Indian financial services companies are wary of these risks in 2019

Oscar Martins

Since the global financial crisis in 2008, the top risks impacting financial services companies almost exclusively focused on risk management and regulatory compliance.

However, last year, the results of our global survey marked an initial shift from those trends -- in that, while regulatory compliance remained a significant source of risk, digital disruption and threats to business competitiveness began to be viewed as increasing sources of concern.

Our 2019 survey results show this shift continuing and, in many areas, accelerating. Financial services organizations in India have also showed similar trends in top risks in 2019 like their global counterparts across the five key themes of the global survey results.

1. Increased regulatory changes, supervision and scrutiny in financial services may heighten in 2019.

February 2018 saw an important change in NPA norms, i.e. even one day default requires classification of the account under Special Mention Account (SMA). The full impact of this regulatory change will be felt in 2019. The Insolvency and Bankruptcy code (IBC) has facilitated resolution of approximately Rs 3 lakh crore NPA/recovery of Rs 71,000 crore, and is expected to have an impact on the NPA book in the near future.

The RBI has enhanced its supervision in 2019, with a number of fines on PSU and private sector banks for various compliance issues including monitoring of end use of funds/ restructuring of accounts,

classification and reporting of frauds, KYC/ AML compliance, SWIFT recon.

In early 2019, SEBI revoked two commodity broking licenses, and levied fines on stock brokers for non-segregation of client funds with own funds. IRDAI is also looking to implement enhanced regulatory and supervision framework for Systemically Important Insurers (SIIs).

We expect heightened scrutiny by all financial services regulators in 2019, notably in financial crimes misconduct, and overall strengthening of risk and compliance management framework.

2. Existing banks may not be able to compete with “born digital” banks or established competitors with superior operations.

Many PSU banks (some private banks as well) operate on a brick and mortar model with multiple layers of governance and hierarchy, huge staff and infrastructure costs, which are passed on to the consumer to keep profit margins intact.

Unlike traditional banks, fintech companies/digital banks can design their operations, processes and strategies with the customer in mind. Over the last 3-4 years, many large private banks have already implemented digital, including implementing Artificial Intelligence (AI) in first-level customer

interaction and robotic process automation (RPA) in operations.

PSU banks over the last 1-2 years are playing catch up, except for large PSU banks like SBI and BOB who have already embarked on this journey. In 2019 and going forward, we expect the PSU banks to revamp their approach to meet the “new age digital banking” requirements.

3. Disruption by new/emerging technologies may outpace organizations’ ability to compete and/or manage the risk appropriately

Larger banks like HDFC Bank and ICICI Bank, besides using AI for and Natural Language Processing (NLP) for first level customer interactions (chat box etc), are using AI for risk management, marketing, portfolio management, HR, hiring, collections, and employee on-boarding.

As banks grow digital channels, business growth increases the risk of doing business with an unknown entity on the other side of the device. High volumes of online payments, require review of vast quantities of transactions in thousandths of a second, to manage existing compliance

requirements especially AML at a new velocity.

Business models are undergoing transformation. For e.g. in early 2019, 11 Indian banks initiated a blockchain-linked loan system for SME customers, enabling big lenders to access public credit data and remove much of the associated risk and information disparities between large banks and SME

loan providers.

The RBI circular on data localisation, SC judgement on Aadhaar, NPCI guidelines on e-NACH, have slightly slowed digital growth, but in 2019 and going forward, fintech companies will have to rethink their business models and processes to overcome risk and compliance challenges, keep innovating

and build a sustainable business model.

4. Attracting and retaining top talent and succession planning may limit our ability to achieve operational targets.

Digital banking, especially after demonetization, has led to huge talent demand in financial services in areas like analytics, digital, marketing, stressed assets recovery, wealth/ portfolio management etc. Global banks expect headcount reduction due to digital banking and automation, but PSU banks are expecting strong hiring trends for “new age banking skills” in India in 2019 and beyond.

As automation (RPA/ AI and ML)is expected to automate 25- 30% of certain banking tasks in the next 2-3 years, strategic workforce planning is required to ensure achievement of operational targets.

Last 6 -9 months have many CEO level changes (i.e. Axis Bank, ICICI Bank, Yes bank etc). The next couple of years, will be crucial for succession planning as CEOs of few larger private banks (HDFC Bank, Kotak Mahindra Bank, Indus Ind Bank) end their terms or are close to retirement after leading the banks for as long as 25 years.

5. Changes in interest rate environment impacting the organisation’s performance and operations

RBI raised its benchmark repo rate in June 2018 for the first time in four years, followed by 25 bps hike in August 2018, taking the rate to 6.5%, and in February 2019 the repo rate was reduced to 6.25%.

India has seen inadequate transmission of interest rate changes by banks to consumers. When interest rates go up they are passed on to lending customers, not necessarily when they come down.

Deposit rates are sticky at lower levels, but when interest rates increase, deposit rates don’t increase proportionately. NPAs/ bad loans between 2013 and 2018, led to poor monetary policy transmission as banks were unable to increase their lending rates and protect net interest margins (NIMs).

With a reduction in NPA levels in 2019, especially in public sector and new RBI requirements from April 2019 .i.e. all new retail and small business loans with floating rates will have to be benchmarked against external benchmark rates produced by FBI, we expect improvement in monetary policy transmission in 2019 and going forward.

Oscar Martins is Managing Director-Financial Services, Protiviti Member Firm for India. Protiviti is a consulting firm.