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Fintech Framework: Regulatory responses to financial innovation

Ashwin Khorana, Technology Advisor & Consultant advises on possible situations in post COVID times


  1. How are banks and NBFCs leveraging on their omni delivery channels?

There are two kinds of banks. One is the high street bank and one is the banks, which are into financial inclusion and working with the Bharat in India. If I come down to the banks, which are catering to the Bharat customers, then I would not call it a similar story to the high street banks, but they are going on the lines of how demonetization was. If you look at the demonetization, the cash had dried out of the market. There was no cash coming into the NBFCs or the MFIs or the banks which needed money to be collected from their customers and we are currently in the same situation, though, for a different reason.

I think the critical thing out here is what we call for that segmental customer the muscle memory. Now that muscle memory makes the customer pay the bank month on month on time, or the collector going and taking the money. Now, with moratorium in place, the banks have started to connect with the customers through online channels. They have started to call the customer. They have started to speak to the customer. They have started to tell the customer whether moratorium is good for them or not, so if they have the money they can pay. It is better to do it that way rather than defer it for a quarter. This was not what done during demonetization, while that connect with the customer was not there. So, that learning has come into this time and all the banks are actually talking to the customers, keeping them informed, reminding them that this instalment should come not now, three months later, so that it continues to be that.

What role tech is playing to accelerate and expand the process?

Majority of digitization that had happened was more phygital. I will say that while the physical and digital merged together to arrive at a process which was simple in disbursement procedures, simple in account creation process, it was also simple in collection. The phygital still remains, the physical connect go out of what has been defined, even if I am opening a savings account online. I still need to do a biometric to get that account open or validate it for a long term account operation. So while, for the initial twelve months, you are allowed to do a two lakh kind of a balance thing, but after that you still need to get the physical connect with the customer to get the whole thing carried on.

In case of NBFC, they are not as lucky as the banks, because the digital footprint of the customers to whom loan has been given is not there. So there needs to be a physical connect. There needs to be a visit to the residences that happened before the loan gets disbursed. All these have actually come to a halt. They are not happening. So where it is a personal loan being given to a salaried employee, it is very simple, straight through, no connect. You are able to do that transaction, move ahead, give the loan and start collecting the instalments. But if it is a loan to be given to a person in the slum who does not have a digital footprint or does not have a credit rating history, then it is like you need to go to their places, verify the places before the loan gets approved.
The liquidity issue is there. I think if I look at the last quarter results of many banks, every bank has showed a growth. Now it is worth waiting for June to find out how we are growing, in what areas are they growing. Definitely deposits will see a growth, but then loans will see a dip in terms of what’s being disbursed.

The other bit is about the collections. If collections are not happening, it is definitely going to impact the liquidity of the banks who are giving loans. So after three months, while our books will still look good because there is no NPA, interest accrual would continue to happen and think of those sort, but the whole thing will come and get stuck at the basis of liquidity if collections do not start soon. So banks are trying to be innovative, and are trying to put new methods of collection.

Demonetization taught us how to use wallets, digital money. I think that learning has been maximized at this moment to see that we do not lose out the second time, especially the NBFCs.
So that is where it stands. How much digitized you are? There are two different kinds of banks and they have two different kinds of customers and only time will tell whether we have been taking the right steps or we still need to improve.

  1. Regulatory compliance is a must for BFSI. In the rapidly changing situation, how can technology help keep pace with regulatory conformance?

If you look at the regulatory compliance, things like giving a moratorium, saying NPA is not going to be applied for the next three months, for whoever is not paying the instalment, taking a call for the next three months are all regulatory compliance. Otherwise you would have had to mark a loan as a NPA once it has crossed the timeline of 90 days. Similarly, there are compliances where you report to RBI on what is happening, what has gone wrong, and what is it that needs to be changed? There are methods in places to do that and get the response back from the regulators with regards to what needs to be carried on.

RBI is already working on Zero Touch regulatory reporting. So basically, data moves from systems to the warehouse and from the warehouse directly to RBI without any manual intervention or correction being carried out. And we are carrying out the correction to inform RBI that this data was corrected and this needed to be fine this way with a lot of reasoning. So there were things already in place from regulatory perspective. I do not think there is anything new that has come for the regulation. Yes, there was a regulation on data access from outside. As employees are working from home, how are you contorting the data? I think there is a kind of relaxation provided to that because the Ministry is continuously providing you with an approval to work from home.
The IT minister has approved WFH till July. Now these things will definitely fall into kind of a regulatory mandate over how you do it.
Every organization has been able to work from home and that is a beautiful thing. How controlled, how secure, our questions will get answered in the coming days. We all think we are secure but you have to understand that hackers are one step ahead. Phishing happening and things of those sort are happening more at the moment. These kinds of things people have to control. What is the regulator going to say, t if there is a technical or security breach happening in your organization, needs to be informed. So I think that regulation is going to remain and not going anywhere. No regulation is going to be there that restricts, it would just try to control and ensure that you are doing it the right way.

 

 

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