“Banks with sizeable digital presence will be more valuable”

Dr Pankaj K Agarwal, Professor of Finance & Dean (Research), Institute of Management Studies, tells TPCI that with operating cash flows of firms gone and jobs and incomes of individuals disappearing, both the wholesale and retail loan book will be under great stress. He also talks about how this pandemic has added to the growing popularity of digital transactions. He maintains, however, that increasing digitalization will need to go hand in hand with protection against cyber-frauds and emergent operational risks. 

TPCI: As the economy struggles with the economic impact of the lockdown, what are the key challenges that you foresee for banks? How do you view their role during the lockdown?

Dr Pankaj K Agarwal (PA): The challenges that India’s banks face today are keeping the workforce healthy, ensuring business continuity and protecting income & asset quality. Although hardly acknowledged, in addition to doctors and police personnel, bankers too did not stop working during lockdown and continue to expose themselves and their family to great risk of infection as face-to-face contact in banking is still preferred by many.

In this milieu, it becomes critical for banks to take every step to keep the workforce safe and their morale high to ensure business continuity. The Net Interest Income is likely to come under squeeze in the near to mid-term in a falling interest rate regime. Finally, with operating cash flows of firms gone and jobs and incomes of individuals disappearing, both the wholesale and retail loan book will be under great stress. Easy liquidity with low credit offtake and asset quality deterioration will pose tremendous challenges for Asset Liability Management (ALM) too.    

TPCI: While the RBI has taken a number of positive measures to inject liquidity into the economy and address the woes of the corporate sector, there are concerns on the extent to which this is transferred to end customers, especially by private banks. What is your take on this?

PA: In the mandatory external benchmark linked loan pricing regime, the transmission of monetary signals by RBI has already improved a lot. Both public and private sector banks follow this regime.

However, it is not liquidity, which banks are/were lacking in recent times, rather it is deployment of funds. Even before COVID-19 struck, the economy was in recession and consumer & business confidence were deep south. The appetite for credit was simply not there! So, the problem is more of finding fair banking risks rather than of liquidity.

TPCI: Customers are understandably concerned about physical content during banking transcations. How can technologies like AI be used to address this?

PA: Some banks in China and South Korea have gone to the extent of sanitizing all their currency holdings. COVID is a droplet infection and any common surface like currency notes and ATM keypads could be a carrier of infection. However, it is the user who is in the best position to avoid getting infected by ATMs by observing good hygiene. On their part, the government and banks are encouraging digital payments, which bring other advantages like convenience too. Thanks to behavioral change with respect to digital payments that came about post-demonetization, many people are already in. But we cannot ignore the fact that a large section of the population, particularly the elderly and low-income earners, still transact in cash. We need innovation and AI to help address the issue of bringing them into digital ambit. The current use cases of AI in ATMs are limited to predictive maintenance and downtime reduction.

TPCI: What measures can the government take to increase the use of digital modes of payment, especially considering that a large population is not comfortable with them?PA: As per a CRISIL report, digital payments are likely to double in value by FY 24. Although India has made great strides in adopting digital payments, a vast population is still outside its net. The resistance to going digital in payments is a mindset and behavioral issue as much as it is a technical one. This can best be tackled with awareness drives and increasing ease of use. The NPCI has been doing a great job at it and UPI is one of the most successful inter-operable digital payments mechanisms hailed all over the world.

The proliferation of payment frauds has also created distrust of digital payment methods and a lot still needs to be done on this front.

TPCI: Bank lending will be a critical factor in reviving the economy  after COVID-19. But quite a few banks are anxious about extending loans due to the fear of rising NPAs. How can this be addressed?

PA: MSMEs are in dire straits today due to demand impairment, unpaid receivables and worker migration. These problems do not appear to be going away anytime soon. The government can extend the scope of credit guarantee to MSME loans to instill comfort in banks. After all, MSMEs are second only to agriculture in employment creation and constitute about half of manufacturing GDP. The government has a clear economic interest in them. Bank credit to NBFCs also needs a similar guarantee.

TPCI: What will be the critical factors defining success/failure of banks in the post crisis period?

PA: Banking being a critical service, the central role is played by people. Banks will need to quickly devise ways to allow a chunk of workforce to work from home, while ensuring their morale and productivity remains intact. In the not-too-distant future, banks with sizeable digital presence will become more valuable as physical movement may continue to remain constrained. However, increasing digitalization will need to go hand in hand with protection against cyber-frauds and emergent operational risks. The current crisis will also force banks to explore new opportunities for non-fund based businesses (other income) as lending may not really pick up soon. In addition, asset slippages are on the cards, which will necessitate both regulatory and growth capital as per Basel norms. Many public sector banks are not adequately capitalized and bracing for impact. To my mind, many private sector banks, most of which are well-capitalized, have no legacy problems and are already strong in digital space stand to gain more.

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Dr. Pankaj K Agarwal (Fellow, XLRI Jamshedpur) had a six-year stint with banking and financial service industry includes fortune 500 banks like SBI. He has about 12 years of thorough experience in teaching and academic administration. His core strength lies in research, training and developing business and academic leaders. He is a Ph. D (Business Management), MBA (FMS), CFA (ICFAI), CAIIB (Gold Medalist) and NSE Certified Market Professional (NCMP).He has won two national awards “Bank of India Prize” and “M P Srivastava Memorial Prize” for outstanding performance in banking sector. He has conducted MDPs for senior officers of various blue chip companies like PNB, NTPC and U P Government. He has successfully convened two well-attended national conferences. He not only has published/presented several papers in international and national journals/conferences, but also has chaired many technical sessions. He is on Board of Editors/ Reviewers of 7 international journals. He has co-authored a well acclaimed text book on Financial Management. His academic interests include corporate finance, banking, capital markets, asset pricing, financial econometrics and developing new learning tools in finance education. He is passionate about financial and econometric modelling and evangelizes open source language “R”. Prof. Agarwal is Life Member of The Indian Econometrics Society (TIES), Indian Commerce Association and Indian Economic Association.