Banks should shift from isolated service provisions to hyper personalized embedded banking: M Rajeshwar Rao, Deputy Governor, RBI

Nov 23, 2023

• 5 elements for resilient financial system include - strong governance and management; sound regulatory principles; adequate capital and liquidity; strong supervisory and risk management practices; and effective crisis management and resolution frameworks

MUMBAI, 23 November 2023: Mr M Rajeshwar Rao, Deputy Governor, Reserve Bank of India today said that the future of banking cannot be imagined without visualizing the needs of post Generation Z consumers. “The future generation of customers are likely to consume financial service in the same way that they consume other products and service, and banks may have to be prepared to make that transition,” he added.

Addressing the valedictory session of ‘FIBAC 2023’, organized jointly by FICCI and IBA, the Deputy Governor said that the banks will have to transition from a sectoral approach to an ecosystem approach. “The banking of future is going to be hyper-personalised, and banks may have to shift from isolated service provisions to hyper-personalised embedded banking. The current form of business segmentation may give way to customer preferences-based verticals and the traditional break-up of assets and liabilities may likely undergo drastic changes,” he asserted. Mr Rao also said that over the course of time, it has been said several times that we need banking, but not banks.

“Banks will continue to be the primary drivers of India’s growth story, but the trajectory that the banks would adopt during this transition will determine how the banking landscape will look in the next decade,” he emphasized.

Drawing a reference to the five natural elements which human body is composed of, the Deputy Governor, RBI outlined the five elements making the foundation of a robust and resilient financial system. “These include strong governance and management; sound regulatory principles; adequate capital and liquidity; strong supervisory and risk management practices; and effective crisis management and resolution frameworks,” he added.

He further added that a resilient financial system is one that can withstand and quickly recover from the episodes of financial shocks and crises. “Such a financial system also requires early identification of vulnerabilities and risk build-up within each entity as well as at the system level, and initiation of appropriate corrective actions. It is of utmost importance that banks as well as other financial entities are always vigilant regarding build-up of risk pockets in their balance sheets and operations, adopt prudent risk management practices and are transparent in disclosing risks to the regulator and other stakeholders,” added Mr Rao.

Speaking on the future of banking, the Deputy Governor stated that the recent crisis episodes in the US and Europe have brought back the question of robust and sustainable business models again to the fore. The business models of the banks have evolved depending on the roles they have played throughout the history, with the current focus being on the intermediation paradigm i.e., acceptance of deposits and credit creation. “This approach needs to change with newer players entering the financial service space and disrupting the traditional rules of the game. In the newer paradigm, markets are likely to become the central point for intermediation where banks may become but one amongst the host of other entities interacting in the marketplace. The traditional banking business model needs to pivot to address this evolving paradigm,” he stressed.

To address the risks and changing paradigms in the banking sector, Mr Rao highlighted that we may have to look at qualitative metrices such as enhanced disclosures, strong code of conduct and clear governance structures. Simultaneously, the self-regulation by the industry through Self-Regulatory Organization (SROs) needs strengthening to promote responsible conduct and innovation. “We have to focus on fortifying cyber security and prevention of cyber frauds in the hyper-personalised and tech-banking environment,” he added.

Highlighting on the need for better customer grievances system, Mr Rao said, “A key element of protecting customers is to provide them an efficient, prompt and cost-effective grievance redress mechanism. We wish to see more serious thought and intent emerging from the Boards and top executives on quality of grievance redressal instead of just monitoring TAT and MIS on complaints,” he stated.

Mr AK Goel, Chairman, IBA delivered the welcome address and Ms Jyoti Vij, Additional Director General, FICCI delivered the vote of thanks.