The banking sector is gearing up to look beyond the pandemic to harness growth potentiality. The nuance of challenges in continuing the journey of bank reforms is now compounded with unprecedented Covid induced changes. A look at the evolving landscape of the financial sector to work out future strategies in banks will be interesting. Amid the rapid financial sector changes, the banking too sector has been rapidly coping with the evolving ecosystem. The metamorphosis in banking is further led by technological innovations and regulatory interventions making way for faster transformation. In addition to the traditional bank branch network pegged at 1,50,207 in March 2021, the alternate delivery channels are fast outpacing presence and strengthening the infrastructure and capacity building on a durable basis providing greater customer convenience on the go.

The proliferation of off-site technology-driven outlets is significantly rising. By June 2021, the number of ATMs has reached 2,13,766. Points of sale Terminals (POS) are at 4.6 million. Mobile / Internet banking is supported with 906 million debit cards and 6.30 lac credit cards. A host of virtual debit cards and digital wallets supplement the infrastructure to intensify digital financial transactions. These are the sequential developments as part of the modernisation of the financial sector, a journey in perpetuity. Increased proactive adoption of digital mode by bank customers due to the Covid-induced compulsion has provided the much-needed shift – a digital penetration level that could have taken years of efforts of banks to reach. As a result, customers could perceive the enhanced operational efficiency, competitive pricing and significant customer-centricity.

In reaching these milestones, private banks had lesser challenges as they started new with their own commercial frame, but PSBs had to reshape their fluid frame with avowed resolute to compete with private peers. The ongoing shift of PSBs from ‘sellers’ market’ to ‘buyers’ market’ is a big leap that is yet to shape up fully. The Covid-induced stressful experience added multidimensional nuances that are painful in the near term but can accelerate the speed of transformation in the medium to long term.

Despite navigating through the large-scale disruptions since the onset of the pandemic, banks are able to shape up well at a pace better than earlier. The recent Financial Stability Report of the RBI – July 2021 highlighted that banks have relatively improved by March 2021. The ratio of non-performing assets (NPAs) of banks have gone down to 7.48 percent, the capital adequacy ratio increased to 16 percent, and the provision coverage ratio (PCR) has gone up close to 70 percent. These improved performance parameters need to be sustained in the years to come using the pathway of policy reforms. The RBI has been proactive in guiding the banks by aligning the regulations and readjusting its lens, enabling banks to support the faster revival of the economy. The government, the majority owner of PSBs too, is calibrating bank reforms balancing its intent and socio-economic needs. In order to work out future strategies, it will be pertinent to recapitulate some notable policy changes, particularly initiated in the last 2-3 years, that tend to shape the future of the banking system.

1. Empowered non-banks

As a proactive central bank, the RBI has been working towards continuing the bank reforms and providing breakthrough support since March 27, 2020 to fight the catastrophic impact of the ‘once in a century’ kind of black swan event - the pandemic. It created reinforcing pillars of policy support to the three strategic arms of the financial sector – PSBs, Private Banks and non-banks so as to supplement and draw their synergy for innovative and well-balanced Covid-induced timely action. In order to complement the comparative advantages of banks and NBFCs, greater operational flexibility was provided to the lending institutions. A ‘Co-Lending Model’ (CLM) has been evolved by the RBI, permitting banks and NBFCs to come together to lend jointly to improve the flow of credit to the unserved and underserved sectors of the economy. It is intended to make available funds to the ultimate beneficiary at the bottom of the pyramid at an affordable cost. The banks can claim priority sector status in respect of their share of credit while engaging in the CLM. Collaboration between banks and non-banks is an inevitable tool to coexist in competitive markets.

Coming to fintech start-ups, the RBI permitted setting up a regulatory sandbox, or innovation hub, to help them launch innovative products at lower costs. It enabled live testing of new products or services in a controlled / test regulatory environment. In order to promote digital transactions while making it mandatory for Prepaid Payment Instruments (PPIs) to move towards interoperability with mandatory full – KYC, it hiked the limit of the outstanding balance in wallets to INR 2 lac. Earlier, the limit was INR 1 lac for any wallet or card. The deposit-taking limit of payment banks is increased from INR 1 lac to INR 2 lacs. When smarter financial intermediaries encounter new age techno-savvy customers, even the thin margins of profitability will logically flow to smart winners.

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