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Tech Turmoil & Regulatory Hurdles — Is it going to impact India’s Banking Sector in long run?

Banking Sector

In recent years, particularly amidst the pandemic, banks have intensified their focus on upgrading technology, recognizing digital platforms as indispensable during lockdowns. Although the momentum towards digitalization was already building, the pandemic underscored its paramount importance for survival in the banking sector.

Deputy Governor of the Reserve Bank of India, Swaminathan J, recently highlighted a concerning trend as per a report by Business Standard – banks are not allocating sufficient resources to their IT budgets. This sentiment is echoed by top IT companies, who observe that Indian banks are lagging behind their global counterparts in terms of investment in technology. Complicating matters further, the banking industry faces a stringent regulatory environment, with numerous regulations and compliance requirements adding pressure to an already constrained situation.

A recent decision by the Reserve Bank of India to halt Kotak Mahindra Bank from onboarding new customers via its online channel has sparked discussions about the state of India’s banking technology. This action is not an isolated incident; the RBI has levied significant penalties on other major banks, including HDFC Bank, UCO Bank, and Bank of Baroda.

These developments raise pertinent questions about the underlying challenges within India’s banking technology landscape. It prompts reflection on the adequacy of IT investments, the readiness of banks to navigate regulatory complexities, and the imperative for technological modernization to ensure resilience and competitiveness in the digital age.

What is happening?

The sector, which is swiftly embracing technology across its spectrum of services, finds itself amidst a challenging phase. The pivotal question arises: Is technology steering the industry in the right direction? If not, where are the shortcomings?

The banking sector’s performance in 2023 was undeniably impressive. Profits surged, marking a collective increase of 38.4%, notably led by public sector banks, which nearly tripled their net profits. Notably, asset quality emerged as a highlight, with non-performing assets plummeting to multi-decade lows, standing at 3.9% (Gross NPAs) and 0.78% (Net NPAs) by the close of the year.

In conversation with Aliasgar Karanchiwala, EVP & IT Head, RBL Bank, ObserveNow found that Regulatory compliance adds another layer of complexity, as banks must navigate a myriad of rules and regulations governing their operations. Moreover, cultural resistance to change within traditional banking institutions can slow down the adoption of new technologies. Also, there’s the issue of inadequate investment in IT budgets, as highlighted by the deputy governor of RBI, which limits the resources available for technological innovation and transformation. Overall, these challenges collectively impede the BFSI sector’s ability to fully leverage the potential of technology to improve efficiency, customer experience, and competitiveness.”

Additionally, he added, “I feel the challenges hindering the adoption of technology in the BFSI sector are multifaceted. Firstly, legacy systems pose a significant obstacle, as many banks still rely on outdated infrastructure that is costly and complex to replace. Additionally, concerns around data security and privacy are paramount, especially in an industry dealing with sensitive financial information.”

Presently, there’s a pressing demand to completely rethink the foundational structure of core banking and the outdated monolithic infrastructure established by banks over two decades ago. However, instead of addressing the fundamental issues, most banks are primarily engaged in “patching” up existing systems. The future trajectory of the BFSI industry is poised to be intriguing as it navigates these challenges.