The Indian economy is perhaps on the brink of a slowdown. At the same time, the RBI and its authorities are under scrutiny for the perceived lack of banking control. Result - the Indian banker is losing sleep over both slow growth and heightened risk.
In such a scenario, Jaya Vaidhyanathan, CEO of BCT Digital and a banking sector expert, says that the regulator needs to walk a tight rope. It needs to ensure that businesses have an enabling environment to succeed, even as fraud is detected and prevented. This requires fine-grained view of credit risk, which in turn, can be achieved through analytical modelling, custom-built to the Indian context.
Talking to Moneycontrol, Vaidyanathan gives more insights into RBI’s Innovation Sandbox and how it will facilitate the much needed room for innovation.
Edited excerpts:
Q: How can RBI’s Innovation Sandbox address the challenges in the banking regulatory framework?
A: The term innovation sandbox implies an environment that promotes out-of-the-box thinking, unrestricted by rules and regulations. Such an environment elevates mistakes with the intent of discovering hidden prospects, challenges and novel solutions. There is no doubt that the RBI initiative has vast transformative potential. Leveraging this to a conformist set-up like regulatory framework in banking, therefore, provides an interesting paradoxical opportunity.
The framework proposed by the RBI could enable FinTech players to experiment with innovative ideas for India’s banking sector. Possible regulatory relaxations are an ideal way to break new ground in tackling risks end-to-end – from assessment to prevention and beyond. One of the fundamental tenets of the innovation sandbox is that it allows technology-led companies to access user and banking-related data for experimentation – data that used to be heavily restricted. When it comes to building competitive offerings and promoting out-of-the-box thinking, this regulatory bypass plays instrumental role.
Q: How can banks benefit from this?
A: As banks continue to evolve, their understanding of customer needs, too, is transforming. As contextual offerings come into the picture, they bring along algorithms for enhanced consumer/competitive insights and an explosion in the channels by which customers and banks access each other. While this is a leap in the right direction, it also opens the banking system to increased risks and vulnerabilities.
The innovation sandbox interfaces a “black hole”, which is constituted by (previously) inaccessible core banking data, with technology innovations. It encourages banking innovations by allowing FinTech players to experiment with data and technologies within a controlled environment. It also gives innovators access to immediate customer feedback, meaning aggressive launch cycles and accelerated time to market. The innovations can in turn simplify banking through faster payments, lower risks, and more. A calibrated launch model minimizes stakeholder risks, which empowers both parties to work together for collective progress.
Q: What is the role of technology in ensuring the smooth execution of innovation sandbox?
A: The concept of the innovation sandbox is rooted on technology – up to a large extent.
For example, recent banking reforms are forcing the industry to relinquish old techniques of data analysis and modelling. With digitization, the volume of data has been increasing in leaps and bounds. It is becoming evident that the technology available with most banks is not adequate to process all of this data. So, an alarming amount of data goes to waste, and with it, valuable insights are lost.
Luckily, advanced technologies can easily overcome these challenges. With the adoption of such new and emerging technologies – like big data, AI/ML, fuzzy logic, natural language processing (NLP) and analytics – the banking industry today is putting big data and analytics to good use.
Q: What is the readiness of Indian banks today to take up this new transformation?
A: We’re as ready as we’ll ever be. There’s no doubt that India’s banking industry needs innovative FinTech intervention. However, banks and users need to understand that, ultimately, the success of the RBI initiative will be strongly determined by how far confidential banking and user data is made available for third-party experimentation. There is a possibility for the experiments to go wrong – we cannot deny that fact. However, such risks can be mitigated (up to an extent) by exercising diligence in data privacy. Strengthening the scope of the Information Technology Act beyond what it currently offers is a starting point.
Q: What is the current regulatory landscape in India and what does 2020 hold in store?
A: The Indian banking system is, no doubt, at a transformative juncture. We’re at the cusp of an era where the emphasis is on safe, responsive and dynamic banking. In my view, 2020 will see greater availability of borrowers’ data within the banking system. The adoption of APIs will allow banks to tap into cutting-edge FinTech innovations easily. The trifecta of data, technologies and strategy will assist bankers in effectively weeding out bad loans and frauds, by accelerating problem detection and pre-emptive actioning.
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