Tag: Green Banking

Private sector banks in India are an essential component of the banking system, contributing significantly to the country’s economic development. These banks are owned and operated by private entities and focus on profitability while delivering efficient and innovative financial services. They play a dual role of economic enablers and financial service providers, serving both individual and corporate customers.

Roles of Private Sector Banks

1. Driving Economic Growth

Private sector banks mobilize savings from individuals and institutions and channel them into productive investments such as loans for businesses, industries, and infrastructure projects. By doing so, they act as a catalyst for economic growth and development.

2. Enhancing Financial Inclusion

Through innovative products and digital banking platforms, private banks reach underserved and unbanked sections of society. Initiatives like mobile banking, rural outreach programs, and microfinance contribute to expanding financial inclusion.

3. Promoting Innovation in Banking

Private sector banks lead the way in adopting new technologies and banking solutions, such as online banking, mobile apps, AI-driven customer service, and advanced payment systems. This innovation improves customer experience and enhances operational efficiency.

4. Providing Employment Opportunities

Private banks create numerous employment opportunities across various levels, from entry-level clerks to managerial positions. By hiring skilled personnel, they also contribute to developing the talent pool in the financial services sector.

5. Supporting Entrepreneurship

Private banks actively fund startups and small businesses by providing loans, working capital, and other financial products. They play a pivotal role in fostering entrepreneurship, which drives innovation, employment, and economic diversification.

6. Encouraging Foreign Investments

Private sector banks facilitate foreign direct investment (FDI) and portfolio investment by providing seamless banking services to international investors. They help integrate the Indian economy with global markets, enhancing foreign exchange reserves and boosting economic stability.

Functions of Private Sector Banks

1. Acceptance of Deposits

One of the core functions of private sector banks is mobilizing deposits from the public. They offer various deposit schemes, such as savings accounts, current accounts, fixed deposits, and recurring deposits, providing customers with a safe place to store their money while earning interest.

2. Provision of Loans and Advances

Private sector banks provide short-term and long-term loans to individuals, businesses, and industries. These loans cater to diverse needs such as personal financing, housing, education, working capital, and business expansion. By doing so, they generate credit and drive economic activities.

3. Facilitating Payments and Settlements

Private banks play a vital role in facilitating payments and settlements through modern banking services. They provide electronic fund transfers, debit and credit cards, net banking, mobile payments, and digital wallets, ensuring seamless financial transactions for their customers.

4. Foreign Exchange Services

Private sector banks offer foreign exchange services, including currency conversion, forex trading, and international remittance. They support businesses engaged in international trade by providing services such as letters of credit, export financing, and foreign currency loans.

5. Wealth Management and Investment Services

Private sector banks offer a range of wealth management and investment services, including mutual funds, insurance, stockbroking, and portfolio management. These services cater to the growing demand for investment planning and financial security among customers.

6. Risk Management

Private banks actively manage risks associated with banking operations, such as credit risk, market risk, and operational risk. They employ advanced analytics and technology to monitor and mitigate risks, ensuring financial stability for both the bank and its customers.

7. Corporate Banking and Advisory Services

Private sector banks offer specialized corporate banking services, including cash management, project financing, and trade finance. They also provide advisory services to businesses, helping them make informed decisions regarding mergers, acquisitions, and investment strategies.

Prompt Corrective Action (PCA) is a framework used by the Reserve Bank of India (RBI) to maintain the health and stability of banks and prevent them from falling into severe financial distress. PCA is a set of regulatory measures and interventions that the RBI can apply to banks showing signs of financial weakness or underperformance. The primary objective of PCA is to ensure that banks take corrective actions in a timely manner to improve their financial condition, thereby safeguarding the interests of depositors and maintaining the stability of the banking system.

Objective of PCA:

The main objective of the PCA framework is to prevent banks from failing by ensuring that they take corrective actions early enough. The RBI introduced PCA as a regulatory tool to monitor and guide banks facing deterioration in financial health, thereby preventing them from escalating into insolvency or systemic risk. The framework encourages banks to improve their financial position by addressing key performance indicators, including capital adequacy, asset quality, and profitability. By doing so, PCA aims to:

• Protect the interests of depositors
• Maintain the integrity and stability of the banking system
• Ensure sound and efficient banking operations

PCA Triggers:

RBI triggers the PCA framework when a bank fails to meet certain prescribed financial thresholds, primarily related to capital adequacy, asset quality, and profitability. The RBI monitors these indicators regularly and if any of these fall below the stipulated limits, the bank is placed under PCA. The following factors are typically used as triggers:

• Capital Adequacy Ratio (CAR):

A bank is required to maintain a minimum level of capital to absorb potential losses and maintain solvency. A bank falling below the minimum CAR (usually 9%) can trigger the PCA.

• Net Non-Performing Assets (NNPA):

The level of non-performing assets (NPAs) reflects the bank’s asset quality. If the NNPA exceeds 6%, the bank is considered to be under distress, triggering the PCA.

• Return on Assets (RoA):

Persistent negative RoA can indicate poor profitability and inefficiency. If a bank suffers from continuous losses over a certain period (typically three years), it may fall under PCA.

PCA Framework – Categories and Gradations

The RBI categorizes the severity of the bank’s financial condition based on its performance metrics and assigns specific corrective actions accordingly. The PCA framework has three broad categories based on the severity of the bank’s performance:

• Category 1:

Banks in this category are experiencing moderate stress, where only basic corrective actions are required. These banks may be asked to submit a detailed plan to address the concerns, focusing on their capital adequacy and improving asset quality.

• Category 2:

Banks in this category have more serious financial distress, and the RBI may impose stricter conditions such as restrictions on branch expansion, limiting managerial compensation, and halting dividend payouts. These banks must take significant corrective measures and show improvement in financial performance.

• Category 3:

This is the most severe category, indicating that the bank’s financial condition is critical. The RBI may apply restrictions such as curbing lending and investment activities, limiting the bank’s operations, or even placing the bank under a moratorium to prevent further deterioration. These banks need to show immediate and significant improvement to avoid insolvency.

Corrective Measures under PCA

Once a bank is placed under the PCA framework, the RBI applies a range of corrective measures to restore its financial health. These measures vary depending on the severity of the bank’s problems and the category it falls under. Some of the common actions include:

• Restriction on Dividend Payments:

Banks under PCA may be prohibited from paying dividends to shareholders to conserve capital and improve the bank’s financial position.

• Restriction on Branch Expansion:

To prevent further financial exposure, banks under PCA may be prohibited from opening new branches or ATMs, which helps reduce operational costs and risks.

• Control on Lending Activities:

Banks facing severe financial problems may face restrictions on their lending operations. This includes a reduction in the volume of loans and advances or restrictions on certain types of high-risk lending activities.

• Enhancing Capital Adequacy:

Banks under PCA are often required to raise additional capital to meet the minimum capital adequacy ratios. This can involve seeking investments, rights issues, or other measures to strengthen the balance sheet.

• Governance and Management Changes:

In extreme cases, the RBI may require changes in the management or governance structure of the bank to ensure better control, oversight, and restructuring of operations.

• Special Audit:

RBI may conduct a special audit to assess the bank’s operations, identify the root cause of its distress, and recommend specific measures for turnaround.

Exit from PCA:

Once a bank under PCA improves its performance and meets the required financial thresholds, it can exit the framework. The RBI regularly reviews the bank’s performance and monitors key indicators. If the bank shows consistent improvement, it can be removed from PCA, and the restrictions will be lifted. The process of exiting PCA is gradual, as the RBI ensures that the improvement is sustainable and not temporary. This ensures the bank’s long-term stability and financial health.

Impact of PCA on Banks

The PCA framework has a dual impact on banks. On the one hand, it acts as a safeguard to prevent banks from deteriorating to the point of failure by requiring them to take corrective actions in a timely manner. On the other hand, the imposition of restrictions under PCA can have a significant impact on the bank’s operations, including reduced growth prospects, limited profit opportunities, and a potential loss of customer confidence. However, the framework ensures that banks are monitored closely, and corrective measures are implemented before the situation worsens.

Examples of PCA in India

Several banks in India have been placed under PCA by the RBI in the past, with Public Sector Banks (PSBs) being particularly susceptible due to their large exposure to non-performing assets (NPAs). Notable examples include Punjab and Maharashtra Cooperative Bank, Bank of India, and Indian Overseas Bank, among others. These banks faced PCA due to rising NPAs, low capital adequacy, and profitability issues. In some cases, banks have managed to exit PCA after restructuring their operations and improving financial health.

The Indian banking system has evolved over several decades to become one of the most robust and diverse financial systems in the world. It plays a critical role in the economic development of the country by mobilizing savings, promoting investment, facilitating credit access, and contributing to financial inclusion. The structure of the Indian banking system is multi-layered and consists of various types of banks, each serving different segments of society and the economy. The system is regulated and supervised by the Reserve Bank of India (RBI), the country’s central bank.

Reserve Bank of India (RBI)

Reserve Bank of India (RBI), established in 1935, is the central bank of India and is responsible for regulating and supervising the banking system. It is the backbone of the Indian banking structure and performs several key functions:

• Monetary policy formulation:

RBI is responsible for controlling inflation and managing the money supply in the economy through its monetary policy tools.

• Regulation and Supervision:

RBI oversees all commercial and cooperative banks, ensuring compliance with banking regulations and safeguarding the financial system’s integrity.

• Currency issuance:

RBI has the sole authority to issue currency notes in India, except for one-rupee notes and coins, which are issued by the Ministry of Finance.

• Banker’s bank:

RBI acts as a banker to the government, managing government accounts and facilitating transactions.

RBI’s role is crucial in maintaining financial stability, promoting economic growth, and protecting the interests of depositors.

Scheduled Commercial Banks (SCBs)

Scheduled Commercial Banks are those banks that are included in the Second Schedule of the Reserve Bank of India Act, 1934. These banks are further classified into:

• Public Sector Banks (PSBs): These banks are owned and controlled by the government. The largest and most significant segment of India’s banking system, PSBs include State Bank of India (SBI), Punjab National Bank (PNB), Bank of Baroda, and Canara Bank. Public sector banks play a critical role in ensuring financial inclusion and economic growth, especially in rural and underserved areas.
  • Nationalization: A significant portion of public sector banks was nationalized in 1969 and 1980. This move was aimed at making banking services accessible to all sections of society and ensuring that the financial system was used for national economic objectives.
• Private Sector Banks:

These are banks owned and controlled by private individuals or entities. Over the years, private sector banks in India have grown in number and influence. Some of the prominent private sector banks include HDFC Bank, ICICI Bank, Axis Bank, and Kotak Mahindra Bank. These banks are known for their modern infrastructure, better customer service, and technology-driven solutions.

• Foreign Banks:

Foreign banks are branches or subsidiaries of banks incorporated outside India. These banks operate in India but follow local regulatory requirements. Examples of foreign banks in India include HSBC, Standard Chartered, and Citibank. Foreign banks play a significant role in bringing international banking practices to India.

• Regional Rural Banks (RRBs):

Established in 1975 under the Regional Rural Banks Act, RRBs aim to provide banking services to rural and semi-urban areas, focusing on agricultural and rural development. These banks are a joint venture between the central government, state governments, and sponsoring commercial banks. They are critical for promoting financial inclusion in rural India.

Cooperative Banks

Cooperative banks are established under the Cooperative Societies Act and operate on the principle of cooperation. They are different from commercial banks in their organizational structure and ownership. These banks focus on providing financial services to their members and are mainly involved in financing agriculture, rural development, and small-scale industries. Cooperative banks can be further categorized into:

• Urban Cooperative Banks (UCBs):

These banks operate in urban and semi-urban areas and provide financial services to individuals, small businesses, and traders. They are regulated by the Reserve Bank of India (RBI) and the State Governments.

• Rural Cooperative Banks:

These banks operate in rural areas and are divided into State Cooperative Banks (SCBs), District Central Cooperative Banks (DCCBs), and Primary Agricultural Credit Societies (PACS). Rural cooperative banks play a vital role in providing short-term credit to farmers and rural entrepreneurs.

Development Banks

Development banks are specialized financial institutions that provide long-term loans and credit for industrial and economic development. These banks do not deal with everyday banking transactions like savings or checking accounts, but instead focus on funding large-scale infrastructure, industrial, and agricultural projects. Some important development banks in India:

• Industrial Development Bank of India (IDBI):

Established in 1964, IDBI was initially set up to finance the growth of industries. Though it has transitioned into a commercial bank, it continues to be an important player in industrial financing.

• National Bank for Agriculture and Rural Development (NABARD):

NABARD plays a significant role in the development of agriculture and rural sectors in India. It provides credit and financial support to farmers, cooperatives, and rural businesses.

Non-Banking Financial Companies (NBFCs)

Non-Banking Financial Companies (NBFCs) are financial institutions that offer various financial services such as loans, asset management, leasing, and investment. Unlike banks, NBFCs do not have a banking license and cannot accept demand deposits (e.g., savings or checking accounts). NBFCs are important for providing financial services to sectors like housing, automobiles, and small businesses. Some notable NBFCs include HDFC Ltd., LIC Housing Finance, and Muthoot Finance.

Microfinance Institutions (MFIs)

Microfinance Institutions (MFIs) provide financial services such as micro-loans, savings, and insurance to low-income individuals and communities, primarily in rural and semi-urban areas. MFIs are critical for promoting financial inclusion and helping people in underserved regions access credit to improve their economic conditions. These institutions are often regulated by the Reserve Bank of India and follow a model that focuses on small, informal loans with minimal collateral.

Payments Banks and Small Finance Banks:

• Payments Banks:

Introduced by the RBI in 2015, payments banks are a new category of banks that can accept deposits, provide remittance services, and offer mobile banking services but cannot lend. Airtel Payments Bank and India Post Payments Bank (IPPB) are examples of payments banks in India.

• Small Finance Banks:

Small finance banks are set up to provide financial services to unbanked and underserved sectors, such as small businesses, small farmers, and low-income families. They can offer a wide range of products like savings accounts, loans, and insurance. Ujjivan Small Finance Bank and Equitas Small Finance Bank are examples of such banks.

The evolution of banking in India is a long and complex process that spans thousands of years. From early money-lending practices to the establishment of a sophisticated modern banking system, the Indian banking sector has evolved significantly, responding to the country’s socio-economic needs and global financial changes.

1. Ancient and Medieval Periods (Up to 1600 AD)

Banking in India has deep roots in antiquity. During the Vedic period (1500-500 BCE), trade and commerce flourished, and the concept of moneylenders emerged. The Vedic texts mention various forms of loans and financial transactions. Financial transactions were largely handled by merchants, guilds, and moneylenders who played the role of informal bankers.

In medieval India, the role of moneylenders expanded, and Shroffs and Seths became integral to the financial system. They offered loans, kept deposits, and facilitated trade and commerce in local markets. These early forms of banking helped in the movement of money for business, trade, and agriculture. The lack of a formal, centralized banking system meant that moneylenders and merchants acted as both depositors and creditors.

2. British Colonial Period (1600-1947)

The arrival of the British East India Company in India led to the introduction of formal banking practices in the country. During the 18th century, the British brought with them modern banking practices to India. Banking institutions such as the Bank of Hindustan (1770), founded in Calcutta (now Kolkata), marked the early start of formal banking operations. However, this bank was liquidated in 1830, and its failure revealed the need for stronger banking institutions.

The first successful commercial bank in India was the Bank of Bengal, established in 1809 in Calcutta, which later merged with the Bank of Bombay (1840) and the Bank of Madras (1843) to form the Imperial Bank of India in 1921. This was a major development in the Indian banking sector, providing a more structured financial system.

In 1865, the Reserve Bank of India (RBI) was conceptualized, but it was not until 1935 that it was formally established. The RBI was created as the central bank of India to regulate currency and credit, and to oversee other banks and ensure the financial stability of the country. The establishment of the RBI laid the foundation for a more organized banking system.

3. Post-Independence Banking System (1947-1969)

Following India’s independence in 1947, the Indian government took steps to develop a banking system that would support economic development, financial inclusion, and welfare policies. A crucial step in this direction was the nationalization of the Reserve Bank of India (RBI) in 1949, making it an autonomous body under the government’s control. The RBI became responsible for regulating the monetary and credit systems of India.

In 1955, the Imperial Bank of India was transformed into the State Bank of India (SBI), which became the largest public sector bank in the country. It marked the beginning of a state-controlled banking system in India. The government aimed at ensuring that banks served national interests, with an emphasis on socio-economic development.

4. Nationalization of Banks (1969)

A defining moment in the evolution of the Indian banking system occurred on July 19, 1969, when the Government of India nationalized 14 major commercial banks, which controlled about 85% of the country’s banking business. The main objective of this nationalization was to direct banking resources towards priority sectors like agriculture, industry, and rural development, and to ensure that credit reached every corner of the nation, including rural and underserved areas.

The nationalization was intended to make the banking sector more inclusive, accessible to the common people, and aligned with the goals of economic development. It significantly expanded the role of banks in rural and agricultural finance, and during this time, many banks also opened branches in remote areas to serve the rural population.

A second wave of nationalization occurred in 1980, with the government nationalizing another six commercial banks, further consolidating the public sector dominance in the Indian banking sector.

5. Reforms and Liberalization (1991)

The 1991 economic reforms, which were prompted by a financial crisis, marked the next significant phase in the evolution of banking in India. In the wake of the crisis, the government implemented sweeping liberalization policies to open the economy to global competition and modernize various sectors, including banking.

Key reforms in banking during this period included:

• The privatization of some public sector banks (though they remained government-controlled), promoting competition.
• The entry of private sector banks like ICICI Bank, HDFC Bank, and Axis Bank. These banks introduced technology-driven banking services and more customer-oriented products.
• The opening up of the Indian banking system to foreign banks, allowing international financial institutions to set up branches in India.
• The introduction of capital adequacy norms and prudential regulations by the RBI to ensure financial stability and safeguard the interests of depositors.
• The introduction of modern banking technology and the automation of banking operations, making banking more efficient and transparent.

6. Technological Revolution and Digital Banking (2000-Present)

The 21st century has seen the banking sector in India undergo a profound technological transformation. Banks began adopting core banking solutions (CBS), which allowed them to provide seamless banking services across different branches in real-time. This shift to technology-driven banking paved the way for various digital banking products such as Internet Banking, Mobile Banking, and ATM services, improving customer convenience and service delivery.

The introduction of ATMs in the 2000s revolutionized cash withdrawals, making banking more accessible to the masses. Furthermore, the Unified Payments Interface (UPI), launched in 2016, transformed the way payments are made in India by allowing instant bank transfers through mobile phones, greatly boosting financial inclusion.

India’s government also launched the Pradhan Mantri Jan Dhan Yojana (PMJDY) in 2014, a financial inclusion program aimed at ensuring access to banking services for all Indians, especially the underserved rural population. As a result, millions of people opened bank accounts and gained access to formal banking services for the first time.

7. Current Trends and Future Directions

Today, the Indian banking system is a dynamic and competitive sector, comprising both public and private sector banks, foreign banks, and cooperative banks. The sector continues to evolve, with significant advancements in FinTech, blockchain technology, artificial intelligence (AI), and cryptocurrency. The banking system has adapted to global trends in digitalization, contributing to a rapidly growing cashless economy.

The regulatory framework remains robust, with the Reserve Bank of India maintaining a strong oversight role. The Indian banking sector is expected to play a crucial role in the future, especially in fostering economic growth, supporting digital innovation, and driving financial inclusion.

The evolution of banking in India is a story of transition from simple money lending practices to a sophisticated and modern banking system that caters to the needs of individuals, businesses, and the economy as a whole. From ancient times to the modern-day era, India’s banking system has undergone significant changes, adapting to both domestic requirements and global financial trends.

1. Early Banking (Pre-Colonial India)

Banking practices in India can be traced back to ancient times. In the Vedic period (1500-500 BCE), financial transactions were conducted through moneylenders and merchant guilds, known as srenis. These guilds were responsible for lending, saving, and even facilitating trade in goods and services. Moneylenders offered short-term credit, while merchants acted as informal bankers by providing loans and credit for trade. Ancient Indian texts, such as the Arthashastra, mention various forms of banking and financial transactions.

In the medieval period, banks were referred to as “Shroffs” and “Seths”, who performed functions like accepting deposits, issuing promissory notes, and offering loans. They were integral to trade and commerce, especially in the urban centers.

2. Modern Banking Beginnings (British Colonial Period)

The modern banking system in India began during the British colonial period, where the foundations for the current banking system were laid. The first modern bank in India was the Bank of Hindustan, founded in 1770 in Calcutta (now Kolkata). However, it ceased operations in 1830 due to poor management and a lack of financial stability.

In 1806, the General Bank of India was established, followed by the Bank of Bengal in 1809, which later merged with the Bank of Bombay (founded in 1840) and the Bank of Madras (founded in 1843) to form the Imperial Bank of India in 1921. This merger eventually became the State Bank of India (SBI) in 1955, marking the beginning of a strong public sector banking system in India.

3. Establishment of the Reserve Bank of India (RBI) – 1935

A landmark event in the history of Indian banking was the establishment of the Reserve Bank of India (RBI) in 1935. The RBI was founded as the central bank of India under the Reserve Bank of India Act of 1934. The primary functions of the RBI were to regulate the currency and credit system, act as the custodian of the nation’s foreign exchange reserves, and supervise the functioning of commercial banks. The creation of the RBI marked a critical step in the organization of the banking system, enabling better regulation and ensuring the stability of India’s financial system.

4. Post-Independence Developments (1947-1969)

After India gained independence in 1947, the banking sector went through significant reforms aimed at nationalization and financial inclusion. The Indian government adopted policies to bring about financial inclusion, emphasizing the importance of banks in promoting economic development.

In 1955, the Imperial Bank of India became the State Bank of India (SBI), India’s largest public sector bank, to align with the government’s policy of promoting nationalized banks. The government also took several steps to extend banking services to rural areas and encourage saving habits among the population.

5. Nationalization of Banks (1969)

One of the most significant events in the history of banking in India was the nationalization of banks in 1969. On July 19, 1969, the Government of India nationalized 14 major commercial banks, which collectively accounted for 85% of the total banking business in the country. This was part of the government’s initiative to ensure that banking services were available to all sections of society, including rural areas and underprivileged sections.

The goal was to increase the reach of banking services, especially in rural areas, and to support the government’s socio-economic objectives. The government continued this trend in 1980 by nationalizing another six commercial banks.

6. Liberalization and Economic Reforms (1991)

The early 1990s brought a major shift in India’s banking system with the liberalization of the economy. The New Economic Policy of 1991 implemented by the Indian government ushered in significant reforms in the banking sector, promoting competition, technological advancement, and private sector involvement.

Key reforms included the privatization of some public sector banks and the entry of private sector banks such as ICICI Bank, HDFC Bank, and Axis Bank. The government also opened the door for foreign banks to operate in India, further enhancing competition and modernizing banking services.

The RBI introduced prudential norms for commercial banks, including capital adequacy requirements, loan provisioning, and improved regulatory frameworks to strengthen the banking sector.

7. Technological Advancements and Modernization (2000-Present)

In the 21st century, Indian banks embraced digital banking and technology-driven services. With the rise of the internet and mobile technology, banking services became more accessible to a broader audience. The introduction of core banking solutions (CBS) allowed banks to offer seamless, real-time services across various branches.

In 2000, the introduction of ATMs revolutionized banking by providing customers with 24/7 access to their funds. The development of Internet Banking, Mobile Banking, and UPI (Unified Payments Interface) further simplified financial transactions.

Pradhan Mantri Jan Dhan Yojana (PMJDY) launched in 2014 played a crucial role in enhancing financial inclusion by bringing millions of people into the formal banking sector, especially in rural areas.

8. Regulatory Reforms and Future Trends

RBI continues to play an essential role in maintaining the stability and growth of the banking system. With advancements in FinTech, artificial intelligence (AI), and blockchain, the Indian banking system is moving towards greater innovation. Digital banking, artificial intelligence, blockchain technology, and cryptocurrencies are expected to play a major role in shaping the future of banking in India.

India’s banking system has evolved from traditional money lending to a sophisticated network of digital and global banking services, continuously adapting to the changing needs of its economy and population.

Over the past three decades, India has experienced immense change in just about every aspect of life. GDP per capita has soared, literacy is up, life expectancy is higher than ever, and the country’s digital economy is booming.

It is expected that consumer spending will double by 2025 and eCommerce penetration will increase by a factor of five, creating an ideal environment for exponential growth. Reports show FinTech Investments in India almost doubled to US$3.7 billion in 2019, up from US$1.9 billion the previous year. This pegs the country as the world’s third largest FinTech hub, behind the US and the UK.

Accessing the growth opportunity that India represents requires deep understanding of a diverse, dynamic economy and a culture that is both ancient and cutting-edge, as well as the latest regulatory and payments environment.

The Government of India launched the National Strategy for Artificial Intelligence (NSAI) in 2018. Also, it launched its flagship project, namely Digital India. The objective of these moves was to transform the landscape of digital technology in a way that it could be integrated with businesses.

Following the outbreak of the Covid-19 pandemic, India started advancing towards achieving its digital transformation goals faster. This has been possible due to an improvement in the country’s digital infrastructure amid a series of subsequent lockdowns to curb the pandemic.

Acknowledging the significance of AI and digital technology, many technology and business leaders have embraced them. This trend is likely to gain traction in the coming years.

Whether one thinks of the Internet or digital technology, both have improved speed and connectivity due to innovation. At present, they are indispensable for business organizations as well as consumers. They are likely to remain valuable assets to business organizations in the future.

India’s rapid digital transformation

India’s digital transformation was jumpstarted by ‘Digital India’, a campaign launched by the Indian government in 2015 aimed at ensuring the country’s citizens are connected through high-speed networks and can access a robust digital ecosystem. The economic rationale behind this campaign is clear; research from McKinsey states that digitisation can create 65 million new jobs by 2025 and add US$1 trillion to the economy. This is a very positive indicator for global companies who are looking to build digital businesses in India.

Digital payments and FinTech are now a big part of life for many of the country’s 1.35 billion people, with 52% of the country adopting some form of FinTech. 99% of the adult population is part of the Aadhaar digital identity system and 60% of that population is under the age of 40. With an estimated 750 million smartphone users you can see how far India has travelled in its rapid digital transformation, providing a strong environment for many digital businesses.

Despite these impressive numbers, digital payments can still increase on a massive scale as a large part of the population has not fully adopted digital payments yet. If you look at eCommerce, it accounted for 3% of consumer spending in 2020, compared to 21% in the US. It is clear that despite India being a huge market and growing fast, it is still early days and entering now can lay the foundation for future growth.

High Barriers to entry

The opportunities India has to offer are huge but changing regulation and rapid developments in the digital and payments landscape can be challenging, making India a difficult market to enter. Every online business hoping to make a successful entry to the Indian marketplace should be aware of these.

Even global multinationals have tried to crack India’s unique market with mixed fortunes. Some, like Amazon, eBay, Uber, McDonalds and Tata group have successfully identified and adapted to the trends and requirements of a hugely multi-faceted country and populace. Others however have struggled to make headways on entry, or even withdrawn altogether as they did not adapt their strategy to the local culture.

To succeed in India, it takes a deep appreciation of hundreds of sub-cultures and demographics. From a payments perspective, it also means understanding that local payment methods are the norm, not the exception. Therefore, offering the full range of payment modes that consumers are accustomed to alongside what are traditional payment methods in other parts of the world will be essential.

India’s unique payments ecosystem

Traditionally India has been a high-cash economy. However, in 2008, the Reserve Bank of India and Indian Banks’ Association set up the National Payments Corporation of India with the goal of migrating to a less-cash economy. The obvious replacement for cash was debit cards and since mobile phone use is so widespread, phone-based payments and eWallets.

Amongst NPCI’s many payments innovations, is the widely used Unified Payment Interface (UPI), which allows instant payments through a variety of services, including PayTM, PhonePe, Amazon Pay, Google Pay and WhatsApp pay. The impact of UPI has been immense and in February 2021, India’s UPI system crossed 2.7 billion transactions with over 100 million users, merely three years after its launch. UPI now fulfils more than half of all digital transactions in the country. The Indian government is exploring launching the UPI app internationally.

Similarly, NetBanking is a local Indian Real-time Bank Transfer product. With this solution, consumers with an account at one of several banks are able to pay for their online purchases via an online bank transfer.

RuPay, another NPCI initiative, essentially functions as an alternative to Visa and Mastercard, providing credit and debit cards, contactless payments, QR code payments and is used in nine other countries.

Equally, another great ‘must have’ for online businesses is the ability to swiftly, securely and seamlessly repatriate revenues, enabling the cross-border settlement of funds in the referred currency such as EUR, USD or GBP.

An API, or application programming interface, is basically software that acts as an intermediary between other pieces of software. As the acronym implies, an API is a program that acts as the interface between applications.

APIs play a crucial role in the Banking as a Service (BaaS) industry. BaaS sometimes called Banking as a Platform (BaaP) or banking Software as a Service (banking SaaS) refers to services that enable banks to provide digital services to customers or integrate with other digital services. BaaS providers like Treasury Prime offer API banking. Treasury Prime also connects fintechs and banks directly with each other so they can build relationships.

A BaaS company is a type of fintech company, and is sometimes referred to as “Fintech Banking as a Service”. Fintech is short for financial technology, and refers broadly to technology for financial operations. BaaS companies provide services to other types of fintechs that need to embed banking services into their applications. In addition to BaaS, fintech refers to payments apps, apps for day trading, neobanks or online-only banks, and other financial technology tools. Examples of top fintech companies include PayPal, Stripe, Square, Gravity Payments, and Affirm.

Benefits of API Banking

• Direct integration and Instant solution; Real time solution for processing banking transaction
• Secured medium of integration; Exchange data or files in encrypted environment
• Highly efficient mode of banking; Reduce turn-around time of banking transaction as initiation as well as reverse status available on customer system on real time. Easy reconciliation
• Saves time; No need to visit bank or uploading transaction files manually.

Artificial Intelligence (AI) has been around for a long time. AI was first conceptualized in 1955 as a branch of Computer Science and focused on the science of making “intelligent machines” machines that could mimic the cognitive abilities of the human mind, such as learning and problem-solving. AI is expected to have a disruptive effect on most industry sectors, many-fold compared to what the internet did over the last couple of decades. Organizations and governments around the world are diverting billions of dollars to fund research and pilot programs of applications of AI in solving real-world problems that current technology is not capable of addressing.

Artificial Intelligence enables banks to manage record-level high-speed data to receive valuable insights. Moreover, features such as digital payments, AI bots, and biometric fraud detection systems further lead to high-quality services for a broader customer base. Artificial Intelligence comprises a broad set of technologies, including, but are not limited to, Machine Learning, Natural Language Processing, Expert Systems, Vision, Speech, Planning, Robotics, etc.

The adoption of AI in different enterprises has increased due to the COVID-19 pandemic. Since the pandemic hit the world, the potential value of AI has grown significantly. The focus of AI adoption is restricted to improving the efficiency of operations or the effectiveness of operations. However, AI is becoming increasingly important as organizations automate their day-to-day operations and understand the COVID-19 affected datasets. It can be leveraged to improve the stakeholder experience as well.

Applications:

• Robo Advice

Automated advice is one of the most controversial topics in the financial services space. A robo-advisor attempts to understand a customer’s financial health by analyzing data shared by them, as well as their financial history. Based on this analysis and goals set by the client, the robo-advisor will be able to give appropriate investment recommendations in a particular product class, even as specific as a specific product or equity.

• Customer Service/engagement (Chatbot)

Chatbots deliver a very high ROI in cost savings, making them one of the most commonly used applications of AI across industries. Chatbots can effectively tackle most commonly accessed tasks, such as balance inquiry, accessing mini statements, fund transfers, etc. This helps reduce the load from other channels such as contact centres, internet banking, etc.

• General Purpose / Predictive Analytics

One of AI’s most common use cases includes general-purpose semantic and natural language applications and broadly applied predictive analytics. AI can detect specific patterns and correlations in the data, which legacy technology could not previously detect. These patterns could indicate untapped sales opportunities, cross-sell opportunities, or even metrics around operational data, leading to a direct revenue impact.

• Credit Scoring / Direct Lending

AI is instrumental in helping alternate lenders determine the creditworthiness of clients by analyzing data from a wide range of traditional and non-traditional data sources. This helps lenders develop innovative lending systems backed by a robust credit scoring model, even for those individuals or entities with limited credit history. Notable companies include Affirm and GiniMachine.

• Cybersecurity

AI can significantly improve the effectiveness of cybersecurity systems by leveraging data from previous threats and learning the patterns and indicators that might seem unrelated to predict and prevent attacks. In addition to preventing external threats, AI can also monitor internal threats or breaches and suggest corrective actions, resulting in the prevention of data theft or abuse.

• Cybersecurity and fraud detection

Every day, huge number of digital transactions take place as users pay bills, withdraw money, deposit checks, and do a lot more via apps or online accounts. Thus, there is an increasing need for the banking sector to ramp up its cybersecurity and fraud detection efforts.

This is when artificial intelligence in banking comes to play. AI can help banks improve the security of online finance, track the loopholes in their systems, and minimize risks. AI along with machine learning can easily identify fraudulent activities and alert customers as well as banks.

For instance, Danske Bank, Denmark’s largest bank, implemented a fraud detection algorithm to replace its old rules-based fraud detection system. This deep learning tool increased the bank’s fraud detection capability by 50% and reduced false positives by 60%. The system also automated a lot of crucial decisions while routing some cases to human analysts for further inspection.

AI can also help banks to manage cyber threats. In 2019, the financial sector accounted for 29% of all cyber attacks, making it the most-targeted industry. With the continuous monitoring capabilities of artificial intelligence in financial services, banks can respond to potential cyberattacks before they affect employees, customers, or internal systems.

AR is an experience where parts of users’ physical world are enhanced with computer-generated input. It can provide an interactive experience of a virtual environment in the real world.

Augmented reality solutions have the potential to substantially benefit the financial services industry. The future of mobile banking may involve apps that allow users to superimpose images and data over their real-world surroundings.

Banks that partner with fintech developers who can leverage augmented reality in banking use cases to offer greater convenience to their customers will be more likely to maintain and boost customer loyalty.

Need

Augmented realities allow users to cover digital information on top of the real-world environment. AR technology is partially immersive experience boosted by heads up display or existing smartphones. Banks and financial institutions can engage customers and create new immersive experiences through millions of existing compatible smartphones. AR can help financial service institutions to engage existing and new potential banking customers.

The need for AR in the banking sector can be deduced by the fact that it will provide consumers to view the information in a concise, engaging as well as in an immersive manner. The banks have found this challenging, and AR can help them in tackling this challenge.

Banks have also faced challenges with respect to enabling greater consumer choice and in providing greater visibility in terms of spending patterns and behaviors. It is another area where banks have encountered issues, but it is also an area where AR can have a profound impact as it will allow consumers to make informed decisions in terms of spending. It will provide customers with a new way of interpreting banking data and information.

Applications:

Virtual Trading

Some companies are making trading a virtual experience by creating virtual reality workstations for trading. Citi uses Microsoft HoloLens to give traders Holographic Workstations. This type of workstation offers 2D and 3D elements that add to the bank’s existing processes. Comarch uses virtual reality in their wealth management software to give users better access to algorithms and trading tools.

Data Visualization

Being able to visualize data is an important tool traders use to help them make important decisions about wealth management, especially as the financial industry becomes more complex and there is more data to analyze. AR and VR add to this experience and make it easier and faster to visualize and organize large amounts of data. Salesforce uses Oculus Rift to create an immersive 3D environment for analyzing data. Fidelity Labs, a part of Fidelity Investments, has also taken advantage of the technology behind Oculus Rift. They created a virtual world called “StockCity” where stock portfolios are turned into a virtual 3D city, where investors can immerse themselves in the data. Also read: Futures be augmented of virtual with AR/VR.

Virtual Branches

Digital-only banks and mobile banks are already here. But someday soon we may be able to go to a virtual bank. If customers are not able to visit a physical branch location for whatever reason, there will soon be given the possibility to go to a virtual branch. The hope is that these branches will be able to provide the same services but exclusively in a VR environment.

Virtual Reality Payments

Some companies are even making payments a virtual experience. MasterCard has partnered with Wearality to create a world where consumers can make purchases without leaving the virtual world. They have a virtual reality golf experience called ‘Priceless’ and players are able to buy clothing in the virtual world, without having to do anything offline.

Financial Education

For both employees and customers of financial institutions, education is important for understanding changes in financial systems. AR and VR have huge potential for teaching people new information in the VR Finance.

Security

In order to create a more secure customer experience, biometric security could be introduced in an AR system that could then connect with a VR world. These could be used to access VR bank services, make ATM transactions, or make payments.

Customer Service

Many financial institutions are also using AR and VR to help improve the experience of their customers. Many banks have AR apps that help customers find the nearest banks and ATMs. When in a city, they can scan the area with their phones and see real-time information about location, distance, and services at nearby banks.

Recruitment and Training

In order to provide high-quality services to customers, financial institutions need to make sure they are recruiting top talent and training all employees to give them skills that will help them do their jobs to the best of their abilities. Some banks are using a VR experience to show tech recruits how innovative and tech-savvy the bank is. Potential employees, as well as current employees, use this platform to form teams and create apps that will help the bank’s customers.