Tirthankar has been associated with Sagar Associates for over two years now, prior to which he worked with companies such as NJUS Law Review, Luthra & Luthra Law Offices, Deutsche Bank, and Amarchand Mangaldas, to name few.

Banks worldwide may have witnessed a period of recovery through liquidity and capitalisation after the global financial crisis of 2008, but Indian banks are burdened with growing loan defaults due to over leveraging by the Indian corporate sector. The Covid-19 pandemic is expected to exacerbate this problem.

In addition, banks are viewed as antiquated and potential victims of disruption by newer technology-focused companies ,i.e. Fintech. However, the centuries-old banks have historically been resilient to obsolescence. The uncertainties triggered by the Covid-19 pandemic and consequent nationwide lockdowns across the world have sre-focused the need for the banking sector to restructure its business models for customer engagement.

Apart from the adverse run-on impact of their clients’ business closures and the rising cost of funds, the pandemic has not halted the functioning of the Indian banking sector, as large portions of the banking operations had been previously digitized. Net banking, Electronic payment and settlement systems largely eliminated the need to visit bank branches in person.

The next phase of transformation in banking operations driven by digital payments, digital lending, and automation and artificial intelligence will be accelerated by the pandemic.

Digital Payments
Non-cash payment systems in India have evolved from credit and debit cards to mobile wallets. The Reserve Bank of India (RBI) had started focusing early on electronic payment and settlement architecture, which culminated in the National Electronic Funds Transfer (NEFT) and Real Time Gross Settlement System (RTGS). Unbundling of payment system providers from traditional banks commenced with the Payment and Settlement Systems Act, 2007 under which the RBI has since licensed several payment system operators of pre-paid instruments, card schemes, cross-border in-bound money transfers, and centralized clearing.

The National Payments Corporation of India (NPCI) was created as an ‘umbrella organisation’ to institute uniformity and standardization in this space. The RBI is also proposing another similar umbrella entity for an alternative retail payment system. The Unified Payments Interface (UPI) was a major development to facilitate ease-of-fund transfers between bank accounts and merchants through mobile phone applications.

UPI has seen exponential growth – from Rs. 75,000 crore in October 2018 to Rs. 1.91 lakh crore transactions in value by October 2019. Aadhar Pay is another

mechanism–but has lost out to UPI-backed solutions after the Supreme Court struck down the mandatory linking of Aadhar to bank accounts.

The RBI also introduced and gave out licenses for payment banks--niche banks that provide payment services and issue debit cards but do not lend money. Most of these shut down, as the restriction on lending presented a competitive disadvantage to attracting depositors. Know your client (KYC) regulations for on boarding customers have been the major stumbling block for mobile wallet players, but this process has been made electronic now including most recently through video KYC, but will need some further regulatory easing for wider adoption.

UPI and pre-paid payment instruments are currently the most popular modes of digital payment, allowing customers to make payments through digital or mobile wallets via smart mobile phones

Covid-19 has compelled governments worldwide to mandate social distancing, strict lockdown, and self-isolation. This environment underscores the vital need and impetus to have digital “contact-less” payments. The Supreme Court has overturned the RBI ban on cryptocurrencies, but it will be some time before cryptocurrencies become main stream. In India, UPI and pre-paid payment instruments are currently the most popular modes of digital payment, allowing customers to make payments through digital or mobile wallets via smart mobile phones, and there will be some regulatory easing to promote its use.

Digital Lending
Digital lending is largely underdeveloped in India. Though online marketplaces and loan aggregators now have a presence, most of the lending is provided by banks or non-banking finance companies (NBFCs) on these platforms. Where online marketplaces or start-ups have incorporated NBFCs, the loan book and market penetration are comparatively low. RBI regulations on peer-to-peer lending is also restrictive.

The RBI has not been amenable to having a large number of companies engaged in higher value lending business, due to the risk of systemic failure and consumer protection issues. The push for digitisation may cause regulatory easing of digital lending.

Traditional banks and NBFCs have wider physical infrastructure for broad-based penetration among their clients. A major challenge on the lending side is that traditional banks have not been able to move to purely digital operations and continue to have various requirements such as a “wet ink” signature and purchase of stamp papers for legal contracts. These legal requirements need more defined regulations, and these transaction processes will need to be digitised so that digital lending can be made scalable.

Automation and Artificial Intelligence
Banks are permitted to outsource non-core activities such as customer service. Under recent lockdowns, customer service operations of banks (and its service providers) are functioning on lower capacity and have been severely affected. A major area that could encounter regulatory developments to ensure business continuity will be call centre operations.

Regulators may need to consider potential ‘work from home’ situations for call centre employees and consequent implications for customer confidentiality in such cases. Many banks also operate customer service through ‘bots’ or ‘robo-callers’ and dispense customer service through instant messaging applications, which will likely gain popularity.

Way forward: Digital ‘only’ future
While banks have survived generations of change, in a post Covid-19 world, banking institutions will need to embrace change and become pure digital institutions or risk their very existence. The COVID-19 pandemic may have forever changed the mode of financial transactions, supporting the ‘digital culture’ that dispenses with the need for physical presence. ‘Digital only’banksare not only better equipped for business continuity in crisis situations, but also cost-efficient.

While digital penetration is lower in rural areas, and it will take some time to develop the “trust” factor among the elder population, the millennial generation’s comfort with smart phones, and the increasing use of the internet through smart phones in rural areas prove that the time is ripe for India to leapfrog into ‘banking’ on the future world of technology-driven finance.