Customer interaction and transactions with banks will be all-way instead of multi-way. With India having a large number of mobile customers, there is great potential for technology to be widely used in the delivery of financial services
Banking system is the backbone of any economy and banks are the trustees of public money. In the last few years, the banking sector is undergoing a structural change. The immediate impact of the Union Budget is always on the financial markets and the banking sector. Although there was no direct announcement for the banking sector in the Budget, there are many points that will affect the banking sector in the coming days, more credit lines for small businesses, introduction of digital currency by the central bank and amendments to strengthen bankruptcy laws are among the major focus areas for the banking sector in this year’s Union Budget.
The Budget is growth oriented both directly and indirectly, with 35 per cent increase in capital expenditure for infrastructure development and 65 per cent defence capital expenditure for local companies, tax incentives for start-ups and the banking sector benefiting from PM Gati Shakti.
The Budget emphasises on fintech and digital banking. On the completion of 75 years of India’s Independence, 75 digital banking units will be set up in different districts by scheduled commercial banks. With the digitisation of banking services operated by the post office, it is a clear indication that the Government is looking to promote digital banking in rural and semi-urban India. More than 35 crore post office deposit accounts will now be linked to the core banking system. Finance Minister Nirmala Sitharaman announced to link 1.5 lakh post offices with the core banking system, this will enable people to access their accounts online and transfer money to post office accounts and other banks, which will help farmers and senior citizens in rural areas, as well as promote interoperability and financial inclusion. Being a part of core banking, it will facilitate fund management, a major effort for the digital economy in rural India.
Last year, Sitharaman allocated Rs 1,500 crore to promote digital transactions and digital modes of payment in rural and under-served areas. The Indian market’s fintech adoption rate is 87 per cent, which is much higher than the global average of 64 per cent. Bad Bank was announced last year. This Budget talks about expediting the Insolvency and Bankruptcy Code resolution process and reducing its time from two years to six months.
The introduction of Sovereign Green Bonds will also help the banking sector. In this new idea, the Government will borrow through such specified bonds for green projects. One more year extension of ECLGS scheme will strengthen the business of MSME as well as banking sector. In addition, the guarantee cover for ECLGS will also be increased by Rs 50,000 crore to a total of Rs 5 lakh crore. The additional amount will be focused on hospitality and related enterprises.
The Government proposes to introduce a digital rupee using block chain and other technologies to be issued by the Reserve Bank of India from 2022-23 for a more efficient and affordable currency management system. With this, India will join the ranks of countries to issue their own Central Bank Digital Currency (CBDC). A central bank digital currency would be a legal tender issued by the RBI in digital form. It can be exchanged face to face with the notes issued by the Government.
The emphasis on digital economy and introduction of fintech innovation will give impetus to the fintech sector. Technology will decide what is the way of banking. This includes huge data, cloud computing, smart phones and other similar inventions. Customer interaction and transactions with banks will be all-way instead of multi-way. With India having a large number of mobile customers, there is great potential for this technology to be widely used in the delivery of financial services. At present, about 93 crore people in the country have mobile phones. But only 4 crore people use mobile banking. Digital banking will lead the economy in the near future and fintech is the way forward for the Indian banking and payment system.
Also, it is essential that the payment systems operating in the country are good and secure. The central bank is making constant efforts to prevent incidents of fraud. Despite this, the incidents of card fraud and online transactions are increasing day by day. However, to secure digital channels, additional authentication has been made mandatory by banks for all online, IVR, recurring transactions based on the information available on credit, debit, prepaid cards. Aadhaar based biometric authentication can also improve the situation.
(The writer is Associate Professor, Atal Bihari Vajpayee School of Management & Entrepreneurship, Jawaharlal Nehru University, and author of ‘Changing Scenario of Indian Banking Industry’)