We could be on the cusp of banking 2.0

The last couple of years saw the RBI taking up the sheet anchor role to steer the economy. The accommodative interest-rate stance implies that it is ready to walk the extra mile to bolster the economy

All commentary of how economies will shape up as the world navigates its way out of Covid-related stress suggests that we could be on the cusp of a multi-year growth trajectory. Is this 2003 redux? 

We should be cautiously optimistic that the year(s) ahead will be a good antidote to 2020! While we await our jabs of hope, here is my take on the trending word — VACCINE —  as a marker of the economic scenario.

Virtual is the new norm and this will stay. Meetings and conferences have turned digital and we have learnt that they can be productive and cost-efficient too. More investments in security and convenience will further enhance the virtual capabilities into a near-physical mode. Every business which is “physical agnostic” will look for the right partner with expertise in technology and innovation.

Asset quality is undoubtedly the biggest task at hand for all lenders. Studies expose the frailties of the sector. It will require all the smarts one can gather to avert meltdowns. Risk models need to be recalibrated to this black swan event. Non-traditional “nayi soch”is the only formula for survival, as the operating environment may remain challenging for about a third of India’s outstanding credit line which was under moratorium. The acid test will be how both retail and small businesses settle in to payment rhythms once all standstill clauses are withdrawn. It would be wise to assume some stress, but my sense is that it is going to be very institution-specific.

Capital is, was and will be king! Post the 2008 crisis, capital requirement was redesigned to absorb shocks. Over the last decade there have been paramount changes in regulatory prescriptions. As the world heals post the pandemic, the sharp differentiation between “capital right” vs “capital lite” will show up. 

Credit flow will be highly influenced by the pickup in demand. It’s almost certain that the comeback in the economy would be multispeed, some segments recovering faster than others. Well-rated clients (corporate and retail) will dictate terms while the more stressed will find it a challenge.  The Guaranteed Emergency Credit Line scheme has given the perfect breathing space for businesses to come back on track. MSMEs which have used this judiciously will likely see a faster return to normal and thereby demand more credit in the latter half of CY21.  

The last couple of years saw the regulator taking up the sheet anchor role to steer the economy. The Reserve bank of India (RBI) assured support through the Targeted Long-term Repo Operations and Operation Twist while ensuring sufficient liquidity.

With growth waning, inflation breached the originally envisaged 6 per cent target. The accommodative interest-rate stance implies that our regulators are ready to walk the extra mile to bolster the economy.

While the nation braced itself for a “technical” recession, we saw some sectors registering sequential growth. Consumption is back and the recent paper from the RBI indicates an inflation target of 4 per cent for the near future. With the production-linked incentive schemes in place for the manufacturing sector under the Atmanirbhar policy and the RBI’s timely interventions, enhanced consumer activity may resume soon.

The nuanced act of balancing inflation and interest rate may keep rates quite stable in 2021 and make it easier for borrowers to plan. 

“Neo-bank” is the buzzword in the finance world. While some may debate that neo-banks have stumbled in Europe recently, the fact can’t be overstated:This digital disruption is very real. When Bill Gates said, “Banking is necessary, banks are not”, he probably meant neo-banks!

Millennials and their tech-savvy businesses love the agility of these franchises, as they offer seamless and paperless alternatives. I believe 2021 is likely to be the annus mirabilis that will upgrade the banking industry to its V 2.0 with a healthy dose of the vaccine. 

The writer is Managing Director & Chief Executive Officer of The Federal Bank. This column has been edited for space