Indian Banking - Can Regtech Lend a Helping Hand?
Isn't it curious that the labyrinthine nature of Indian banking in a way mirrors the country's economy itself? On display is a befuddling array of credit and financial institutions that starts with the scheduled banks and goes all the way down to the humble credit societies. In between one can find species ranging from non banking financial companies, cooperative banks, small finance and payment banks, micro finance institutions and a sprinkling of newly minted technology driven payment and lending platforms - all of which cater to myriad customer segments, both retail and business.
Regulating such a complex system is at best challenging and at worst borders on crisis management. Politicians and economists also stick to the refrain that for robust and sustained economic growth, credit has to flow faster and at lower intermediation costs. Now, lower credit costs are clearly a function of how risk is managed both at the lending institution and at systemic levels.
The Reserve Bank of India plays a central role in managing systemic risk in addition to the normal supervisory process. Collection and analysis of a variety of data is core to the RBI accomplishing its objectives; ergo robust regulatory reporting is a vital cog in ensuring the health of the banking system.
No one would gainsay that the existing reporting system can improve further.
The RBI is embarking on two large scale initiatives to build the next level of regulatory reporting and lending information infrastructure. One is the Central Information and Management System (CIMS) and the other is the Public Credit Registry (PCR). Both are expected to change forever the way regulatory and lending oriented information is collected, analyzed and disseminated. For example, through CIMS, the RBI is also looking at building a system to map the footprint of economic activity by assimilating data from other agencies such as GST network, Central Statistical Office and the Ministry of Company Affairs.
Regtech is poised play a pivotal role in the roll out of CIMS. Banks and other financial and credit institutions stand to benefit in multiple ways by embracing the new regime. To start with, RBI is now putting a lot of emphasis on the Automated Data Flow (ADF) approach. Though the ADF approach has been around a while, it could finally see traction with large financial institutions looking at full adoption.
Of course, this renewed thrust on regulatory reporting and analysis could benefit the RBI but would it of any help to the regulated entities?
For one, there would be an accent on a seamless data push to the regulator. Multiple data collection methods could coexist such as APIs, file uploads and messaging services. Secondly, the data points that need to be reported would acquire unique identities and exist in a loosely coupled fashion with the RBI stipulated returns that are in vogue. Greater harmonization could lead to lower efforts in data collection and aggregation activities, boosting accuracy and efficiencies. Moreover, banks with an ambitious data warehouse and analytics strategy in place can look at tailoring their solution in line with the data dictionary announced by the regulator as well.
In short, with the right infusion of technology, compliance can turn into a relatively painless business process, coexisting in sync with the varied line of business activities. Too good to be true? Well, the direction is incontestable and substantial improvement looks certainly feasible if vision, right technology and dogged execution are put in place.
That’s not the end of the story, either. A move to risk management 2.0 need not be the prerogative of the regulator alone. Banks and financial institutions across the spectrum can explore combining transactional and reported data with a variety of external data sources which are increasingly available through data APIs. This can cut across, to begin with, filings across GST, MCA and stock exchanges. When such an initiative is combined with raw data on borrower behavior - say, from the public credit registry initiative - emergence of a risk management tool box that works may not be too far away.