jan Dhan Yojana has been announced recently to give a further push to Financial Inclusion initiatives in India. The scheme has been launched with the objectives of providing universal access to banking facilities, providing basic banking accounts with overdraft facility and RuPay Debit card to all households, conducting financial literacy programs, creation of credit guarantee fund, micro-insurance and unorganised sector pension schemes. The objectives are expected to be achieved in two phases over a period of four years up to August 2018. Under the scheme, technological innovations like RuPay card and mobile banking are also being made use of. Banks are also permitted to avail of RBI’s scheme for subsidy on rural ATMs and UIDAI's scheme for subsidy on micro ATMs to augment their resources at the village level. Way forward 34. Banks’ business models for financial inclusion should be designed to be at least self-supporting in the initial phase and profit-making in the long run, with an unwavering focus on affordability. The banks need to think and act differently and make themselves more flexible so as to meet even the smallest requirements of the rural population. Banks need to move from a cost centric model to a revenue generating model by offering a bouquet of deposit, credit and other products and services. The products and services should be designed in such a way that it suits the needs of people in unbanked rural areas. i) BC Model 35. There are multiple challenges being faced while implementing BC model. Sustainability and scalability of the BC model is essential. There are issues around BCs’ cash management services and remuneration to be paid to them. There is a need to have a close look at the problems constraining the model and to develop practical solutions that help in realising the full potential of this channel. More and more innovative products will have to be introduced which would benefit both banks as well as the rural people and at the same time make the BC model more viable. ii) Differentiated banking 36. RBI is set to create a framework for licensing small banks and payments banks. These differentiated banks would be expected to serve niche interests and to meet credit and remittance needs of small businesses, unorganised sector, low income households, farmers and migrant work force. This aims at allowing a wider pool of entrants into banking to further Financial Inclusion. iii) PMJDY 37. The objective of Financial Inclusion as defined by us is very much in sync with the objectives sought to be achieved under the PMJDY. We are fully committed to the implementation of the scheme and are trying to ensure that the efforts of RBI converge with the work under the PMJDY so that the common objective of financial inclusion is achieved. Further, the idea is to enable more transactions in these accounts and providing more credit products, which will not only help rural people to avail of credit at comparatively lower rates of interest but, at the same time, also make the financial inclusion process viable for banks. With implementation of PMJDY, it is expected that the beneficiaries of social security will get the direct credit of their entitlements without any leakage. However, for successful achievement of the same, it is to be ensured that there is timely and accurate listing of beneficiaries. Message for students 38. Before I conclude my address, let me leave you with a couple of thoughts. Very shortly you would be venturing into the job market and start working. My advice to you is that you should choose your profession/vocation carefully and work hard in whichever field you opt for. But I would also advise you to work smart. Working smart, among others, also involves need for networking. You must choose your associates wisely and cultivate that association. My second thought is around what I call the theory of ‘1-2-3’ being practiced in the professional job market. These days, the organisations seek to hire one person, pay him/her the salary of two persons and expect him/her to work equivalent to three persons. If you do not guard against that, you would end up burning out very early in your professional lives. My advice to you would be to develop the spirit of a marathon runner and not that of a sprinter. Only then would you be able to fully realise the potential imbibed by you through the quality education received from this esteemed institution. Conclusion 39. Financial Inclusion cannot be achieved without the active and collaborative involvement of all stakeholders like RBI, other financial regulators, banks, governments, NGOs, civil societies, media, etc. Good intentions always need to be supported by concerted action for achieving goals. The support of policymakers, regulators, governments, IT solution providers and public at large would be essential to bring about a decisive metamorphosis in Indian banking and making it inclusive. 40. Finally, though Innovation is desirable, excess of the same could also mean higher cost and time overruns. It is important to strike a balance between no innovation and excess innovation. Innovation need not always be revolutionary. Enough on the financial inclusion front could be achieved even by thinking ‘inside the box’, that is, by focusing on doing the basics right. I would like to conclude by quoting Gene Roddenberry, “It isn't all over; everything has not been invented; the human adventure is just beginning.” 41. I once again thank Narsee Monjee Institute of Management Studies University and the faculty and students of the School of Business Management for inviting me to this Conference for sharing my thoughts on a topical subject. I am sure that you would now have a better understanding of the issues involved and you would reflect on the challenges at hand in making banking inclusive. I am also confident that some of the students present here would join the banking sector and serve as torch bearers for “inclusive banking and inclusive growth” in the days ahead. I hope the deliberations during the day would also pick up some issues that I have laid down on the table. We have a lot of expectations from our youth and I do hope some of you could take up research in this area and come up with actionable solutions for financial inclusion. 42. I wish you a successful conference today as well as success in all your future endeavors. Thank You. * Chief Guest Address by Shri S. S. Mundra, Deputy Governor, Reserve Bank of India on “Banking Renaissance: Inclusion, Innovation & Implementation” at the seventh Annual Banking Conference “Bank on it , 2014” organised by the Narsee Monjee Institute of Management Studies in Mumbai on October 11, 2014.

Problem Loan Management and MSME Financing R. Gandhi

I am very glad to be talking to you on a subject which is very contemporary and very critical for the economy. Both the Government of India and the Reserve Bank have long been convinced of the contribution, and of the enormous potential, of the SME sector to the economic growth, employment and income generation for vast masses of the country. Recent Government pronouncements about “Make in India” are fundamentally based on these convictions. Therefore, detailed discussions and debate on the ways, procedure, precautions and follow-up on SME financing are very apt and timely. I appreciate the efforts of CRISIL and others in this regard. I understand that in this workshop you all had discussed about SME Loan Life Cycle Management, Credit Scoring as a technique for credit appraisal, strategies and tools to monitor SME loans and handle problem SME loans, including building early warning systems, etc. I am sure all of you have been benefited by these discussions. Let me dwell a bit more on the problem loan management, as currently it is a serious issue for the banking sector. Asset Quality 2. Asset quality is an important parameter to measure the health of the banks. In the last twenty years or so, the Gross Non-Performing Asset Ratio as well Net Non- Performing Asset Ratio of Indian banks have been showing a declining trend due to many factors, and very significantly due to the sustained improvements in the credit risk management practices adopted by the banks. The gross non-performing assets (NPAs), in percentage terms, have declined steadily from 15.70 per cent at end March 1997 to 2.35 per cent at end March 2011. However, asset quality of the banking system has suffered significant deterioration in the recent years. NPAs expressed in terms of Gross NPA Ratio increased to 4.11 per cent at the end of March 2014. During the period, the ‘restructured but standard loans’ (restructured in terms of regulatory dispensation provided to banks for supporting viable accounts facing temporary difficulties and in line with public policy imperatives) as a per cent of gross advances increased considerably from 1.14 per cent in March 2008 to 5.87 per cent in March 2014. There has been further deterioration in asset quality during March to September 2014 and the GNPA ratio and restructured advances ratio increased to 4.54 per cent and 6.13 per cent respectively at the end of September 2014. As such, the overall stressed advances (NPAs + Restructured advances) remained high with considerable increase in the recent period working out to 10.67 per cent for the banking system as at the end of September 2014. In terms of value, with Gross NPAs at `2,798 billion and Restructured standard advances at `3,780 billion, the total stressed advances amounted to `6,578 billion at the end of September 2014. Stressed Sectors 3. Based on the levels of stress in different subsectors, it was observed that (i) ‘infrastructure’ (ii) ‘Iron and Steel’ (iii) Textiles (iv) Mining (including Coal) and (v) Aviation services had significantly higher level of stress and thus these sub-sectors/segments could be taken as ‘stressed’ sectors in the current scenario. Macro-Stress tests 4. Macro-stress tests are conducted by the Reserve Bank of India to ascertain the resilience of banks against macroeconomic shocks. The results of this analysis presented in the Financial Stability Report-December 2014, suggest that under the baseline scenario, the GNPA ratio is expected to be around 4.0 per cent of total advances as at the end of March 2016. However, if the macroeconomic conditions deteriorate, the GNPA ratio may increase to 6.3 per cent under severe stress scenario by March 2016. Drivers for deterioration in Asset Quality 5. Theoretically speaking, there could be various factors which may cause a good loan to turn into a problem loan. Some of the external reasons could be economic recession, non-payment in other countries, inputs/power shortage, price escalation, accidents/ natural calamities, and changes in government policies in excise/import duties, pollution control norms, delay in disbursal of loans by lenders, etc. Internal reasons for loan accounts becoming problem loans could be diversion of funds for expansion/diversification/ modernisation/for taking up new projects, for helping/ promoting associate concerns, time/cost overrun during the project implementation stage, business (product, marketing, etc.) failure, inefficient management, strained labour relations, inappropriate technology/ technical problems, and product obsolescence, etc. 6. The current deterioration in the asset quality of Indian banks could mainly be attributed to domestic and global economic slowdown, delays in statutory and other approvals, especially for projects under implementation, relatively aggressive lending practices during upturn (2003-08), as evidenced from high corporate leverage, risk concentration, especially to large greenfield projects, and of course, lax risk management systems of banks, etc. NPA Management 7. Managing NPAs has a lot to do with managing productive assets and ensuring effective corporate governance. Management of NPAs begins with the realisation of benefits that accrue in running a quality advances portfolio and warrants a better understanding of risks in lending. The Board of Directors has to decide a strategy on NPA management keeping in view the regulatory norms, the business environment, the asset profile, the available resources, etc. The strategy should be reflected in Board approved policies and procedures to monitor implementation. 8. The essential components of sound NPA management are: Prevention of NPAs through prudent underwriting Effective early alert system Quick and effective remedial measures to prevent slippage Faster resolution of post slippage 9. A multi-pronged strategy of preventing slippage of standard assets into NPA category and reducing NPAs through cash recovery, up gradation, compromise, legal means etc., is called for. Restructuring 10. Generally, stress in borrowal accounts is more likely to be resolved in terms of recovery if the company is in operation. For this to be effective there must be a system of identifying the weakness in accounts at an early stage. Banks should put in place an ‘Early Alert’ system that captures early warning signals in respect of accounts showing first signs of weakness. This would help the banks to take remedial measures and prevent the account from becoming NPA. Banks may restructure / reschedule the accounts of viable entities and assist the entity to tide over the temporary difficulties faced by them. 11. Once a weak account is identified, the bank needs to consider various corrective actions. One of the corrective options is restructuring. In spite of their best efforts and intentions, sometimes borrowers find themselves in financial difficulty because of factors beyond their control and also due to certain internal reasons. For the revival of the viable entities as well as for the safety of the money lent by the banks, timely support through restructuring in genuine cases is called for. The objective of restructuring is to preserve the value of viable entities that are affected by certain internal and external factors and minimize the losses to the creditors and other stakeholders. We already have a detailed regulatory prescription, separately for Corporate Debt Restructuring mechanism for consortium advances and standalone restructuring by individual banks. 12. The objective of the Corporate Debt Restructuring (CDR) framework is to ensure timely and transparent mechanism for restructuring the corporate debts of viable entities facing problems, outside the purview of BIFR, DRT and other legal proceedings, for the benefit of all concerned. In particular, the framework aims at preserving viable corporates that are affected by certain internal and external factors and minimize the losses to the creditors and other stakeholders through an orderly and coordinated restructuring programme. The CDR Mechanism has been designed to facilitate restructuring of advances of borrowers enjoying credit facilities from more than one bank / Financial Institution (FI) in a coordinated manner. Framework for Revitalising Distressed Assets 13. The Reserve Bank of India has released in early 2014 a Framework for Revitalising Distressed Assets in the Economy. The Framework outlines a corrective action plan that will incentivise early identification of problem cases, timely restructuring of accounts which are considered to be viable, and taking prompt steps by banks for recovery or sale of unviable accounts. The main features of the Framework are: i) Central Repository of Information on Large Credits (CRILC) has been set up by RBI to collect, store and disseminate credit information with the reporting entities in respect of borrowers enjoying aggregate exposure (funded + non funded) of `50 million and above. ii) Early formation of a lenders’ committee (Joint Lenders Forum) with timelines to agree to a plan for resolution; mandatory beyond the exposure of `1000 million and above. The Corrective Action Plan may include any one of the following: Rectification Restructuring Recovery iii) Incentive and disincentive structure for lenders to take corrective actions in a timely manner iv) Incentives for lenders to agree collectively and quickly to a plan: better regulatory treatment of stressed assets if a resolution plan is underway, accelerated provisioning if no agreement can be reached. v) Improvement in current restructuring process: Independent evaluation of large value restructurings mandated, with a focus on viable plans and a fair sharing of losses (and future possible upside) between promoters and creditors. vi) More expensive future borrowing for borrowers who do not co-operate with lenders in resolution. Support to viable but stressed Accounts 14. Despite the best efforts by banks, slippages do occur. Once an account slips into NPA category, then the focus should shift to upgradation. At this juncture, it is important to understand that the Reserve Bank has not barred banks from sanctioning need based additional finance to borrowers whose accounts are classified as NPAs. On the contrary, Reserve Bank’s extant guidelines envisage a situation where banks may need to sanction additional finance to borrowers under stress to revive / rehabilitate the borrower and to preserve the economic value of the asset. Mere classification of an account as NPA need not result in withdrawal of support to viable borrowal accounts. However, while considering their support to accounts under stress, banks should make proper distinction between wilful-defaulters / non-cooperative / unscrupulous borrowers on the one hand, and, on the other hand, borrowers defaulting on their debt obligations due to circumstances beyond their control. Sale of NPAs 15. In the event of failure of the above mentioned measures, banks could resort to filing suits with Debt Recovery Tribunals or invoke the provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. Banks may also sell their NPAs to asset reconstruction companies. The RBI has granted Certificate of Registration (CoR) to 14 ARCs so far. In addition to asset reconstruction companies, banks may also explore selling the NPAs to other banks, non-banking finance companies or other financial institutions, who have the requisite skills to resolve the NPAs efficiently. In February 2014, regulations on sale of stressed accounts have been amended to facilitate emergence of a market for distressed assets. Recovery Channels 16. Despite various corrective measures, if upgradation is not proving to be possible due to unviable nature of the borrowers’ business, the bank should take steps to recover the loans through any of the recovery options available to them. Among the various channels, the amount of NPAs recovered under the SARFAESI Act, 2002 formed almost 80 per cent of the total amount of NPAs recovered in 2013-14. The SARFAESI Act has, thus, been the most important means of recovery of NPAs. NPAs of SCBs Recovered through Various Channels (Amount in ` Billion) Year No. Particulars Recovery Channel Total Lok Adalats DRTs SARFAESI Act 2012 -13 1 No. of cases referred 8,40,691 13,408 1,90,537 10,44,636 2 Amount involved 66 310 681 1,058 3 Amount recovered* 4 44 185 232 4 3 as per cent of 2 6.1 14.1 27.1 21.9 2013 -14 1 No. of cases referred 16,36,957 28,258 1,94,707 18,59,922 2 Amount involved 232 553 946 1,731 3 Amount recovered* 14 53 244 311 4 3 as per cent of 2 6.2 9.5 25.8 18 Notes : 1.* : Refers to amount recovered during the given year, which could be with reference to cases referred during the given year as well as during the earlier years. 2. DRTs: Debt Recovery Tribunals. 17. However, the present legal system is unable to cope with the mammoth task, considering the ever increasing number of suits and the limited infrastructure available at DRTs / courts. Further, there are various issues relating to DRT and SARFAESI, which needs to be strengthened to make these channels more efficient and effective. They are being examined at various levels. 18. Banks also explore entering into a compromise settlement / one time settlement with the borrower to optimise its recovery in present value term. MSME Financing 19. As this workshop was meant to specifically discuss SME financing, let me share a few thoughts on this matter. 20. As I mentioned in the beginning, Micro, Small and Medium Enterprises (MSMEs) play a major role in economic development, particularly in emerging countries. There is heightened attention by the international community on MSME sector. This is primarily because of the critical importance of job creation in the recovery cycle following the recent financial crisis, and the MSME’s potentials in that respect. 21. Yet, lack of access to finance is a major obstacle to their growth. Although the situation can differ among countries and individual businesses, the financing gap for SMEs in the developing country has a few well-accepted causes. These include Information asymmetries, higher risks, Sizeable transaction costs and a lack of adequate collateral. These factors can be exacerbated by institutional factors within a country. Finally, there are a number of "demand side" considerations that deserve more attention. 22. The following three factors play a considerable role in perpetuating the MSME financing gap - The poor quality of projects seeking funding, the inability of MSMEs to make the best possible use of available resources of funding and the negative attitude displayed by MSMEs towards equity financing. 23. Unfortunately, there is no authentic data available about the SME financing gaps. The informal segment within the SME sector is so vast and, by definition, no authentic information about them is available. However, various data sources and studies indicate that most of the small firms rely on internal financing and informal sources. 24. A study by the IFC and McKinsey and Company (McKinsey) suggests that there are close to 365-445 million micro, small, and medium enterprises in emerging markets of which 25-30 million are formal SMEs and 55-70 million are formal micro enterprises, while the rest (285-345 million) are informal enterprises. According to the same study, close to 45 to 55 per cent of the formal SMEs (11-17 million) in the emerging markets do not have access to formal institutional loans or overdrafts despite a need for one. The finance gap is far bigger when considering the micro and informal enterprises; 65-72 per cent of all MSMEs (240-315 million) in emerging markets lack access to credit. The size of the finance gap varies widely across regions and is particularly daunting in Asia and Africa. Some studies about SMEs in India have reported that as high as 93 per cent of their financing needs are met by internal and informal sources. 25. In order to scale up the best practices in SME Finance, the G-20 SME Finance Sub-Group executed a global SME Finance stocktaking exercise with various SME finance models. This exercise entailed the collection of 164 SME finance models spanning across a broad spectrum of interventions, including: (i) legal and regulatory framework; (ii) financial information infrastructure; (iii) public support schemes; and (iv) private sector initiatives. The stocktaking exercise confirms the rise in various parts of the world of specific business models aimed at providing financial services to SMEs in a cost-effective manner. From microfinance up-scaling to bank down-scaling, including community banks, these models share common characteristics: they reduce cost to serve through intensive use of technology and/or the adoption of cost-effective clientrelationship models; they combine offering of savings, transactional, and credit products, with a view to increase generated income; they use advanced risk management technology to maximise the risk/reward balance; and, they achieve strong focus on the small and/or medium enterprise segment, to help implement excellent execution capabilities in the above areas. 26. Hence, the key challenge is to support banks in extending credit facilities to SMEs. It will be a greater challenge to reach informal SMEs. This is due to SME intrinsic weaknesses, flaws in delivery models and, most importantly, lingering deficiencies in the enabling environment for financial services: i.e. the financial infra-structure covering accounting and auditing standards, credit reporting systems, and collateral and insolvency regimes. Some other ideas 27. In this workshop, you all had detailed deliberations on how to assess credit needs of an SME, how to monitor the relationship and what new techniques you can adopt for this. Let me give you a flavour of ideas beyond this: Reaching informal businesses will have to be built on microfinance approaches. It all has to start with account relationship. The financial inclusion programmes like PMJDY will facilitate key information inputs to banks about the existence of the MSMEs, whether in formal and in informal segments. Banks should leverage these data and information feeds to identify potential MSMEs for suitable financing opportunities. Banks will also need to develop ingenious and innovative products suitable for the MSMEs. I strongly believe that this aspect needs to be grounded more at the grass root level. Based on broad parameters given by their central / head offices, the actual packaging of the products and services will have to happen closer to the field. Key elements of such packaging will have to include Risk-sharing facilities. Banks will also have to play a much larger role than being the financiers. MSMEs often lack management skills, tools, governance and financial planning expertise. Banks will have to help these entrepreneurs leverage the RSETI like institutions to fill the gaps. Another major weakness that inhibits the growth of this sector is the lack of good records management by the MSMEs; this often results in poor credit ratings and a perception of risky business. Some innovative solutions using cloud computing have been tried successfully in some countries like Ghana. Perhaps this can be studied and adapted for Indian environment. 28. These interventions need to be accompanied by enhancements to the enabling environment for MSME lending, such as improved credit bureaus, and collateral and insolvency regimes. For the success of effective SME financing models, it is imperative that suitable supporting environment for the financial sector is in place. In particular, financial information and the ability to enforce collateral are seen as critical necessities. Weaknesses in these areas appear to impede more aggressive financial services growth in developing markets. 29. We are very aware of these requirements and have taken several measures in that direction. Our recent guidelines, based on Aditya Puri Committee recommendations, envisage that credit information now will flow to all credit bureaus simultaneously and therefore the financial entities can have a holistic view about any prospective borrower at one go. As regards collateral registry, steps have been initiated in this direction. The Central Registry of Securitisations, Asset Reconstruction and Security Interest of India (CERSAI) has come on the scene for registering security interests over property. Other types of registry and inter-linking registries are also being debated. As regards insolvency, especially for MSMEs, as announced in the last Budget, a Committee is working out an insolvency framework. 30. Public support schemes (funded facilities, guarantee schemes, and state banks) represent the large majority of the collected models. India has also adopted these strategies. CGTSME, MSME lending as a priority sector lending for banks etc measures have been in line with this thought. 31. Although MSME financing and microfinance models have started yielding desired results, equity financing remains a challenge. Given that banking and lending services represent the bulk of SME financing in the developing world, especially for small firms, equity financing presents an opportunity for the development of a complementary financial product. Conclusion 32. To conclude, let me emphasize that increasing access to finance can only be successful if qualitative aspects are taken into account. Adhering to principles of responsible finance and the G-20 principles on innovative financial inclusion can serve this purpose. It should also be noted that although financial access is critical for MSME growth, expansion of financial access should not be achieved at the cost of financial stability. Appropriate prudential measures need to be exercised while offering finance to MSMEs, in order to avoid the potential pitfalls stemming from excessive credit. * Valedictory Speech delivered by Shri R. Gandhi, Deputy Governor, Reserve Bank of India on January 30, 2015 at a Workshop organised by CRISIL on “Credit Risk and Problem Loan Management” at Goa. Assistance provided by Shri A. K. Choudhary and Shri Nethaji B. is gratefully acknowledged.

A New Banking Landscape for New India S. S. Mundra

Smt. Arundhati Bhattacharya, Chairman, State Bank of India; Smt. Chanda Kochhar, MD and CEO, ICICI Bank Limited; Smt. Shikha Sharma, MD & CEO, Axis Bank Limited; Shri Aditya Puri, MD, HDFC Bank Limited; Shri Sunil Kaushal, Regional Chief Executive, India & South Asia, Standard Chartered Bank as also other senior members of the banking and financial sector; members of the print and electronic media; ladies and gentlemen!

2. At the outset, let me thank Tamal and the Mint Management for inviting me to deliver the keynote address at the Mint Annual Banking Conclave. This event has become one of the most awaited events on the calendar of bankers. I last attended this event as a panelist in January 2014 when the topic for panel discussion was “Indian Banking: A New Banking Landscape” and this time it is enlarged to “A New Banking Landscape for New India.”

3. When I sat down to think about the theme of the Conclave, I wondered what is new about India. Is it the new political regime and consequential policy changes? Is it the tag of being the new growth leader in the world economy? Is it a more financially included India that is being thought about or is it a ‘digital’ or ‘connected’ India that is new. I think it is a bit of all and beyond. We all know that political stability is a necessary precursor to a sustained economic development anywhere in the world and a democratically elected government with decisive mandate is capable of launching significant pro-growth reforms.

Defining Contours of New India

4. What are the defining contours of the new India? What are the themes that would play out over the next decade or two? To my mind, there are seven key themes which would define the Indian economy and Indian banking sector in the days to come. These are:

• demography
• urbanisation
• digitisation
• industrialisation
• education
• inclusion and
• global integration

Let me elaborate on a few of these in greater detail and delve upon the impact they could have on the banking system going forward.

a) Demography

5. Much has been talked about the demographic dividend that India possesses. At its current pace of growth, the Indian population is predicted to exceed China by 2025. Further, while China’s working-age population may peak around 2015 and shrink for a decade and a half thereafter, 68 per cent of India population would be within the working age range (15-64) until 2030. Life expectancy of the Indian population is also slated to increase to about 70 years by 2030. While on the one hand the numbers present sustained opportunity for the banks in terms of new stream of customers, it also presents challenges. These challenges are in the form of diverse behavior patterns that customers in different age groups display. The banks would need to continuously foretell the customers’ preferences and focus their strategies on meeting them proactively.

b) Urbanisation

6. India is also witnessing a growing trend of urbanisation. By 2030, urban population is estimated to rise to 631 million recording an annual increase of 2.6 per cent as against an annual rise of 1.1 per cent in the overall population. This would mean that 41.8 per cent of the population would be living in urban agglomerations as against 31 per cent today. While even at that percentage, the urban population would be far lower than the global average at 50 per cent presently; this would open up huge business opportunities for the banks for creation of public infrastructure, housing, consumption, education needs of customers and so on.

c) Digitisation

7. Digitisation is another area which is being pursued relentlessly by the new Government. There is massive focus on enhancing internet penetration in the country through accelerated broadband connectivity. The internet penetration has seen a sharp growth over the last year, however, the extent of internet penetration at 20 per cent pales in comparison to other developing countries like China (46 per cent), Brazil (53 per cent) and Russia (59 per cent); let alone the developed nations like US, UK and Japan where the number is in excess of 85 per cent. In these low numbers lie the inherent opportunities for the banking sector. As the number of internet users in the country grows, the banks would be able to better utilise this medium as a delivery channel. On the other hand, the mobile penetration in the country is significantly high at around 930.20 mn and beckons as an opportunity to be tapped.

d) Industrialisation

8. The new Government’s ‘Make in India’ pitch also touches the right cords and efforts are afoot to increase the presently stagnant share of manufacturing in GDP to around 25-30 per cent by 2025 from 15 per cent at present. If that materialises, it would mean addition of 90 million domestic jobs and attendant corporate and retail business opportunities.

e) Education

9. Likewise, there is tremendous scope of improving the level of education in the country by strategic focus on the four Es i.e. Expansion, Equity and Inclusion, Excellence & Employability. It would entail significant changes in consumer awareness, needs, demands and expectations.

f) Financial Inclusion

10. The launch of the PMJDY scheme with a focus on linking each household with a bank account has received extremely positive response. At last count, the number of accounts opened under the scheme had reached 12.14 crore. I don’t need to emphasise the avenues that this scheme has opened for the bankers. Moreover, it is just a stepping stone. Major part of the work has to commence now.

g) Global Integration

11. That brings me to the last theme of growing global integration, which I believe is already having significant repercussions on the financial sector. Be it the quantitative easing by the advanced economies and the subsequent withdrawal of it, convertibility of currency, making or breaking of regional alliance of economies and currencies etc. There could be other hitherto unforeseen developments too affecting the global structure of finance. Let me highlight two recent headlines reported in Financial Times: One, the potential exclusion of Russia from the SWIFT payment system and the other about withdrawal from correspondent banking relationships in 30 jurisdictions by three of the world’s biggest banks. Ostensibly, the motivation for these banks to sever their ties with the lenders in developing nations has been to limit the risk of being hit by regulatory sanctions on account of breaches, money laundering and terrorist finance. Events such as these, though having their origin in specific jurisdictions, have the potential to significantly impact the business and finance elsewhere in the globe.

12. Under the circumstances, it would be important for the banks to keep track of emerging trends and be prepared not only to negotiate through the imminent challenges, but simultaneously be ready to latch on to the opportunities that present themselves.

Key actors/acts in the New Banking Landscape

13. Let us see what would be the impact of these themes/developments on the key actors/acts in the new banking landscape.

14. Customers, employees, owners and regulators comprise the key stakeholders in the banking system. In the emerging landscape, the banks would have to contend with a set of customers who are more educated, better informed and well-networked. The banks may probably be forced to hard sell their products and services using a variety of media across the physical and the virtual world. As the complexity of the products/services demanded by the customers increases, the banks would have to not only focus on upgradation of skillsets of their employees but also on their retention. Also the new competition would potentially pull down the ROEs that the owners currently enjoy rendering it difficult to persuade future investors to put in more capital in the banks. In case of public sector banks, the ownership structure itself may change with Government bringing down its stake in these banks. They would, thus, also join the race to seek private capital.

15. As we have witnessed, the regulators across the globe have been particularly very severe on failings of the regulated entities on the consumer protection, money laundering and fair market conduct front. This regulatory activism is evident in the frequency and quantum of penalties levied on banks worldwide. Post crisis, the banks in US and Europe alone have been forced to cough up approximately $230 bn in penalties and legal cost so far1. Next two years are likely to see another $70 bn being forked out by the banks for the same reasons. These are staggering numbers. We have also seen some enforcement actions in our jurisdiction but these are pretty benign in comparison. Believe me; Indian regulators have been relatively more tolerant thus far. Some of you who have overseas operations are well aware of the tough stance that the host regulators adopt. Banks would need to gear up to face stricter regulatory regime.

16. The new banking landscape would impact the processes currently in vogue in the sector. Let me highlight some of these in greater detail.

Competition and Consolidation

17. Competition and consolidation in the sector is an impending development that the banks would have to contend with sooner rather than later. Two new private sector banks should start operating within this calendar year. Further, the small finance banks and payments banks might mark their presence, may be, later in the year or by early next year and so. There could be consolidation and mergers between the existing market players. No doubt, the pie is big enough to accommodate new players and there is plenty of opportunity for the well-organised and mainstream regulated players to wean away the customers from unregulated shadow banking entities. But, the existing players can afford to stay in denial at their own peril. We have seen competition giving a tough run to the monopoly players. It has happened in the aviation sector, the telecom sector and there is no reason why it would not happen in the banking sector. And believe me, this is not the end of new competition for you. RBI has been indicating about the possibilities of the bank licensing process being put on tap or introducing more varieties of differentiated banks. Also, there is a healthy appetite from the foreign banks to enter this country.

18. The entry of new competitors alone would not mean dramatic changes soon. Banking is a business of scale which the new players cannot build overnight. New banks would start small and scale up over a period of time. Not only would there be a competition for business but also for talent. The processes would be forced to be more efficient.

Technology

19. I have already talked about a paradigm shift being brought about by technology in the way the social interactions are taking place. Growing mobile and internet penetration has opened new avenues for the entrepreneurs. This is reflected in the way the new age customer transacts her business. If all traditional businesses have been impacted by technology, banking could not have remained unaffected. As a flip-side to its well-documented advantages in terms of efficiency and effectiveness of service delivery, technology has also fast tracked the process of customer alienation- first in the form of ATMs and then in the form of internet and mobile banking. In this sense, banks have become faceless entities. This transition calls for a change in the way the banks interact with and retain their customers. I will shortly return to the expectations built around the integration of technology in the banking services and its impact on the banks.

Risk Management

20. Risk Management in banks is of the same vintage as the banks themselves. The banks are in the business of taking risks and hence they need to have a risk management framework in place. It’s been more than a decade and a half since RBI first released the risk management guidelines for banks in India. But, my own sense is that risk management has been pursued in our banking system more under compliance compulsions and has not been dovetailed in the banks’ businesses processes as much as they ought to have been. As the complexity in the financial world grows, the banks would need to carefully consider and set their risk appetite after duly evaluating their capital level as also the skillsets of the officials entrusted with the management of risks.

21. As I said before, the defining elements of the new India would have far-reaching impact on each of the actors and the acts in the new banking landscape. These elements would interplay and provide shape to the new banking order. It would be interesting for you to pick up these 7 contours, 4 actors and 3 acts and interplay them to build probable business scenarios. You may be amazed to see the range of possibilities and challenges. Let me now return to the subject of technology, which is widely perceived as the ‘be all and end all’ of the new in banking.

Technology- A Great Enabler

22. I would begin by quoting Brett King, the author of famous book ‘Bank 3.0’.

“Customers don’t use channel or products in isolation of one another. Everyday customers would interact with banks in various ways. They might wire money to a third party, visit ATM to withdraw cash, go online to check salary credit, pay an utility bill , use their credit card to purchase some goods from a retailer , fill out a personal loan application online, ring up the call center to see what their credit card balance is or report a lost card. More sophisticated they are, they may also trade some stocks, transfer some cash from their Euro A/c to USD a/c put up a lump sum in a Mutual Fund or sign up a home insurance policy online”.

23. The above statement denotes the diverse set of banking applications which technology can support In fact, there is a need of a single channel solution to multiple product offerings. It must, however, be remembered that technology is just an enabler and not a panacea for all ills. Most, if not all, Indian banks have invested heavily in web-based and mobile-based delivery solutions. Each of these channels is supported by a different vendor and each one uses different technology which increases complexity and involves cost. Further, technology is ever evolving and adoption of new technology for staying contemporaneous is a costly proposition. Hence, unless we are able to optimally exploit all the capabilities of the technology enabled delivery solutions, we could be looking at unproductive investments.

24. While there is a lot of euphoria around the adoption of mobile banking and mobile payments, the model has been relatively less successful barring a few countries where the right environmental factors existed. I am talking here about the delivery of financial and payment services by using the mobile device rather than its use as an access channel for internet banking etc. In the Indian context, an objective analysis would reveal various reasons for slow adoption. On the other hand, there are technical issues like type of handsets, variety of operating systems, encryption requirements, inter-operable platforms or the lack of it, absence of standardised communication structures, difficulty in downloading application, time lag in activation etc. These get accentuated by the operational difficulties in on-boarding merchants and customers and customer ownership issues. The interplay of these factors has stymied the deployment and adoption of mobile banking as an effective and widely accepted delivery channel. Issues of coordination and cooperation between banks and telcos, is another aspect which acts as either a driver or a barrier to the adoption of mobile banking. These issues need to be quickly resolved if the mobile has to serve as an influential delivery channel for distributing banking products and services in India.

25. Let me also highlight some opportunities that technology throws up. Take for example the results displayed on the Google search page which is personalised. Each time an individual runs a search at Google, the website collates details of the sites visited/links clicked by that individual and loads more of those websites his/her future searches. There are more ATM transactions than searches on the Google webpage at present. However, the kind of personalisation Google has achieved in its searches has not been attempted in the area of advertisement on ATMs.. This could be an area for the banks and their software vendors to work on in future so as to generate further sales leads.

Few Qs seeking As

26. Let me leave you with some questions that the banking profession and the bankers would need to find answers to ensure their relevance in the emerging landscape.

(i) Can there be a possibility of account number portability on similar lines as mobile number portability? So, if an individual is not happy with the service received at one bank, he can possibly opt for shifting his banking relationship, lock, stock and barrel to another bank. Of course, there could be issues around loan contracts etc. but there is no reason to believe that such challenges cannot be surmounted and pave the way for a massive disruption in the way banking is conducted today.

(ii) How long can the banks continue increasing their retail loan portfolio? Unless some means to pool and distribute these loans to other investors in the market is created, the retail lending pipeline can get chocked quite quickly.

(iii) How is crowd funding going to impact lending business of the banks in future? The amount of funds raised by crowd funding platforms worldwide has increased progressively from $ 1.5 bn in 2011 to $ 2.7 Bn in 2012 and further to $ 5.1 bn in 2013. I hear some of you say it is negligible in volume. The pace of growth however, is quite fast and combined with the peer-to-peer lending business this could create disruptions, at least for some of the players who operate in the same segment.

(iv) If Mobile Banking were to succeed, would plastic money still be needed? Basically there are two questions rolled in one. First, whether mobile banking can succeed and if that is the case what implications would it have for the future of ATMs and the debit cards that have been issued by banks. There is justifiably a growing need for reducing the reliance placed on cash by the system and hence, if more and more people moved to mobile/ internet based payments, the plastic cards and the investments made thus far, would be rendered useless unless put to more imaginative uses.

(v) What International Financial Reporting Standards (IFRS) implementation would mean for the banking system? IFRS accounting could potentially overstate assets or overstate capital position. The question is how prudential regulation would exist alongside IFRS? Proposed impairment calculations under IFRS, accounting for interest income on Effective Interest Rate basis and presence of multiple systems for operations and accounting of different portfolios would mean that IT systems would have to be upgraded/realigned for IFRS migration. Banks would also need to overcome challenges around converging policies for financial accounting and tax accounting for preparation of financial statements. The banks would need to train their staff in various departments like credit, and treasury, etc. for acquiring proficiency in IFRS accounting.

(vi) Would the large corporates continue to borrow from the banks? Of late, the global markets, particularly the emerging market economies, have been flush with funds flowing in on account of variants of QEs launched by the Central Banks in the Advanced Economies. Many large corporate houses have been able to access funds at very cheap rates without needing to reach out to banks. The sustained deflationary trends in the Euro Area and Japan portend further bouts of QEs which can adversely impact the lending business of banks in the emerging markets. Further, the large corporates in developed countries normally access financial markets directly for their funding requirements rather than commercial banks. Hence, even while this time-specific event of QEs might fade away, as Indian economy and the financial markets mature, more and more large corporates could start bypassing banks for their funding requirements.

(vii) Would the pain from the loans restructured earlier return to haunt the banks? My understanding is that the prolonged global economic slowdown might have thrown off the projections made earlier at the time of restructuring the advances in the immediate aftermath of the crisis. As the moratorium period comes to a close, the banks would need to take a hard look at the techno-commercial viability of these projects and take the losses wherever the viability seems in jeopardy. Timely decisions, including for recall/recovery of the loan, wherever the financial prospects are unviable, would be critical.

Conclusion

27. Before I conclude, let me also give a perspective on the global regulatory reforms and how it might impact the Indian banks. Basel III norms have been announced and set to be implemented as per the indicated timeline, with the liquidity regime already kicking in from January 1, 2015. So you are well-versed with the new regulatory phrases- leverage, capital conservation buffers, counter-cyclical capital buffers etc. The D-SIBs guidelines have also been announced and the list of banks considered systemically important in the domestic context would be unveiled in August 2015. Besides, being subjected to stricter capital and liquidity buffers, these banks may also be nudged to prepare detailed ‘recovery and resolution plans’. Negotiations are also on at the Financial Stability Board level for implementation of a TLAC (Total Loss Absorbency Capital) framework for the banks identified as G-SIBs. The essence of all the above discussion is that the banks would need to substantially augment their capital bases to stay in the business. The question is where do you find such capital?

28. I have covered much broader landscape than I had originally intended to. I believe the elite panel gathered here today would deliberate on the issues raised and also reflect on them later. I once again thank Mint for inviting me and wish you all a fruitful deliberation.

Thank you!

---

* Keynote address by Shri. S. S. Mundra, Deputy Governor, Reserve Bank of India at the Mint’s Annual Banking Conclave, 2015 on “A New Banking Landscape for New India” on January 29, 2015.

1 http://www.irishtimes.com/business/financial-services/us-european-banks-have-paid-230bn-in-legal-costs-since-2009-1.2064163