Covid-19 has increased the risks associated with digital transactions in the Indian banking system and overall instances of fraudulent transactions have risen during the pandemic, veteran banker, Uday Kotak said.
“During COVID, we have witnessed increased fraud in the banking system. The thought of losing my customers’ money to theft is what keeps me up at night,” Uday Kotak said in an interview given to a business magazine.
“So, while COVID has brought about a significant increase in digital adoption and transactions, it has also increased the risks associated with digital,” Kotak said.
Even before Covid, bank frauds have seen a major spike in the Indian banking system. According to RBI data, many banks, across the private and public sector, have seen a significant spike in number of fraud cases in 2019-20 and the quantum of money involved, indicating that challenges on risk management continues in the system.
For instance, PNB (Punjab National Bank) reported Rs 14,633 crore worth of frauds in FY 20 from 509 cases, more than double compared with Rs 5,903 crore from 216 cases in FY 19, according to the official figures. To cover this, the bank has made a provision of Rs 14,625 crore in FY 20. In FY19, the bank has provided Rs 7,320 crore to cover the fraud, data showed.
Stressing that risk management lies at the core of what distinguishes financial institutions, Kotak said the technology will be at the forefront for building the core of the banking business with customer-centricity as the focus.
Fintechs and banks
To a question on fintechs, Kotak said, while fintechs are very good at is understanding customer convenience, there is a balance between customer convenience and the safety of their money.
“This is a very important distinction — one that we as bankers normally learn the hard way. As a leveraged institution, the bulk of our money is other people’s money, and net equity ratios of banks are obviously much higher than those of any other form of company,” Kotak said.
Covid taught banks the importance of risk management, Kotak said. “Frankly, you never thought something like this would happen. It brings you to the core of risk management, because the cost of planning for this risk, which is a once-in-100-years event, is extremely difficult,” Kotak said.
“Though most of us moved fast with work-from-home, I don’t think many of us thought about the risk or our preparedness enough, compared to the speed with which we changed our business models or lives,” the veteran banker added.
More consolidation in the offing
Kotak is of the view that the Indian banking system will undergo consolidation moving ahead and eventually private banks will control half of the assets of the banking system.
Noting that even now about 65 percent of the Indian banking system is still owned by the state, Kotak said more private-sector banks are taking a share. “My personal view is that you will see consolidation among public-sector banks, you’ll see greater consolidation in banking as a whole, and, long term, I think state-owned banking and private-sector banking will move to a ratio of 50/50,” Kotak said.
Last year, the government effected a major consolidation drive among state-run banks. It merged ten public sector banks into four.
As part of the plan, Oriental Bank of Commerce and United Bank of India were merged into Punjab National Bank, Andhra Bank, and Corporation Bank into Union Bank of India, Syndicate Bank into Canara Bank, and Allahabad Bank was merged into Indian Bank.
Covid--a great leveler
Kotak said Covid is a great leveler to bridge the gap between urban and rural India. Though historically, there has been a migration from rural to urban India for more opportunities, if connectivity and broadband infrastructure could be properly built out in semi-urban and rural India, there would be less need to move to cities, Kotak said.
“This can lead to a more balanced India with a strong push to rural and semi-urban growth, even as urban India, which was otherwise choked, learns to live with the new way of life,” said Kotak.