“At present, financial services are only a small part of their business globally. But given their size and reach, their entry into financial services has potential to bring about the rapid transformation of the financial sector landscape,” Das said.
The entry of these firms have many potential benefits, and they can easily provide basic financial services to the masses at cheap cost, he said.
But the advent of fintechs and BigTechs are a challenge to banks, as well as banking regulators. While banks have to imbibe these new technology and business practices to remain competitive, banking regulators, on the other hand, Das said, “have to focus on achieving a balance between promoting innovation and applying a measured/proportional supervisory and regulatory framework.”
“All these mean that the future of banking will not be a continuation of the past. We would see a very different banking sector, in terms of structure and business model, in the coming years,” the RBI governor said.
There would be different categories of banks. The first segment could be large Indian banks with domestic and international presence, for which merger of public sector banks are already taking place. The second segment could be mid-sized niche banks, and the third segment could be smaller private sector banks, small finance banks, regional rural banks, and co-operative banks. The fourth could be of digital players, which may act as service providers directly to customers or through banks by acting as their agents or associates.
In any case, the conventional banking system would make way for next-generation banking, with a focus on digitisation and modernisation, where the need for brick-and-mortar branches would be reviewed continuously.
The decision by the National Payments Corporation of India (NPCI) to set up a subsidiary focusing on taking the Unified Payments Interface (UPI) model to other countries would help enhance global outreach of India’s payment systems, the RBI governor said. A new umbrella entity for retail payments, for which draft guidelines have been released, would also intensify competition and further innovation in the retail payments space.
According to Das, despite the recent decline in impaired assets and a significant improvement in provisioning, “profitability of the banking sector remains fragile”.
Even as capitalisation has improved, “the sector continues to encounter challenges from events like those around the telecom sector”, he said. “Consequently, the overhang of non-performing assets (NPAs) remains relatively high, which is weighing on credit growth.”
Banks now have shifted their focus away from large infrastructure and industrial loans towards retail loans, but this diversification strategy has its own limitations. “Further, sector-specific pockets of stress need policy attention,” the governor said, adding, proper due diligence and risk-pricing in lending are of prime importance so that health of the banking sector is not compromised while ensuring adequate flow of credit to productive sectors of the economy.
“As the Indian banking sector
is propelled forward to a higher orbit, banks would have to strive hard to remain relevant in the changed economic environment by reworking their business strategies, designing products with the customer in mind and focusing on improving the efficiency of their services,” Das said.