Dear Reader,
How far will a regulator go in protecting the end consumer of financial services, specifically, banking services? All the way till the end, is what the Reserve Bank of India (RBI) has demonstrated so far.
The past few years has been exciting if you are someone who uses the plethora of banking services, from credit cards to payment apps. The RBI has been hard at work, finding regulatory gaps and filling them, bringing in entities under its purview where there was regulatory vacuum and tightening existing rules to keep entities on the straight and narrow. Be it the risk weights on unsecured loans, tightening screws on co-branded credit cards, bringing the wide network of fintech products and start-ups under its purview, all the while keeping a close eye on banking activities, the RBI has been on the ball.
The surge in technological innovations pertaining to money has kept the central bank on its toes. The pandemic made it clear that the RBI cannot be caught unawares by activities with nefarious intentions and must be proactive to protect the customer. After all, India’s financial system may be a giant and robust machine, but it is perched on the delicate branch of trust. Any questions raised on trust would threaten financial stability. This trust is now more precarious than ever with the thread of technology entwining closely with banking.
Of late, the RBI perhaps seems too harsh as it came down heavily on large lenders by restricting their business operations partly after it found serious compliance issues. We asked here whether the increase in frequency of restrictions (HDFC Bank in 2020, Paytm in 2023 and Kotak Mahindra Bank in 2024) shows that the central bank may be worried over financial stability or the conduct of these institutions. All that said, there is no doubt that the RBI’s actions are aimed at protecting the end customer. The key question now is: Are India’s financial institutions taking the customer for a ride?
The regulator’s ombudsman scheme received 7 lakh complaints against financial entities in 2022-23, a staggering 68 percent year-on-year increase. A fifth of the complaints were pertaining to digital banking. Note that complaints that come to the ombudsman are less than 5 percent of the total received by financial entities. In essence, this means that there has been a general surge in complaints.
And why not? System outages, data leaks, and errors have marred banks and other financial entities over the past year. HDFC Bank had to face the music after repeated outages that affected its digital banking operations two years ago. The same is true for Kotak Mahindra Bank. Fintech poster boy Paytm’s payments bank story is even more serious. The regulator pulled up Paytm over Know Your Customer lapses that raised questions of customers’ security. In Kotak’s case, much of the issue surrounds the bank’s IT infrastructure.
The business restrictions show that financial institutions do not have the requisite IT infrastructure to manage the surge in the volume of transactions and that increases the risks of theft. The fact that RBI officials are frustrated with the lack of adequate measures from financial entities even after multiple years of guidance speaks volumes about our banks.
Banks are increasingly beefing up their IT game, too. The operating expenses of banks have remained elevated for the past two years and many of the new investments that banks have made have been in technology. Bankers have indicated that spending on technology won’t reduce for some time to come. Even so, much more needs to be done.
Banks have increased their reliance on technology for everything mundane to even critical processes such as credit risk. Indeed, the RBI has warned regularly about the rising risks from technological innovations. Governor Shaktikanta Das has frequently warned in his public addresses that artificial intelligence and algorithms should not be relied on by banks while underwriting credit risk.
Simply put, human judgement cannot be replaced by unproven machine models when assessing risks. At best, technology can be a complementary assistant to human judgement. When the fiduciary world of banking meets the everchanging one of technology, no amount of caution can be let go. Financial institutions can use technology as able assistants, but outsourcing the basic functions related to money should be in the human hands of bankers.
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