Why choosing to work for Banking sector today can be a wise decision?

“Imagination is more important than knowledge. For knowledge is limited whereas imagination embraces the entire world, stimulating progress and giving birth to evolution“ 

-Albert Einstein

Whatever be the other effects, nationalisation of banks in July 1969,  helped to take banking services to the masses. The number of bank branches saw a phenomenal growth from a mere 8,187 branches in 1969 to 1,20,535 branches in December 2019.  During the last  50 years, this sector has seen many changes with new players being introduced into the arena. The landscape has changed significantly. In the 1990s, before RBI  gave licenses to the first set of private banks, 90 per cent of the share of the banking market was held by the Public Sector Banks (PSBs). In 2014, this share had declined to a little over 75 per cent, but since then the share has been dropping and by 2019, It has dipped to  61 per cent. PSBs share in incremental advances has dropped to 23.75 per cent in 2019 from as high as 73.45 per cent in 2014. Private sector banks have also attracted 77 per cent of the incremental deposits in 2018-19. Large private sector banks have wooed the business from their public sector counterparts not only by offering better interest terms but also personalised and structured services made possible by advancement in technology. The PSBs have taken a little longer to adapt to technology, mainly because of the legacy issues.

The number of bank branches saw a phenomenal growth from a mere 8,187 branches in 1969 to 1,20,535 branches in December 2019.  During the last  50 years, this sector has seen many changes with new players being introduced into the arena.

In January 2015, the government organised the first Gyan Sangam, an offsite meeting of the CEOs of India’s PSBs and financial institutions presided over the Prime Minister and the Finance Minister. This was described as a unique initiative arranged with the objective of ushering in a “catalysing transformation’. This was followed up in August 2015, by the Indradhanush Plan, which among other things promised to address governance ( or lack of it) in the government-owned bank.

The PSBs today are at a crossroads and going through a phase of ‘Manthan’ with new frameworks such as ‘Privatisation’, ‘Corporatisation’, ‘Consolidation’ being discussed.  The decision of the government to go ahead with the process of merger of six public sector banks into four inspite of the pandemic indicates the seriousness in which it is pursuing its desire to create global-size institutions for achieving the objective of USD 5 trillion economies by March 2025.  With the Regulators looking into the option of granting licenses to the Corporates for setting up Banks in India,  India Inc is now looking at this sector not just to   ‘Borrow from’ but also to ‘Promote.’ There are many opinions on the future of the banking industry particularly as to its future form and shape.

The decision of the government to go ahead with the process of merger of six public sector banks into four inspite of the pandemic indicates the seriousness in which it is pursuing its desire to create global-size institutions for achieving the objective of USD 5 trillion economies by March 2025.

The way forward for this sector is exciting and challenging.  It is now apt to discuss a few areas, first of concern and then the opportunities in this sector.

The most pressing challenge of the day are the NPAs. Businesses, especially in the MSME sector,  were not able to withstand the heat of the historic contraction of the economy caused by the coronavirus pandemic.  As a result, recognition of NPAs was put on the hold during the period. On the direction of the Apex court, banks were also asked to waive the compound interest portion of loans up to Rs 2 crore for the six-month moratorium period beginning March 1, 2020. Over 75 per cent of the borrowers benefited from the decision, though it resulted in an additional burden of around Rs 7,500 crore for the Government. For the large corporates, banks, under the direction of RBI,  implemented a one-time restructuring of loans within strict parameters. Companies under stress were given time till December to avail the scheme. But inspite of the best efforts, one is not sure about the trajectory of bad loans still remains unclear. One school of thought is that NPAs are bound to increase largely because of MSMEs. With more than a third of the customers skipping payment in the past few weeks, financial stress among middle and low-income retail borrowers is beginning to worry all. Gross NPAs of all banks may jump to 12.5 per cent by the end of this fiscal under the baseline scenario from 8.5 per cent in March 2020, according to the Financial Stability Report (FSR) released by RBI in July. Under baseline scenarios, state-owned banks' GNPA ratio may increase to 15.2 per cent by March 2021 from 11.3 per cent in March 2020. The GNPA ratio of private banks and foreign banks may increase from 4.2 per cent and 2.3 per cent to 7.3 per cent and 3.9 per cent, respectively, over the same period.

Coming to the issue of credit offtake, it has, as expected, remained muted during most part of the year mainly due to the pandemic. Despite ample liquidity in the system, demand from the corporate sector has not taken off. Over the years, the need for credit in MSMEs has been rising. However, the credit allocation to the small firms has not been up to the mark. According to RBI, MSMEs have faced a decline in lending for more than two years since 2015. Moreover, the Micro-Units Development and Refinance Agency (MUDRA) scheme which aims to provide credit for expanding existing small businesses hasn’t been successful either. However, disbursal of agriculture and retail loans has since gathered substantial momentum from September onwards,  as per the data released from official government sources and bankers hope that faster than anticipated recovery could bring in the ‘animal spirit’ as far as businesses in India are concerned.

Over the years, the need for credit in MSMEs has been rising. However, the credit allocation to the small firms has not been up to the mark.

The increasing incidences of fraud is another cause for concerns. In the first week of November 2019, the CBI searched around 200 locations in 16 Indian states and Union Territories. At least 1,000 officials were deployed. This was after 42 cases involving at least Rs 7,000 crores worth of fraudulent transactions were registered. In the financial year 2018-19, government agencies detected 6,801 cases of fraud involving Rs 71,543 crores. The number of cases in 2018-19 were 14.9 per cent more than the previous year, but in terms of value it was 73.7 per cent higher. It is clear that the incidences of frauds in banks are increasing. But it is not in all cases that the bankers were actively involved. In many of these cases, the banks were only victims of circumstances. Be that as it may, the damage to the sector by these fraudsters has already been caused.  In the financial year 2015, banks detected 4,639 cases of frauds involving Rs 19,455  crores and this has risen to 8,700 cases and Rs 1.9 lakh crore in 2020.

It is clear that the incidences of frauds in banks are increasing. But it is not in all cases that the bankers were actively involved. In many of these cases, the banks were only victims of circumstances.

The challenges are plenty and it will be interesting to see how the banking sector will make a course correction in 2021. At the top of the new era of banking will be an adaptation to new technology. The developments in technology have already brought about paradigm shifts in banking operations and such changes are expected to continue in the coming years as well.    Since banking is a service sector, dealing with technology-induced changes predominantly depends on acceptance by the bank employees.  They have so far done well to adapt to the changes and have come a long way from the initial reluctance to embrace the ‘core banking solution’ that we saw in the late 1990s. With the old generation of bankers having reached superannuation and the new generation being more tech-savvy, adaptation to technology by employees may be easier.

The developments in technology have already brought about paradigm shifts in banking operations and such changes are expected to continue in the coming years as well.    Since banking is a service sector, dealing with technology-induced changes predominantly depends on acceptance by the bank employees.

Targeting the rural markets has been difficult and innovations are required to penetrate this market. The opportunity that is waiting to be exploited is digital banking in rural areas. Similarly, today, many banks and financial organisations have accepted the potential of blockchain technology owing to the overwhelming popularity of cryptocurrencies and the wide dissemination of blockchain recently. According to Accenture, the world banking sector will save up to $20 billion by 2022 by implementing blockchain. Blockchain is no more just a dreamy idea and its implementation in financial institutions is sure to increase. AI is a fast-evolving and go-to technology for companies across the world to personalise experiences. The banking sector is one of the first adopters of this technology. The fundamental applications of AI include bringing smarter chatbots for customer service. AI  is not used only for customer support and has a wider range of applications in the industry, including areas like  fraud detection and, risk management which the bankers are soon to explore

According to Accenture, the world banking sector will save up to $20 billion by 2022 by implementing blockchain. Blockchain is no more just a dreamy idea and its implementation in financial institutions is sure to increase.

As Dr Viral V. Acharya, Deputy Governor, RBI has put it  “A bank is something one can bank upon.”  Even though of late we are witnessing some aberrations, I am certain this industry will churn well to throw out the poison within and stand tall in the years to come.

In this era of complexity and disruption, business environments are becoming more vulnerable and challenging. Organisations are replicating procedures using technology and technical skills taught by  B-schools have to be updated. Real-time course corrections in the PGDM -BKFS programme of T.A. Pai Management Institute (TAPMI), helps students adapt to these changing times.  The proof of this is when the students from this programme get placed in companies like TresVista, Deloitte, EY, KPMG, Bajaj- Finserv, Tata Capital, HSBC, Citi,  Goldman Sachs, L&T Finance and many others in key profiles such as Risk Assurance, Financial Advisory, Financial Analyst, Risk Analyst, Cyber Security etc.

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Note: The views expressed in this article are that of the institute and do not reflect/represent those of Shiksha