Rajiv Anand
As we wrap up 2018, here is a look at some of the big impact trends that hit the banking sector this year, and what they mean for the industry and the customer.
It's fair to say it’s not been a dull year for the banking industry! The year has had its share of Supreme Court verdicts, Reserve Bank of India (RBI) regulations and emerging tech trends, here is a quick roundup.
Aadhaar verdict
The Supreme Court passed a verdict in September this year that disallowed use of Aadhaar based e-KYC and e-Sign services by private companies. However, in December the government approved amendments to make Aadhaar voluntary for opening a bank account or getting a mobile connection.
Industry Impact: The verdict caused some concerns to the industry, especially to players building their model on pure digital offerings. E-KYC is a revolutionary concept, which brought convenience to customers and helped institutions digitize and make their processes more efficient. The recent move to make it voluntary is welcomed by the industry.
Customer Effect: While the Supreme Court order validated the constitutional validity of the use of Aadhaar and put the choice in the hands of the customer on sharing the details, it curtailed its use by private companies particularly telecommunication companies and financial institutions. This has certainly made the on-boarding of new customers that much more difficult. Hopefully, 2019 will see regulations being passed to allow voluntary use of Aadhaar possible.
Benchmark for floating rate loans
RBI is expected to introduce guidelines for ensuring uniform benchmarks for retail/ micro, small & medium enterprises (MSME) floating rate loans originated from April 2019. As of now what we understand is that the rate needs to be linked to an external benchmark as specified by RBI and the spread over the benchmark rate (as decided by the bank) should remain unchanged through the life of the loan unless the borrower’s credit assessment undergoes a substantial change.
Industry Impact: In the short term we don’t expect any change in rates. Banks are already adhering to the marginal cost of funds-based lending rate (MCLR) based pricing which is linked to an internal benchmark. Linking to an external benchmark will bring uniformity in how rates are set amongst banks, however, the actual impact will be known once the final guidelines are out, in terms of how portfolios need to be managed and rate change impacts passed onto customers.
Customer Effect: Prescribing uniform benchmark rates will improve transparency to customers and make rate comparisons easier. It will be in the interest of the customer if these guidelines are applied uniformly across lending institutions.
Non-Banking Financial Company (NBFC) Crisis
Default in the short-term obligations of IL&FS, an AAA-rated entity triggered a crisis of confidence among all NBFCs. This led to mutual funds and banks being reluctant to roll over commercial papers for NBFCs leading to liquidity squeeze for this sector.
Industry Impact: NBFCs face a liquidity crunch with higher funding costs that will affect their ability to lend and their margins. However, NBFCs with a strong balance sheet and operations will not be severely impacted.
Customer Effect: Customers with good financials will continue to find sources to borrow from. Customers with higher risk profiles, unstable cash flows etc. could face some stress in getting funding as this market is largely catered to by NBFCs.
UPI 2.0
Since its launch in August 2016, Unified Payments Interface (UPI) has seen tremendous growth with 128 banks live on UPI and 525 million transactions being processed through it in November 2018. Monthly UPI transaction volume grew by 114 percent from April to September this year, while automated teller machine (ATM) transactions grew by 5 percent during the same period. This signals a move to a less cash economy, driven by convenient payment methods.
UPI 2.0, is the cool new avatar which has introduced and has under works many features that will enhance the experience for customers and businesses. After easing person to person (P2P) payment transactions, the new features improve the experience for person to merchant (P2M) and credit-related transactions. Further, NPCI has also enhanced security measures in its new release by embedding digital signatures to intent and quick response (QR) code based transactions.
Industry Impact: This pushes forward the digitization agenda of the nation. UPI brought the banking ecosystem on a single platform, which made payments interoperable. UPI 2.0 eases the linkage between business and customers, and extends features on the credit side, making UPI a more holistic solution.
Customer Effect: UPI 2.0 further improved convenience in payments for customers, by increasing the number of use cases, and further reducing friction.
Continuing Pace of Digitisation Financial institutions continue their focus on digitization with full gusto. After significant digitization being done in the payments space, this year we are seeing innovations in lending. Instant loans offered through third-party portals is one of the new offerings picking up in the market. Online and instant bank account opening has also seen good traction, with primarily millennials adopting this product. Another key trend is the use of Artificial Intelligence/Bots etc. in customer interactions and automation of internal processes.
Industry Impact: Digitisation is leading to a reduction in costs. This enables financial institutions to reach a wider audience. Overall, this will help improve business top lines and bottom lines.
Customer Effect: Rapid digitisation is driven by customer preferences as much as it’s driven by innovations and tech advancement. Customers can expect frictionless, instant processes and hassle-free ways to manage their finances.
The writer is Executive Director, Axis Bank.
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