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Sunday, July 21, 2024

Technological disruptions and the role of Banks

While speaking at the 18th banking technology conference organised by Indian Banks’ Association on 3rd December, 2022, Executive Director, RBI, Mr. Ajay Kumar Choudary is reported to have said, “in line with our outsourcing guidelines, the board and senior management must ensure that at no point of time, core activities of banks are outsourced. We are observing an increase in outsourcing of services in the banking and finance sector. The idea is that banks should concentrate on the development and upgradation of their core banking solution.”

He further said, “it is equally important that we all acquaint ourselves with the evolving tech and become self-sufficient and reduce the dependency and ensure effective handling of outsourcing.”

While addressing the bankers in the same conference, Deputy Governor, RBI, Mr. T. Rabi Sankar is reported to have said, “How is that a system of transaction between two bank accounts has evolved in a way where most of the business is owned by non-banks? Clearly, banks have missed a step here.

National Payments Corporation of India was forced to extend the deadline for its rule, that restricts the market share of third-party application providers in UPI up to 30%. Obviously, non-banking players like phone pe and Google pay continue to dominate this space.

Mr. Rabi Sankar very rightly said, “probably, the feeling is that small value transactions are an insignificant business to put your resources into. What you missed is that when a revolutionary technology comes up, it affects only a small part of the business. Scaling that up and improvising on that to affect the rest of the business is just a small step away.”

The financial world is witnessing competition between digital methods and traditional methods of carrying banking services. While technological advancements in banking sector have brought transformative changes in designing flexible and innovative financial products, automating, and standardizing the work processes, it has also led to the advent of fintech companies competing in the existing space with the banks. The assumption that technology would lead to automation, improvement in customer service and the manpower will have more quality time to focus on customer relationship has proved to be a misconception.

On the contrary, after embracing the sophisticated technologies banks have started outsourcing of not only non-core activities but also core activities and the workforce is being driven to do more of cross selling in order to boost the fee income. Attractive incentives are given to the bank staff (including the public sector banks) who surpass the cross-selling targets that also include foreign trips! banks are shifting their focus from their core banking functions and that is one of the evils for the mounting NPAs (bad loans). Whereas, outsourcing has increased the operational risk for the banks.

Technology has brought rapid changes in not only the work processes but also led to new financial products and changes in financial services delivery by the banks. In line with this, there is a need for the banks to shed their traditional or conventional approach and adopt new approaches.

GeM (Government e Market place) is a National Public Procurement Portal; an end-to-end online Marketplace for Central and State Government Ministries / Departments, Central & State Public Sector Undertakings, Autonomous institutions, and Local bodies, for procurement of common use goods & services.

It is a totally paperless, cashless and framework driven e-commercial center that empowers acquisition of regular use merchandise and services with negligible human interface. GeM portal has tie up with banks to enable them to offer financial services to MSMEs who source the procurement needs of various government institutions. Banks can capture the cash flows in a secured channel and provide finance to the MSMEs by securitisation of the cash flows and dispense with the traditional collateralised lending model.

On November 2, 2018 the Department of Micro, Small and Medium Enterprises issued a notification stating that all companies registered under Companies Act and having a turnover of more than INR 500 crores and all Central Public Sector Enterprises are required to on board a TReDS (Trade Receivables Discounting System) platform, thus making TReDS registration mandatory for such entities. The Registrar of Companies (RoC) in every state has been nominated to be the competent authority to monitor the compliance of this notification.

The MSME suppliers to the corporates and Central Public sector Enterprises, who are also members of this TReDS portal are provided financial assistance from the banks for the sales made by them (MSMEs). Such sale invoice discounting by banks is to be done ‘without recourse’ to the MSME suppliers. This invoice discounting is collateral free.

GeM and TReDS platforms have the scope to introduce disruptive technologies and replace the traditional methods of trade and commerce with digital methods. It is understood that block chain technology and digital currencies will be playing a key role in this initiative and the government and the regulators are working in that direction to frame the guidelines.

Similarly, participation on technology platforms by various stake holders also provides scope for rapid expansion of e commerce and e governance initiatives.  NFRA (National Financial Reporting Authority) has proposed to the government to exempt MSMEs with net worth less than Rs.250 Crs from statutory audit.

While banks and FIs have expressed their concerns on the proposed move, it is understood that the government has assured them that the turnover details of the MSMEs can be shared by the GST authorities and the income and profit details of the MSMEs can be shared by the Income Tax authorities.

National Digital Health Mission too has similar ambitions to digitize the health records of the citizens of the country. Flipkart, National Small Industries Corporation, Facebook, Amazon, Aramex India (logistics service provider), have launched several digital initiatives to support MSMEs. Reliance’s Jiomart partner is offering a new technology platform in B2B model which is likely to bring a revolution in the conventional supply chain.  

The government has launched E-Way bill system for GST registered person / enrolled transporter for generating the way bill (a document to be carried by the person in charge of conveyance) electronically on commencement of movement of goods exceeding the value of Rs. 50,000. This mechanism enables faster movement of the cargo without undue delay at intermediary check points from the place of shipment of cargo to the place of destination.

e Governance has four phases- 1. Information, 2. Interaction, 3. Transaction and 4. Transformation. Currently e Governance in Bharat is passing through the phases 2 &3. The day is not far off for us to reach phase 4. As rightly said by Mr. T. Rabi Sankar, Deputy Governor, RBI, “Scaling that up and improvising on that to affect the rest of the business is just a small step away.”

Banks should shed their mindset of being a cog in the wheel and realise that they are going to play a pivotal in this big picture. And the reason for this is simple, whatever the technological disruptions that may take place, RBI and the Government would continue to depend on the banking system for effective dissemination of their monetary policy and fiscal policy measures respectively. These technologies can only bring a shift from traditional methods to digital methods but the key players will continue to remain the same.  

Reference:

  1. https://ewaybillgst.gov.in/.
  2. https://gem.gov.in/.

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Dr. B.N.V. Parthasarathi
Dr. B.N.V. Parthasarathi
Ex- Senior Banker, Financial and Management Consultant and Visiting faculty at premier B Schools and Universities. Areas of Specialization & Teaching interests - Banking, Finance, Entrepreneurship, Economics, Global Business & Behavioural Sciences. Qualification- M.Com., M.B.A., A.I.I.B.F., PhD. Experience- 25 years of banking and 18 years of teaching, research and consulting. 270 plus national and international publications on various topics like- banking, global trade, economy, public finance, public policy and spirituality. Two books in English “In Search of Eternal Truth”, “History of our Temples”, two books in Telugu and 75 short stories 60 articles and 2 novels published in Telugu. Email id: [email protected]

2 COMMENTS

  1. *TReDS being a new pasture like securitization
    Bankers need a clear knowledge briefing between
    TReDS and Bill purchase and discounting of eearlier years.
    *Whether usage bills too are done away with with the onset of options and futures.
    How the new system does away with collaterals or security for bank lending and borrowing.
    *Whether tReDS is a derivative product.

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