The banking sector is leading the journey towards an Atmanirbhar Bharat

Source: This post has been created based on the article “The banking sector is leading the journey towards an Atmanirbhar Bharat” published in the Indian Express on 6^th October 2023.

UPSC Syllabus Topic: GS Paper 3 Indian Economy — Indian Economy and issues relating to mobilization of resources.

News: The article discusses the growth, emerging changes and the associated challenges lying ahead for the banking and financial sector in India.

What are the reasons for the growing optimism for India across the world?

1) High growth and stability despite episodes of stress — from the dotcom bubble to the September 11 attacks, the 2008 financial crisis, the European debt crisis, the Covid-19 pandemic and the Russia-Ukraine War.

2) Huge changes have occurred in the banking and financial sector, which is leading the transformative journey of India.

What are the positive developments in the banking and financial sector post-independence?

Developments in this sector in the 75 years post-independence, especially the reforms over the past 30 years, have made the financial sector diverse and inclusive. These developments include:

1) Consolidation in the public sector banking space.

2) Emergence of private banks.

3) Specialized non-banking financial companies (NBFCs).

4) The emerging fin-tech ecosystem.

What are the wide-ranging changes in this sector?

1) Legacy issues of Non-Performing Assets (NPAs) and “External shocks” have been tackled.

2) Profits generated by banks (Internal Accruals) are being reinvested to fund growth and expansion.

3) Healthy projections of loan growth in the coming years due to decreasing capital costs.

4) Departure from the “bricks-and-mortar” model by banks to cutting-edge technology adoption.

5) Universal coverage of banking through Pradhan Mantri Jan Dhan Yojana (PMJDY) and the widespread use of technology to deliver financial services have transformed finance.

6) Products like mobile banking applications, retail electronic fund transfers, UPI, Aadhaar e-KYC, Bharat Bill Payment System, and “scan & pay” have transformed traditional banking.

7) Banks are also currently moving towards a knowledge-based regime, enabled by AI and cognitive computing. AI-enabled capabilities can help banks to personalize customer engagement and increase their ability to develop a deeper understanding of customers.

What are the associated challenges in front of this sector?

The fast pace of technological changes and structural transformations have created “regulatory blind spots” and vulnerabilities leading to various lacunae. These include:

1) Issues in Digitalisation of banking and finance: Mushrooming of unregulated digital lending apps and the issues of crypto-currencies and cyber-attacks.

2) There is an added responsibility to ensure the availability of critical support infrastructure for a secured payment settlement system, ATMs, internet/ mobile banking, dealing with cyber security risks, and addressing customer grievances.

3) Banks are expected to be major financiers for initiatives to control climate change. Banks will also have to account for a new risk based on climate change, which is a challenge due to the lack of a clear methodology and data.

4) Quality of human resources is also an emerging challenge due to the widening of the skill gap. To address this, banks and financial institutions will have to attract, train and retain talent. Capacity building will be needed to ensure upskilling and reskilling of human resources in order to develop employees who are flexible, agile, and open to new technologies.

5) Investment in research and openness to accepting and developing out-of-box ideas for seamless service delivery and hyper-personalization of products will have to be undertaken.