On 1st July 2015, the Modi Government launched the Digital India campaign, aimed at providing government services to citizens electronically by improving online infrastructure and making the country digitally empowered in the field of technology through digital literacy. Among the many sectors targeted for investment and overhaul by Digital India is the Banking sector, which is an integral part of the daily lives of India’s vast population.
Banking in India started moving towards digitisation quite early, with ATMs coming in the 1990s. But the transformation in the last 5 years has been revolutionary with increased use of mobile phones and access to internet available to the Indian populace and Aadhaar making all personal records digital and accessible. Various steps and initiatives have been adopted for strengthening the Payment and Settlement Systems in banks like the launch of United Payments Interface (UPI) and Bharat Interface for Money which enable direct bank to bank payments instantly and collect money using a Mobile number or Payment address. It is due to such initiatives and platforms that customers now do not have to store or carry cash alongside them and can make transactions anywhere at any time.
The Indian economy’s overreliance on cash was exposed by demonetisation in 2016, which also sped up the adoption of online and digital banking technologies for many.
While the shift to digital banking seems obvious, questions still remain over the capability for its adoption in rural areas, which house the majority of the Indian population. The cost of internet may be low but access to internet services is still restricted to only half of the Indian population with urban areas accounting for most of that. With digitisation of banking dependent on internet services and smartphone technology, penetration of the rural markets remains a challenge.
The Covid-19 pandemic that hit in 2020 has highlighted the need for digitised banking, with national lockdowns forcing people into their homes and limiting access to physical banks. Even with the digitisation that has taken place in the past five years, the change brought about in Banking is not uniform across different areas and functions.
Going forward, the transformation into a digitised system of banking will require the Indian government to resolve several challenges and maximise all opportunities that lie ahead.
To understand the current state of the Indian Banking Sector and the various changes, obstacles, and improvements that digitisation has brought to it, we engaged with Professor Dr. Keerti Pendyal, Assistant Professor & Assistant Dean of Outreach at the Jindal School Banking and Finance. Dr. Keerti provided great insights into various aspects of the banking sector in our conversation, which we have canvassed below. The entire interview can also be accessed here.
Change in Banking Functions with the shift to digital cash and digital banking
Since 2016, we have increasingly seen users adopt digital payment & banking solutions given the incredible ease with which transactions can be made digitally. However, the big caveat here is that because many of us have been included in the financial transaction space right from our childhood, moving to the digital transaction space has not been a hurdle for this part of the population.
At the same time there is still a large chunk of the population, about 19 crore adults as per the World Bank’s Findex Report, who do not have access to Bank accounts. Thus the core banking functions like borrowing or lending money remain limited to the people who have such access, because they are able to produce documentation, we have been able to satisfy the rigorous conditions laid down by financial institutions. These conditions, though necessary, put these financial services beyond the reach of a large chunk of India's population.
So, a shift to digital banking will not affect the core banking functions of lending and borrowing, or offering of new financial products to the population because most of the population who are already being served can make that shift comparatively easily as compared to the ones who do not have access to the products. However, these conditions of the banks are also necessary as they protect the banks themselves.
Therefore, shifting to a digital mode or digital banking will not affect the actual process or actual core services of Indian Banks, nor will it increase the reach or access, but will help customers by speeding up the process making it more efficient.
Hurdles we need to overcome to attain our digitisation objective
The number of adults who still lack access to bank accounts amount to 20% of the adult population, which is still a substantial number of adults and remains the biggest hurdle to clear. While each successive government since bank nationalization has focused on new opening branches in rural areas, the current government is in a unique position to tackle this issue with the explosion in technology. A lot of the country has been covered using the Jan Dhan accounts, but there is still some way left to go. This coverage can be increased by leveraging technology to lower the costs of setting up banks and bring increased access to these services in villages.
The second challenge lies in changing the attitudes of the people. An interesting revelation from the Findex report 2017 and the RBI’s Financial Inclusion Report 2021 is that a large chunk of the bank accounts in India (almost 47%) are dormant. An account is classified as dormant if there is no transaction happening for almost a year. This basically means that the beneficiaries are either not aware that money is getting deposited in their accounts, or that even if they are aware that it is being deposited, they are not utilizing it and relying on cash for daily expenses, which usually comes from the local money lender.
Thus the attitudes and habits of people have not changed, and even if the government were to open the accounts for everybody and digitise the transactions, it would be of any use. The next big hurdle therefore would be to get people to change their attitudes and increase their use of banking services.
The impact of complete digitisation on rural economies in India
If at a point in the future we are able to get the attitudes to change, then it would definitely be good to digitise rural economies. A change in attitudes will bring about increased and regular use of bank accounts, building up of credit histories and access to more advanced loans or insurance products which financial institutions offer.
At the same time there would be an increase in transaction costs. When the farmer needs money to buy the seeds, he goes to the local money lender and not the banks because the transaction cost is less, and it is more convenient. The way agriculture is structured, you have outflow happening throughout cycle while inflow comes at the next harvest season but you must keep your house running. All these expenses are catered to by loans from the same person and none of these loans area formal written contract.
A similar transaction happening between a bank or between a credit union requires a farmer to make multiple contracts or loan and the transaction costs increase. The interest rates may
go down with banks eventually. Thus, in the long run digitisation will be a good sign for the rural economy, but it must go hand in hand with other initiatives which reduced transaction costs. It cannot be suddenly introduced in villages otherwise it may lead to the rural economy collapsing. Therefore, any plan for digitising rural economies must take cautious steps in this direction.
Regulatory Changes required with the rapid digitisation of the banking system
There is not much to be done in terms of the regulatory changes that we need to introduce in response to the rapid digitisation of the financial sector. The RBI has always been one step ahead and has effectively brought in regulations such as upper limits for digital payment wallets, liberalisation of the KYC norms and bringing large NBFCs (Non – Banking Financial Companies) under their purview. It has actually gone beyond and done a lot more.
The government recently also launched the “e-RUPI,” which is a contactless & cashless voucher-based payment system that does not require the user to have a smartphone or internet connectivity. This will further help millions of rural Indians to access the banking system.
There certainly is more optimism about the collaboration between private companies and the government financial agencies. The RBI, drawing inspiration from the Bank of England (U.K.’s central bank) has encouraged private technological innovation to tackle societal problems in the field of banking and finance, like cross border transactions which are expensive and time consuming. Even SEBI (Securities and Exchange Board of India) recently employed algorithms and machine learning to challenge insider trading.
The government institutions regulating the banking sector have been operating ingeniously and have broken the stereotype that government organisations are often backward or sluggish by embracing technology effortlessly.
Views on blockchain technology & cryptocurrency, and whether they present a threat to the existing financial structures
Blockchain technology and cryptocurrencies can be addressed separately. Blockchain technology brings a lot of advantages to the table. Businesses, insurance companies, mutual funds and many other financial institutions are actively exploring the various ways in which they can use and benefit from blockchain. Even the RBI is looking for ways to integrate blockchain into their underlying infrastructure to provide digital currencies like the Swedish e-Krona and the Chinese digital Yuan. Incorporating the blockchain technology would allow for quicker and safer digital banking services.
Cryptocurrencies on the other hand pose a different challenge as it can be seen as a more of a speculative product. The only advantage that cryptocurrencies have over regular sovereign currencies is their decentralised nature, not being controlled by any central bank. However, this is also the biggest disadvantage because they are largely crowdfunded and do not have anyone to back them up or guarantee their value like with sovereign currencies. The present situation of speculation around cryptocurrencies is similar to the “Tulip mania” of the 17th century.
But their decentralised nature does not still pose a threat to sovereign currencies. The one essential aspect on which all currencies run is ‘faith.’ Cryptocurrencies will be a threat to sovereign currencies only if more people have faith in them and start using them. Though cryptocurrencies are popular amongst a certain group of the population, it will become a threat only when a substantial chunk of the population starts using it extensively as a medium of exchange.
In terms of regulatory measures, the very nature of such cryptocurrencies is a hindrance to the RBI as it cannot regulate the transactions but can only impose regulations on other smaller aspects such as opening an account in a cryptocurrency exchange or enforcing stricter KYC norms for such accounts.
The benefits of digitisation for the Indian economy and the way forward
E-commerce is the most obvious answer and firms like Amazon, Flipkart, Swiggy and Zomato will see a huge boost from more people gaining access to digital banking services. The financial products and services industry would benefit a lot from the digitisation of the banking sector.
The future of the banking sector would be a difficult thing to predict given the uncertainty that surrounds the COVID-19 pandemic. It is worsened by the fact that even before the pandemic hit, there were some major shocks that affected the banking sector. There was the NPA (non-performing assets) crisis and the “four balance sheet problem” which were two of the major problems that the banking sector had to address. The recovery from these already existing issues has slowed down because of the pandemic. The banking sector did take a big hit due to the pandemic and it is still trying to shake it off. With the banking products and services just starting their journey towards recovery, it will take a good six months to a year before we can comment on what the future holds.
The readers must note that the views expressed in this interview are the personal opinions of Professor Dr. Keerti Pendyal, and must not be regarded as views of Arthaniti or as absolute facts.This is written by Arthaniti's Editorial team members - Akshay Purandare (JGLS) & Nalin Karthik (JGLS)
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