Digital Technology and AI are transforming Indian Banks from loss-making public sector entities to profit-making behemoths
Digital banking helped banks increase their profits by 57% and surpassed Rs. 1 lakh crore in FY 2023. This is a mind-blowing turnaround story of banks – transforming from a net loss of Rs. 86,000 Crore in 2017 to a net profit of over Rs. 100,000 Crore in 2023.
This article talks about the incredible success story of how the loss-making Indian banks were turned around and made into money-making giants. This article talks about how digital banking is transforming the entire banking industry. To understand it, let’s briefly look into history to know how banks operated when there was no technology to work with. Also, let’s understand the banks’ journey in the 21st century.
Like their peers in the Western world, Indian banks are gung ho about adopting technology into their day-to-day operations. Digital banking has resulted in banks shedding the unnecessary flab accumulated over the years and becoming “slim and trim” profit-making machines. However, it was not like this in the past when the banking industry was in its infancy.
Banks in the 60s, 70s and 80s
In pre-independent India, many banks were started by businessmen and were based in various cities. These banks were profitable right from the beginning. However, the prevailing socialist environment of the 60s made the then PM Mrs. Indira Gandhi nationalize banks and turn them into government entities.
The 60s and 70s saw banks chugging along slowly with high expenses incurred due to operational inefficiencies and with little profits. Without technology, every work was done manually, and that required big staff.
Banking Operations – Pre Digital banking days
Banks had to do a lot of things manually to carry out day-to-day operations, and they are as follows:
- Track every rupee coming inside the bank as deposits OR loan repayments (credits)
- Track every rupee going out of the bank as withdrawal OR loan disbursements OR in the form of demand drafts (debits)
- Track all other expenses and record staff salaries, incentives, commissions, etc.
- Reconcile debit and credit accounts and verify with the available cash daily.
- Prepare weekly/ monthly reports and submit them to the Reserve Bank of India (RBI).
Unlike current digital banking, banks of that era used to record all transactions on paper-based ledgers and save them in safe places, and cash in safe vaults.
All Transactions were in Cash only
In those days, the entire Indian economy was driven by cash, and people would go to the bank to deposit “in” and withdraw “from” their accounts. People’s salaries were paid in cash in those days, which people used to deposit in the banks by visiting branches.
Every branch used to have a large staff to cater to the customers who visit the branch for deposits, withdrawals, inquiries, loan repayments, demand drafts, passbook entries, etc.
What is Magnetic Ink Character Recognition” (MICR)
The intercity/ Interbank cheques would take over 2 weeks to clear, as it was done manually. However, in the late 1980s, MICR technology was used to verify the authenticity of cheques issued. The Cheques were issued with the MICR code printed on the bottom. Click on MICR to learn more about it
Banks in the 1990s
Birth of Internet
In the 1990s, with the Indian liberalization, computers were introduced in India. The era saw the birth and rise of the Internet. The government introduced the Internet to corporations, government departments, banks, and others with leased lines owned by Videsh Sanchar Nigam Limited (VSNL), a government-owned enterprise. The 1990s laid the foundation for true digital banking.
Core banking solution (CBS)
Banks began using Information Technology initially with the introduction of standalone PCs and migrated to Local Area Network (LAN) connectivity. With further advancement, banks adopted the Core Banking platform. The CBS enabled banks to bring convenience to customers through anywhere and anytime banking. With the advent of Personal Computers (PC) and CBS, the bank operations at each branch got that much simpler. The staff could serve more customers and handle increased bank transactions with ease.
What is CBS? –
Core banking system OR CBS is a back-end computer system that processes all daily banking transactions and posts update to accounts and other financial records. CBS typically includes deposit, loan, demand-draft, and credit processing capabilities. It has interfaces to general ledger systems and reporting tools.
Different Core Banking platforms such as Finacle designed by Infosys, BaNCS by TCS, and FLEXCUBE by i-flex, gained popularity in India.
Birth of ATM & EFT
The 1990s saw computerization going deeper, interbank fund transfer through Electronic funds transfer (EFT) using the internet, interbank/ branch connectivity, and eventually, Automated Teller Machines (ATMs) all saw the light of the day. Digital banking started with the inclusion of ATMs and EFTs
What is EFT?
It is the electronic transfer of money from one bank account to another, either within a single financial institution or across multiple institutions, via computer-based systems, without the direct intervention of bank staff.
Banks during 2000 – 2010
The Banks’ real march into the digital world got faster in the first decade of 2000. With Internet broadband services made available to individuals, institutions, and corporations, the banks plunged deeper into the Internet world. They started offering the following services
- Immediate payment service (IMPS), is a facility to make interbank/ intercity account-to-account money transfers instantly. Since the money transfer happens 24×7, people can transfer money anytime and, it is very convenient.
- Real Time Gross Settlement (RTGS), is a facility that enables the instantaneous transfer of funds between banks and financial institutions. RTGS offers a secure and efficient means of transferring large amounts of money, providing businesses and individuals with a reliable method for conducting high-value transactions.
- National Electronic Funds Transfer (NEFT) is a facility by which one can transfer funds between bank accounts. NEFT was set up in 2005 and is under the management of the Reserve Bank of India.
- National Electronic Clearing Service (NECS) is a facility by which one can make recurring payments such as utility bills, loan repayments, and insurance premiums electronically regularly. It is made available by the Reserve Bank of India for individuals, businesses, and other organizations to make recurring payments
- One-line banking is a facility banks extend to customers. Using this facility, customers can do all kinds of transactions that they would do when visiting bank branches.
- Debit and Credit cards: Banks tied up with “Visa” and ‘Mastercard” international to issue debit and credit cards. Later on, in tie up with India’s very own “RuPay” network, banks issued “RuPay” credit cards.
Coustmers footfall to branches came down
With the introduction of online banking and the above-listed services, customers’ visits to the bank became less. Only those who are not exposed to computer systems and the Internet visit the branches. This resulted in a boost in the bottom line of the banks.
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Banks during 2010 and 2022
Banks’ plunge into the digital world got even deeper with the introduction of a slew of facilities to their customers. They are as follows
- Biometrics The usage of Biometrics in bank branches has been enormous. Banks use fingerprints to authenticate access for banking transactions. It allows banks to identify customers in their branches. In case the biometrics doesn’t match with the system, the access is not permitted. Biometrics are used in ATMs, mobile banking, and Internet banking.
- Mobile banking By 2015 when mobile apps became increasingly popular, banks introduced their mobile banking apps. Customers found it even more convenient as the banks are now literally inside their pockets
- Cheque truncation is a facility introduced in banks where real (paper-based) interbank cheques are processed instantly using the scanner and the latest state-of-the-art technology. The result is that cheque-based fund transfers happen very fast.
- Mobile payment In 2016 with the help of the United Payment of India (UPI) introduced by the government-owned National Payment Corporation of India (NPCI), banks launched the UPI payment system. It caters to small payments at the retail end.
ATMs require no debit card
ATMs require no debit card to withdraw money: The introduction of “Mobile banking and payment apps” has brought banks and customers’ funds into their pockets. It has resulted in VERY FEW customers heading to ATMs to withdraw money. Even at ATMs, they can withdraw cash using the “QR Code”, as Debit cards are NOT required there anymore. Just the bank app installed on their mobile phones is enough. This is how seamlessly the “QR Code” has been integrated into the mobile banking app. Debit cards have become REDUNDENT already.
Loan application, processing happening virtually: Customers can even apply for loans through their mobile apps. Customer verification and loan processing are happening online. Once verified, if the customer is found eligible, his funds get credited into his account in less than 24 hours.
Banks in 2023 and beyond
After the successful digitization of banking transactions, the Reserve Bank of India (RBI) has turned its attention to loans to small traders, tiny businesses like vegetable/ fruit/flower cart vendors, small businesses, etc. “Indian software product industry roundtable (iSpirit)” conceptualized and developed OCEN that banks want to use to disburse loans to small and medium businesses. OCEN can fairly assess the eligibility of loan seekers, and it can decide the amount, tenure, and interest rate for the loan.
Open Credit Enablement Network (OCEN)
It is said that OCEN Democratizes the Digital Lending Process and has the POTENTIAL to TRANSFORM small and medium-sized businesses for the better.
OCEN technology enables borrowers to easily interact with lenders (loan service providers, account aggregators, etc.) and get small credit loans. The loan size can be anywhere between Rs. 2000 to Rs. 5,000,000. This could be inter-day or intra-day loans that help individual owners and MSMEs run their businesses smoothly without a money crunch.
OCEN was launched in 2020, and banks have fully geared up to use this facility to reach out to SME business owners for loans.
Central Bank Digital Currency (CBDC)
CBDC is the digital form of the rupee that RBI wants to put to use in India. The future of world finance is heading towards central bank-owned cryptocurrency. India has already developed the technology required to support the digital rupee and RBI started the pilot project “CBDC-Retail” on 01-Dec-2022. The retail e-Rupee was launched in denominations of 50 paise, 1, 2, 5, 10, 20, 50, 100, 200, 500, and 2000, while wholesale e-Rupee does not envisage any denomination. The UPI is owned by a consortium of banks, financial institutions, and NPCI, so dispute resolution may be complicated. Since RBI owns CBDC, it makes it easier for transactions and dispute resolution. To learn more about CBDC Click Here
Artificial intelligence (AI) and the future of Indian banking
Digital Banking to revolutionize the Indian Banking Industry like never before
In the coming years, Big data and AI will play an even bigger role in the banking industry. AI & big data will help banks to know about their customers and their spending habits well. They will be able to assess the customers’ needs beforehand and will prompt banks to approach customers with loans at attractive terms. Already OCEN uses AI in a significant way to fairly asses the eligibility of loan seekers who are small traders.
AI will do the same for other kinds of loans, and also it will cater to the new-age financial needs that people want in the future. In a nutshell, Big data and AI will help banks and financial institutions to stay profitable.
There is a reason why Banks have gone behind mechanization in the 1980s, automation in the 1990s, Internet savvy in the 2000s, and digitization in 2010 and beyond. The number speaks it all.
Digital Banking has made banks benefit a lot by adopting newer technologies. E-banking has resulted in reduced costs and increased revenues through various channels. As per the study, the cost of a bank transaction via Branch Banking is in the range of Rs.70 to Rs.75 while it is around Rs.15 to Rs.16 on ATM, Rs.2 or less on Online Banking, and Rs.1 or less on Mobile Banking.
The customer base has also increased because of the convenience of ‘Anywhere Banking‘. Digitization has reduced human error. Digitization has made it possible to access and analyze the data anytime enabling a strong reporting system.
Banks in India as of 2023 are sitting on large piles of cash, as a consequence of going digital.
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