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(This article covers the whole magazine Article wise. The headings used here are same as the names of the articles in the January edition of Yojana)
INTRODUCTION
The banking sector was always deemed to be one of the most vital sectors for the economy to be able to function. Its importance as the “lifeblood” of economic activity, in collecting deposits and providing credits to states and people, households and businesses is undisputable.
In all economic systems, banks have the leading role in planning and implementing financial policy. Apart from this Banks today are involved in investment and share markets mobilising people's money into profit earning endeavours. Banks are penetrating into the insurance sectors also. To perform all these roles, the banking sector has to be in prime of its health.
However, the Banks in India (especially Public Sector Banks - PSBs) are facing several challenges ranging from rising NPAs (Non Performing Assets) to poor Banking Stability Indicator etc. Challenges before Indian Banks are -
Currently, the worst-hit are the state-owned banks, which dominate the Indian banking system. In March 2017, the average bad loans of PSBs stood at 75% of their net worth. These bad loans are squeezing banks’ profitability and capital positions, threatening the health of some of India’s biggest banks. Our discussion of this edition of Yojana will be focused around these problems and the efforts being undertaken or could be undertaken to resolve these problems.
The banking system is one of the most important sources of credit in India and is responsible for smooth functioning of financial markets. As discussed above there are some key challenges to accept for the betterment of Banking System-
Financial depth matters for capturing the relative size of the banking system, but it is also positively associated with economic growth and poverty reduction. A study using state-level data from India highlights that financial deepening has contributed to poverty alleviation in rural areas. India should strive to have a more robust and well-capitalized banking system. The existing measures have not been enough to tackle these challenges. We need to focus on three areas to stimulate the banking sector-
• Improving governance of banks, • Enhancing competition in the sector and • Developing corporate bond markets to relieve pressure from banks as lending sources.
• 1969 – Govt. nationalized banks with deposits more than Rs. 50 crore (controlling 80 % bank branches) • In 1980 – more banks were nationalized – totalling to more than Rs. 200 crore • From 1969 to 1991 – priority sector lending grew from 14 % to 41% • In 1991 – efficiency and productivity declined with poor customer quality.
The Committee on Financial Systems, chaired by Mr. M. Narashimham in 1991, recommended
• Reducing the Statutory Liquidity Ratio (SLR) and Cash Reserve Ratio (CRR) to free up bank resources, • Relying on market forces to determine interest rates, making it easier for private and foreign banks to enter to enhance competition and • Reducing substantially the number of public sector banks (PSBs).
In 1998, the Committee on Banking Sector Reforms, also chaired by Mr. Narsimham, recommended a further set of measures to strengthen the banking sector. It reviewed progress in existing measures and proposed further measures related to legislation, capital adequacy and bank mergers. The 1998 Committee also recommended steps relating to greater technology use, skills training and professional management of banks. Many of these reforms put in place since 1991 improved the performance and strength of India’s banking sector.
PSBs are the biggest contributors to the large and rising stock of NPAs. Gross NPAs in PSBs rose from Rs. 2.78 lakh crore in March 2015 to Rs. 7.33 lakh crore in June 2017. Even private banks have been plagued by a high share of NPAs. The decline in banks’ profits is largely due to higher growth in risk provisions, loan write-offs and decline in net interest income. The stress on the banking sector has translated into a slowdown in industrial credit. They also limit banks’ ability to meet international capital requirements under Basel III. The Indradhanush plan will not only help PSBs meet their minimum capital requirements but they will also help banks clean up their balance sheets and cover bad loans. It also includes wider banking reforms needed to strengthen institutional governance. The Insolvency and Bankruptcy Code (IBC) provides a channel for addressing NPAs. It requires banks and promoters to agree on a resolution plan within 270 days or face asset liquidation.
In the future, India should strive to have a more robust and well-capitalized banking system, with enhanced capacity to extend credit and an incentive structure suitable for productive allocation of resources. To build a robust banking system, recapitalization will have to be complemented by a host of other measures including corporate governance reforms, lower entry barriers, improved financial supervision, development of a dynamic corporate debt market and efficient debt recovery mechanisms. There are three particular areas that can be prioritized. The first is improving governance. And strengthening institutions, particularly in PSBs. In terms of sequencing, these reforms are. as important as recapitalization and will also need to be pursued in parallel. Global examples highlight the importance pf undertaking. banking sector, ‘reforms in tackling NPAs. For example, in China, besides recapitalization, banking sector reforms focussed explicitly on strengthening financial regulation and supervision, improving corporate governance and enhancing transparency.
PROTAGONIST TO ECONOMIC TRANSFORMATION
The Indian banking system will have to play the role of a protagonist in this economic transformation. Not only are we growing to witness a sustained rise in banking services, but we will also see increasing sophistication of solutions and delivery. For the first time, the per capita dollar income of the country will touch the 2000 mark, a threshold, which in global economic history is usually associated with multi-fold expansion in domestic consumption with improving affordability turning past luxuries into necessities. The Indian banking system will have to play the role of a protagonist in this economic transformation.
Factors which contributed towards increase in market share for private sector banks in the last 10 years are predominantly
As India on the path on becoming the 4th largest economy in the world by 2025, The 4 Ds will determine the banking landscape:
Technology will further define banking contours in the future. ‘Omnichannel’, not multichannel, will redefine the way customers interact with banks. For example, disseminating personalized offers on customers’ mobile phones, use of home video-conferencing system for personalized connect, leveraging face-detection technology for efficient cross-sell are some of the avenues through which technology will aid banking in the future. Amidst a high mobile density in India, the potential for leveraging this technology for offering financial services remains immense.
MANAGING NON-PERFORMING ASSETS: A PARADIGM SHIFT
Financial intermediation by banks is an engine of growth because they cause money to be circulated in the economy by seeking deposits from those who have surplus and lend for investment activity. One major reason for muted credit growth is fast accretion of NPAs on banks’ balance sheets. Gross NPAs of banks in India as on September 2017 are Rs 8.40 lakh crore. The rise of NPAs had its genesis in rapid credit growth of banks during the preceding years say from 2008 onwards. Across the broad spectrum of industries, those which are under stress include primarily basic metals and their products, cement and their products, textiles, infrastructure etc.
Present Situation and how it came about • More than Rs. 7 lakh crore worth loans are classified as Non-Performing Loans in India. This is a huge amount. • The figure roughly translates to near 10% of all loans given. • This means that about 10% of loans are never paid back, resulting in substantial loss of money to the banks. • When restructured and unrecognised assets are added the total stress would be 15-20% of total loans. • NPA crisis in India is set to worsen. • Restructuring norms are being misused. • Exuberance in increasing balance sheet size by lending to borrowers unworthy of such loans on account of their past credit history. • Funds were borrowed for creating excess capacities in anticipation of demand without factoring in the global capacities/demand supply position. • Project completion was delayed for various reasons. • Recovery of receivables was poor. • The concerned corporate was not able to raise capital through the issue of equity or other debt instruments from capital markets and used borrowed money as equity leading to double leveraging. Banks did not look at the colour of the equity. • Business failure because of over optimistic projections. • Diversion of funds meant for Expansion/modernisation. • Wilful defaults, siphoning of funds, fraud, misappropriation etc. • Lack of skill on the part of the banks to monitor end use of funds and diversion by the borrower through web of shell companies etc. • Deficiency in credit appraisal and improper due diligence. This bad performance is not a good sign and can result in crashing of banks as happened in the sub-prime crisis of 2008 in the United States of America.
Solutions • The NPA crisis in the 1990s was mitigated by a $500 million World Bank loan backed by a corresponding budgetary outlay. • This time the cost will be higher and, therefore, one must target the banks carefully. • But if we do so, we will strengthen distressed balance sheets and give space to the recapitalised bank to behave as they should. Recapitalisation will raise their enterprise value, which can then be leveraged through selective divestment. • Banks need to do forensic audit for ascertaining the end use of funds. • Big Data Analytics and other IT based solutions should be used for doing proper due diligence about the borrower and his businesses like fintech companies are doing. • Artificial Intelligence(AI) can be leveraged to predict default at least one year in advance with confidence of 80 per cent. A fintech company like D2K technology of Navi Mumbai has developed such a software and results have been remarkable. • Banks have to fine tune their HR policies to train the young work force, which at present lacks experience, and upgrade their skills. • The government on its part has to appoint professionals on the Board of Banks having domain knowledge and sufficient experience of Bank’s functioning. Selecting retired executives like MI and ED having impeccable track record on the bank Board is worth examining. • To expedite recovery, government will do well to have a few more NCLTs and large number of DRTs as present benches are woefully short to achieve this objective. • Strength of judges can be increased to cope up with the workload. With the coming in of insolvency of individuals, proprietors and partnership firms, the need will be acutely felt.
BANK RECAPITALISATION: ENHANCING CAPITAL BASE
Since the Government is the majority shareholder in the public sector banks, it has to provide equity capital, if the banks are struggling. This injection of capital is also known as the recapitalisation of banks. The recapitalisation is aimed at tackling the twin balance sheet problem in India and also to revive growth and investment. The Non-Performing Assets (NPAs) in the banking sector have been rising. As of June 2017, the NPAs of the banking system were as high as 10.2 % of the loans advanced by the banks. This high NPA has limited the capacity of banks to lend. The bank credit growth in the year 2016-17 was 5.1 %, which is the lowest since 1951. Hence, a massive recapitalisation was deemed as necessary to clean up the balance sheet of the banks.
The recapitalisation of banks worth 2.11 lakh crores has been proposed to be done in three ways • Budgetary allocations: 18000 crore • Raised from the market through the issue of equity shares by banks: 58000 crore • Issue of Recapitalisation bonds by the Government: 1.35 lakh crore The Government of India has been infusing capital on a regular basis into the PSBs, to enable them to meet regulatory capital requirements and maintain the government stake in the PSBs at a benchmark level. However the new recapitalisation plan makes mention of recapitalisation bonds also.
Recapitalisation Bonds Recapitalisation bonds are dedicated bonds to be issued at the behest of the government for recapitalizing the trouble hit Public Sector Banks (PSBs). Bonds worth of Rs 1.35 trillion is to be issued to inject capital into PSBs who are affected by high level of NPAs. Recapitalization bonds are proposed as a part of the Rs 2.11 trillion capital infusion package declared by the government on October 24th, 2017. Money obtained from the sale of the bonds will be injected into the PSBs as government equity funding.
The PSBs will get additional capital from the government from the issue of the bonds. The amount of capital (money) to be obtained by each PSB will be determined later and it depends upon the depth of their NPA problem. Now, banks once obtained funds, can write-off the bad assets (loans) by using the fund from recapitalisation. As per the Basel III norms, there should be a minimum higher quality capital like equity capital (Tier I capital). The Minimum Tier I capital as per the norm is 7%. Several PSBs doesnt have this minimum higher quality capital.
What will be the impact of Recapitalisation Bonds on government’s fiscal deficit?
The funds mobilized from the sale of the bonds will not come as part of the fiscal deficit. but the interest payment for it will be a part of the fiscal deficit. In doing so, the sovereign money will not move out and it will simply be an accounting entry. Money not changing hands will ensure that the government remains insulated from an additional burden on the fiscal.
FACILITATING FINANCIAL INCLUSION
Financial inclusion is a process of ensuring access to appropriate financial products and services needed by all sections of the society in general and vulnerable groups in particular at an affordable cost, in a fair and transparent manner. The objective of financial inclusion is to transform the lives of vulnerable people by providing them access to banking finance and enabling them to generate stable income.
History of Financial Inclusion in India • The Cooperative Credit Societies Act, 1904 gave an impetus to the cooperative movement in India. The objective of cooperative banks was to extend banking facilities, mainly availability of credit, on easy terms compared to the money lender. • Nationalisation of State Bank of India in 1955. • The priority sector lending became important by 1974 which implied directing lending to unbanked areas. • The Reserve Bank of India (RBI) and the National Bank for Agriculture and Rural Development (NABARD) have also been making concerted efforts in extending banking across the country under which schemes of microfinance initiatives, and business correspondents (BCS) were launched. Other initiatives included establishing Regional Rural Banks (1975), adopting service area approach (1989), and Self- Help Group-Bank linkage programme (1989, 1990). • Other initiatives included establishing Regional Rural banks, adopting service area approach and SHG-bank linkage programme. • Recent initiatives by RBI by simplifying norms on know-your-customer (KYC) requirements, and introducing ‘no- frills’ account.
Initiatives by Government • PMJDY which envisages universal access to banking facilities consolidates government’s effort to increase number of households availing banking services. • The public sector banks, traditionally involved in social banking, continue to play an important role in extending banking services to unbanked areas but share of private banks, both in number of accounts and amount outstanding is increasing significantly in the last decade • Setting up Micro Unit Development Refinance Agency (MUDRA) for providing micro credits. • Social security schemes like Pradhan Mantri Jeevan Jyoti Bima Yojana (PMJJBY), Pradhan Mantri Suraksha Bima Yojana (PMSBY) and Atal Pension Yojana (APY).
Innovative means of extending credit
Commercial banks began exploring alternatives like mobile vans, banking kiosks and Business Correspondents (BCs) to extend banking services to unbanked population. In case of rural areas savings are often substantial since the cost of visiting a branch to complete a transaction requires about 2-6 hours which implies absence from regular activity. The banking outlets, with BCS have now been established in remote areas or amidst slums, places where banking penetration was low or non-existent. Accordingly, commercial banks have been successful in extending banking services to nearly 6 lakh villages, mainly through BCS.
Suggestions
• There is need to extend financial inclusion to the disabled, including those elderly where locomotor activity, vision and hearing is impaired. • There is a need for facilities like biometric-enabled and multi-lingual hand-held devices which can provide confidence in rural masses. • Technological innovations like integrated machines that have functionality of cash withdrawals and deposits; facility of scanning documents to facilitate new account opening and loan disbursals; and voice commands and narration for available facilities could help increase banking penetration. • The instruments offered under financial inclusion also need consideration. • Standard instruments that are offered by commercial banks are designed for salaried segments of society like recurring deposit schemes which would need to differ in rural areas depending on pattern of income based on cycle of agriculture production. • Financial literacy is a challenge and therefore, bankers been adopting different strategies reach larger segments of the society mainly in villages. • It is important build a relationship with customer especially villagers, before the part with their money. • To enhance financial literacy some banks have taken several initiatives such as conducting quiz at college level, preparing comic books, organizing magic shows. etc.
• There is need to standardize literature/material to extend financial literacy amongst the unbanked.
RESOLVING INSOLVENCY
India improved its position on the ‘Ease of Doing Business’ ranking, 2018 released by the World Bank by 30 places to 100th position. One of the reasons cited for that was its performance on resolving insolvency. Well-defined and time-bound norms for entry and exit are considered key to ease of doing business. The Code filled the gap in the exit or restructuring of businesses that the country had. Insolvency arises when an individual or organization could not pay its financial dues to its lenders. Insolvency can be tackled through restructuring the debt or if it is not settled this way legal action may be taken against the insolvent, the company concerned is restructured or else its assets are sold to pay the debts. Before the Code, there were about 12 laws, including the Contracts Act, the Recovery of Debts Due to Banks and Financial Institutions Act, the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act. These have not yielded the results that were required. Also the Sick Industrial Companies (Special Provisions) Act and the winding up provisions of the Companies Act, 1956 did not prove to be too effective.
The Insolvency & Bankruptcy Code (Key Features)- • The National Company Law Tribunal (NCLT) adjudicates insolvency resolution for companies. The Debt Recovery Tribunal (DRT) will adjudicate insolvency resolution for individuals. • The Code is quite different from the earlier resolution systems as it shifts the responsibility to the creditor to initiate the insolvency resolution process against the corporate debtor. • Under the earlier regime, it was the debtor who primarily initiated a resolution process. While the creditor was the last to pursue separate actions for recovery of dues. However, corporate debtor can also file for insolvency. • After a case is admitted by NCLT, resolution processes will have to be completed within 180 days, extendable by another 90 days. • During the resolution process financial creditors assess whether the debtor’s business could be restructured and also consider options for the revival. During this process, creditors’ claims will be frozen. If the insolvency resolution process fails, the liquidation of assets begins. • The resolution processes are conducted by licensed Insolvency Professionals (IPs).
Recent Amendment
The Amendment amends the Insolvency and Bankruptcy Code, 2016 to prohibit certain people from submitting a resolution plan (specifying details of restructuring a defaulter’s debt). These persons include: (i) wilful defaulters, (ii) disqualified directors, (iii) promoters or management of the defaulting company, and (iv) any person who has committed these activities abroad. The Amendment bars an insolvency professional from selling the property of a defaulter to any such person during liquidation.
MISSION INDRADHANUSH
Mission Indradhanush is a 7 pronged plan launched by Government of India to resolve issues faced by Public Sector banks It alms to revamp their functioning to enable them to compete with Private Sector banks Many of the measures taken were suggested by P J Nayak committee on Banking sector reforms as indicated. The 7 parts include appointments. Banks board bureau, capitalisation, de-stressing, empowerment, framework of accountability and governance reforms (ABCDEFG)
Appointments - It was decided to separate the post of Chairman and Managing Director by prescribing that in the subsequent vacancies to be filled-up, the CEO will get the designation of MD & CEO. There would be another person who would be appointed as non- Executive Chairman of PSBs.
Banks Board Bureau (BBB)- The BBB will be a body of eminent professionals and officials, which will replace the Appointments Board for appointment of Whole- time Directors as well as non- Executive Chairman of PSBs.
Capitalization - As of now, the PSBs are adequately capitalized and meeting all the Basel lll and RBI norms. However, the Government of India wants to adequately capitalize all the banks to keep a safe buffer. The requirement of extra capital for the next four years up to FY 2019 is likely to be about crore. This estimate is based on credit growth rate of 12 per cent for the current year and 12 to 15 per cent for the next three years depending on the size of the bank and their growth ability. Out of the total requirement, the Government of India proposed to make available 70,000 crores out of Budgetary Allocations for four years .
De-stressing PSBs - The Infrastructure Sector and Core Sector projects have been the major recipient of PSBs’ funding during the past decades. But due to several factors, these projects got stalled/stressed thus leading to NPA burden on banks. Some of the actions undertaken in this direction are-
• Project Monitoring Group (Cabinet Secretariat)/Respective Ministries will pursue with concerned agencies to facilitate issue of pending approval/permits expeditiously. • Pending policy decisions to facilitate project implementation, operation would be taken-up by the respective Ministries/ Departments. • Ministry of Coal/PNG will evolve policies to address the long-term availability of fuel for these projects. • Respective Discoms will be provided hand-holding towards enabling early reforms. • Promoters will be asked to bring in additional equity in an attempt to address the worsening leverage ratio of these projects. • The possibility of changing the extant duty regime without adversely impacting the downstream user industry would be considered by the Government. • The decision to increase import duty on steel has already been taken. • RBI has been requested to consider the proposal of the Banks for granting further flexibility in restructuring of existing loans wherever the Banks find viability.
NPA Disclosures - RBI released Guidelines in 2014 suggesting various Steps for quicker recognition and resolution of stressed assets. RBI has now come-out with new category of borrower called Non-Cooperative borrower. Fresh exposure to a borrower reported’s non-cooperative will necessitate higher provisioning. RBI has tightened the norms for Asset Reconstruction Companies (ARCs). This step win increase the cash stake of ARCs in the assets purchased by them. The Central Government has decided to establish six new Debt Recovery Tribunals (DRT) at Chandigarh, Bengaluru, Ernakulum, Dehradun, Siliguri, Hyderabad to speed-up the recovery of bad loans of the banking sector.
Empowerment - The Government has issued a circular that there will be no interference from Government and Banks are encouraged to take their decision independently keeping the commercial interest of the organisation in mind.
Accountability- A new framework of Key Performance Indicators (KPIs) to be measured for the performance of PSBs. Streamlining vigilance process for quick action for major frauds including connivance of staff etc.
Governance Reforms - The process of Governance Reforms started with “GyanSangam” – a conclave of PSBs and FIS organized at the beginning of 2015 in Pune. The ‘GyanSangam ‘ recommendations included among others strengthening of Risk Management practices. The focus is on improving HR Management practices and removing barriers so that the banks can share and work together on common resources.
STRENGTHENING CYBER SECURITY
Digitization is the rise of the digital transaction where bank, customers, merchants, industries and other stakeholders form an interdependent financial system network. Digitization is not an option for banking industry, rather it is inevitable, because every industry is being digitized and banking sector is no exception.
Why Digitization? • Demographic changes • Changing customer behaviour in favour of digitization • Leveraging increased smart phone usage and mobile penetration • Financial Inclusion and government initiatives & digitization increases the reach of banks to masses
BHIM- Bharat Interface for Money BHIM is a digital payments solution app based on the Unified Payments Interface (UPI) from the National Payments Corporation of India (NPCI), the umbrella organisation for all retail payments systems in India. If you have signed up for UPI-based payments on your bank account, which is also linked to your mobile phone number, you’ll be able to use the BHIM app to carry out digital transactions. BHIM will let you send and receive money to other UPI accounts or addresses. You can also send money via IFSC (Indian Financial System Code) and MMID (Mobile Money Identifier) Code to users who don’t have a UPI-based bank account. There’s also the option of creating your own QR (Quick Response) code for a fixed amount of money, which the merchant can scan to make the deduction.
Measures taken to ensure Cyber Security of Banks
1. National Cyber Security Policy, 2013 • It was released as a formalized step towards cyber security by the Ministry of Communication and Information Technology under Department of Electronics and Information Technology. • Its mission is to protect cyberspace information and infrastructure, build capabilities to prevent and respond to cyber-attacks, and minimise damages through coordinated efforts of institutional structures, people, processes, and technology. • Protection and resilience of critical information infrastructure with the National Critical Information Infrastructure Protection Centre (NCIIPC) operating as the nodal agency. • National Computer Emergency Response Team (CERT-in) functions as the nodal agency for coordination of all cyber security efforts, emergency responses, and crisis management
2. Cyber Swachhta Kendra (Botnet Cleaning and Malware Analysis Centre) • To combat cyber security violations and prevent their increase, CERT-in in 2017 launched Cyber Swachhta Kendra (Botnet Cleaning and Malware Analysis Centre). • The Centre is operated by CERT-in under Information Technology Act, 2000. It is part of Ministry of Electronics and Information Technology’s Digital India initiative, will detect botnet infections in India, and enable cleaning and securing systems of end-users. • The Cyber Swachhta Kendra is a step in the direction of creating a secure cyber ecosystem as envisaged under the National Cyber Security Policy.
The Centre offers the following security and protective tools: • USB Pratirodh, which is aimed at controlling the unauthorized usage of removable USB storage media devices. • An app called Samvid which allows only pre approved set of executable files for execution. • M-Kavach, a device for security of Android mobile devices which protects from malware that steal personal data and credentials. • Browser JSGuard, a tool which serves as a browser extension which detects and defends malicious HTML and JavaScript attacks made through the web browser based on Heuristics. It alerts the user when he visits malicious web pages and provides a detailed analysis threat report of the web page.
3. Information Technology Act IT Act, 2000 is the primary law in India dealing with cybercrime and electronic commerce which had subsequent amendment in the year 2008.
IT Act describes the following:
• Digital and Electronic Signature • Electronic Governance. • Attribution, Acknowledgement Despatch of Electronic Records. • Secure Electronic Records and Secure Digital Signatures. • Regulation of Certifying Authorities. • Electronic Signature Certificates.
IT Act has specific provisions to deal with Online Frauds & Phishing (Phishing is a type of social engineering attack often used to steal user data, including login credentials and credit card numbers. It occurs when an attacker, masquerading as a trusted entity, dupes a victim into opening an email, instant message, or text message)
4. Direction by RBI • RBI has given directions to protect interests of the customer in its circular on Customer Protection — Limiting Liability of Customers in Unauthorised Electronic Banking Transactions. • It has thrust upon ‘Zero Liability’ and ‘Limited Liability’ for bank customers against any fraud provided if’ the same is reported to the bank immediately. • RBI has made it mandatory for banks to register all customers for text message alerts and permit reporting of unauthorised transactions through a reply to the alert message. The cyber security infrastructure is to be continuously upgraded, as new threats emerge. Security is a journey, awareness will enable to face and mitigate the risk.
BIG DATA ANALYSIS INBANKING INDUSTRY
Big data is used for better understanding of customers behaviors and preferences. Big data analytics is the process of examining large and varied data sets i .e. big data to uncover hidden patterns, unknown correlations, market trends, customer preferences and other useful information that can help organizations make more-informed business decisions.
How can Big Data be used?
• Understanding and Targeting Customers. • Understanding and Optimising Business processes • Improving Healthcare and Public Health. • Improving Science and Research. • Improving and Optimising Cities and Countries. • Improving Security and Law Enforcement
Banking industry generates a huge volume of data on a day to day basis. To differentiate itself from the competition, banks are increasingly adopting big data analytics as part of their core strategy to improve their reach to consumers and better targeting of consumers.
Here are five of the most common use cases where banks and financial services firms are finding value in big data analytics.
1. Fraud Detection
Banks and financial services firms use analytics to differentiate fraudulent interactions from legitimate business transactions. By applying analytics and machine learning, they are able to define normal activity based on a customer's history and distinguish it from unusual behavior indicating fraud. The analysis systems suggest immediate actions, such as blocking irregular transactions, which stops fraud before it occurs and improves profitability.
2. Compliance and Regulatory Requirements Financial services firms operate under a heavy regulatory framework, which requires significant levels of monitoring and reporting. Big data is used for monitoring purposes and ensuring compliance with regulations.
3. Customer Segmentation Banks have been under pressure to change from product-centric to customer-centric businesses. One way to achieve that transformation is to better understand their customers through segmentation. Big data enables them to group customers into distinct segments, which are defined by data sets that may include customer demographics, daily transactions, and interactions with online and telephone customer service systems, and external data, such as the value of their homes. Promotions and marketing campaigns are then targeted to customers according to their segments.
4. Personalized Marketing One step beyond segment-based marketing is personalized marketing, which targets customers based on understanding of their individual buying habits. While it’s supported by big data analysis of merchant records, financial services firms can also incorporate unstructured data from their customers' social media profiles in order to create a fuller picture of the customers' needs through customer sentiment analysis. Once those needs are understood, big data analysis can create a credit risk assessment in order to decide whether or not to go ahead with a transaction.
5. Risk Management While every business needs to engage in risk management, the need may be largest in the financial industry. Regulatory schemes such as Basel III require firms to manage their market liquidity risk through stress testing. Financial firms also manage their customer risk through analysis of complete customer portfolios. The risks of algorithmic trading are managed through back testing strategies against historical data. Big data analysis can also support real-time alerting if a risk threshold is surpassed.
RURAL BANKING: TRANSLATING VISION TO REALITY
65% of Indian population is residing in villages or as Mahatma Gandhi said - India lives in villages, ensuring inclusion of rural population in formal banking network is essential for inclusive growth. During the last 70 years, beginning with cooperative credit structure, followed by nationalisation of PSBs and expansion of their branch network in rural areas and regional rural banks, the formal rural institution has grown and expanded many-fold. However, sadly the penetration of Banking services in rural areas has not been upto the mark.
Why Banks are reluctant to expand services into Rural Areas?
• Due to irregular income and expenditure patterns, the banks have high Non- Performing loans in rural areas. • Dependence of the rural economy on vagaries of monsoons. • The loan waivers driven by political agenda. • The average ticket size of both a deposit transaction and a credit transaction in villages is small, which means the banks need more customers per branch or channel to break-even. • Since many rural folks are not literate and so not comfortable using technology-driven channels like ATMs, phone banking or internet banking, hence mostly dependent on bank branches, leading to banks’ high cost to serve. • The highly irregular and volatile income streams and unscheduled expenditure like medical or social emergency, attribute to higher risk of credit for the banks. • Poorer groups might need basic savings services and micro-credit to cover production costs and emergency expenses • Farmers and farmers’ organisations require larger amounts of credit to finance production, inputs, processing and marketing besides risk mitigation products, for example, insurance for loss of life and assets.
The new rural finance paradigm needs to be based on the premise that rural people are bankable and rural clientele is not limited only to the farmers and uneducated but also includes a generation which can use and adopt technology, and hence, a demand-driven design and efficient provision of multiple financial products and services through an inclusive financial sector comprising sustainable institutions serving a diverse rural clientele, is the need of the hour. Thus, developing an inclusive yet sustainable rural financial system is extremely challenging and involves comprehensive understanding of the host of complementary issues.
Initiatives taken so far
• Reserve Bank of India (RBI) has been undertaking financial inclusion initiatives in a mission mode through a combination of strategies ranging from provision of new products, relaxation of regulatory guidelines and other supportive measures to achieve sustainable and scalable financial inclusion. Some of these steps are: facilitating no-frill accounts and General Credit Cards (GCCs) for small deposits and credit, norms were relaxed for people intending to open accounts with annual deposits of less than 50,000. • With a view to provide hassle-free and timely credit to farmers, Kisan Credit Cards (KCC) have been issued by the banking system. • In January 2006, RBI permitted commercial banks to make use of the services of Non-Governmental Organizations (NGOs) Self Help Groups (SHGs), micro-finance institutions, and other civil society organizations as intermediaries for providing financial and banking services. • RBI also directed the commercial banks in different regions to start a 100 per cent financial inclusion campaign, as a result of which UTS like Puducherry and states like Himachal Pradesh, Kerala announced 100 per cent financial inclusion in all their districts. • RBI’s vision for 2020 is to open nearly 600 million new customers’ accounts and service them through a variety of channels by leveraging on IT. • Enormous success in opening of about 26 crore accounts under Jan Dhan Yojana. • Setting up Micro Unit Development Refinance Agency (Mudra) for providing micro credits. • Various social sector schemes like Atal Pension Yojana, Pradhan Mantri Suraksha Bima Yojana and pradhan Mantri Jeevan Jyoti Bima yojana which would provide social security. • Providing banking services through banking correspondents and business facilitators. • Proposed concessions on credit and debit transactions. • Aadhaar enabled micro ATMs and RuPay cards to replace cash transactions • Promoting differential banking through new licenses given to payment banks and to small finance banks. • Launching of India Posts Bank.
Way Ahead
• To wean away villagers from borrowing from money lenders, banks should develop simplified credit disbursement procedures and also flexibility in their processes. • Providing easy cheap remittance facilities to migrants is an absolute imperative. • To achieve meaningful financial inclusion banks should give priority for small farmers as compared to large farmers while sanctioning credit. • For optimum usage of Banking Correspondents, they need to be adequately compensated by banks so that they are sufficiently incentivized to provide banking services to villagers at their door- steps • Banks need to enhance their ATM network in rural and unbanked areas to serve the rural villagers. • Adequate security measures as well as Financial Literacy campaigns need to be undertaken. • Banking sector needs to undertake a drive to make available banking services in local vernaculars to increase their acceptance among rural masses.
By: Deepak Hooda ProfileResourcesReport error
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