Laden with high levels of non-performing assets (NPAs) or bad loans in their books, most banks have made the Indian banking sector a notoriously dangerous one. To keep the Public Sector Banks (PSBs) running, the government needs to infuse capital every year.
Private sector banks are also not spared of the menace of NPAs. In fact, to save the customers’ interest, the Reserve Bank of India (RBI) had to intervene thrice in a span of one year.
To prevent bankruptcy, the RBI had put moratorium on Punjab and Maharashtra Cooperative (PMC) Bank in September 2019, on Yes Bank in March 2020 and Lakshmi Vilas Bank (LVB) in September 2020.
But what are the reasons behind the plight of the banking sector?
“Most financial institutions in India have very primitive/ outdated risk models/ risk monitoring frameworks, and usually realise the stress in their portfolio well past the point where they can intervene and proactively manage risks. Their investment in the right data (traditional and alternate), risk analytics models, and infrastructure that supports quality ‘early warning signals’ is low. Invariably, the customer ends up bearing the cost of institutional inefficiency. A classical case in point is the high cost of traditional customer acquisition being passed on to the customer as ‘processing fees’,” says Amit Das, CEO and Co-founder of Think Analytics.
So, getting adequate information about a prospective lender in a cost effective way is very important before the loan application is accepted. But how to do so?
“Alternate data brings down the cost of lending, and provides real-time early warning signals. However, most Banks and NBFCs have no native capability of ingesting and harnessing the power of alternate data,” suggests Das.
“There are significant off-the-shelf monitoring triggers available for institutions to leverage. However, the legacy mindset often slows down innovation,” he says.
But what do customers do to safeguard their interests till the things improve in the banking sector?
Customers need to realise three things, suggests Das –
In current times of digital businesses, switching costs are low (they can open a new account or get a new loan in less than 5 minutes if they keep their financial health in check). And they need to switch to a better service provider if they can get a better deal. In our experience, we have seen that the best customers manage their financial relationships across 2-4 financial institutions all the time.
Like institutions, they also need to manage their portfolio through diversification. Instead of locking in their life’s savings in just one institution, they can build multiple relationships. It helps them get better deals, but also de-risks their existing investments. In our experience, customers with investments in multiple asset classes, and a variety of instruments, manage to tide the business/ economic swings better.
Information is power. The consumption of digital information has gone up tremendously. By focusing a little bit of our digital time towards our financial well being, and being aware of the institutions we are engaging with, we can manage our risks better, rather than get surprised by adverse events very late.
