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Fast pace of technological change and structural transformation of the economy can create regulatory blind spots and vulnerabilities, challenging the standards and methods taken for granted.

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• GS Paper 3 Inclusive growth and issues arising from it.
• Achievements of Indians in science & technology; indigenization of technology and development of new technology.
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Why in the News?

In today’s rapidly evolving financial landscape, characterized by technological advancements and economic transformations, the banking sector faces regulatory uncertainties and vulnerabilities that challenge established norms and methods. Dinesh Khara, an influential figure in the Indian banking sector, sheds light on the changing dynamics and future prospects of the industry.

India’s Growing Optimism and Governance

• India’s global standing is on the rise, thanks to its robust governance structures and progressive policies that have fostered innovation. Across the country, innovative ideas are taking shape, leading to the creation of novel public goods.
• One sector at the forefront of this transformation is banking and finance, playing a pivotal role in the world’s largest democracy.

Navigating a Decade of Challenges

• The past 25 years have witnessed substantial growth and stability in India’s banking sector, despite various global crises, including the dotcom bubble, September 11 attacks, the 2008 financial crisis, European debt crisis, COVID-19 pandemic, and the Russia-Ukraine war.
• These crises have pushed the limits of human knowledge, impacting India’s financial landscape, especially in the last decade marked by the COVID-19 pandemic and the Ukraine conflict.

Transformation and Inclusivity

• Over 75 years, India’s banking sector has matured into a vibrant industry, partly driven by reforms in the last three decades.
• This transformation includes consolidation in the public sector, the emergence of private banks, specialized non-banking financial companies (NBFCs), and the growth of the fintech.
• The sector has successfully addressed legacy issues like non-performing assets (NPAs) and has become more resilient. Internal accruals now serve as a source of growth capital, and prospects for healthy loan growth are promising.

Embracing Technological Advancements

• Banks in India have transitioned from traditional brick-and-mortar models to technology-driven entities.
• Universal banking coverage through initiatives like Jan Dhan and the use of technology for digital financial services have revolutionized the sector.
• Innovations such as mobile banking apps, UPI, Aadhaar e-KYC, and digital pre-paid instruments have transformed traditional banking, with the emergence of public financial platforms further propelling this evolution.

The Era of AI and Cognitive Computing

• India’s banking system is transitioning into a knowledge-based regime, driven by AI and cognitive computing across all functions and processes.
• AI-enabled capabilities are personalizing customer engagement and enhancing understanding of customer behavior, setting the stage for a more dynamic and responsive banking experience.

Regulatory Challenges in a Changing Landscape

• As technology evolves, so do the opportunities and challenges for banks. The rapid pace of technological change and economic transformation create regulatory blind spots and vulnerabilities, necessitating a reevaluation of established standards and methods.
• While digitalization has expanded the reach of financial services, it has also given rise to concerns such as unregulated digital lending apps, cryptocurrencies, and cyberattacks.

Banking’s Role in Climate Change Mitigation

• Climate change poses a significant challenge for banks. The global commitment to “equal but differentiated responsibility” requires banks to participate in decarbonization efforts.
• This commitment opens doors to new business opportunities in renewables, city gas distribution, green hydrogen, and the trade of green goods.

Human Resources as a Key Differentiator

• The dynamic nature of the industry widens the skill gap, demanding banks and financial institutions to attract, train, and retain talent.
• Flexibility, agility, and openness to new technologies are essential attributes for employees. Upskilling and reskilling are vital to address emerging challenges, with capacity building playing a pivotal role in the financial sector’s sustainability.

Embracing Research and Innovation

• In addition to training, the financial sector must invest in research and embrace innovative ideas for seamless service delivery and hyper-personalization of products.

The Importance of Governance

• Recent events in the US banking system have underscored the significance of governance as the backbone of an institution. While external financial stability has not significantly impacted Indian banking, vigilance is essential.
• Robust governance frameworks enable banks to command a governance premium, particularly as they strive to support India’s growth ambitions and insulate themselves from the costs of climate risk.
• India’s banking sector is poised to catalyze change in a rapidly evolving landscape. With a growth-centric mindset and a youthful demographic, the sector has learned from past crises and is more resilient.
• As India strives to become a developed nation by 2047, the banking sector’s role in financing growth and stability remains pivotal.
• Recent policy initiatives have addressed market failures and provided stability, making banking the vanguard of India’s journey towards an Atmanirbhar Bharat, fostering equitable and sustainable development for all, much like the success of Chandrayaan-3—a testament to the blend of innovation and technical excellence for the benefit of humankind.

Sources: Indian Express

Mains Question

“Discuss the impact of technological innovation on the Indian banking sector and its role in financial inclusion.”