Why would a virus outbreak in one city in China throw the world into disarray? The answer lies in a mathematical theory proposed almost half a century ago. In a 1972 meeting of the American Association of Advancement of Science, mathematician Edward Lorenz gave a talk titled, 'Does the Flap of a Butterfly's Wings in Brazil Set off a Tornado in Texas?'
Lorenz was talking about the science behind complex systems, what we now know as the Chaos Theory. It tells us that the more complex a system gets, the more fragile it becomes. These systems are very sensitive to their starting conditions, so a tiny difference in the initial 'push' you give them causes a big difference in where they end up. This is also known as the 'Butterfly Effect'.
The most complex of human-made systems is globalisation, with supply chains spanning continents. In 2014, Ian Goldin, professor at Oxford University, wrote a prescient book titled Butterfly Defect (an obvious pun on the Butterfly Effect) and warned of risks to the global economy arising from six vectors. Amongst them, one was 'pandemics'.
Unfortunately, Professor Goldin's warning was ignored, and when Covid-19 struck, the world was utterly unprepared. Given today's hyper-connected world, the virus outbreak in China quickly affected almost every country. We have all seen the result - hundreds of thousands of deaths, millions infected, trillions wiped out from the global GDP.
India is no exception to this economic impact. From the fastest-growing economy in the world, the Reserve Bank of India is now forecasting a de-growth of 7.5 per cent in FY21. Millions of MSMEs, as well as individuals, have been severely impacted. For the first time in the country, we can see stress on retail loans building up.
As a part of the Indian banking ecosystem, Axis Bank was also affected. Thanks to the tireless efforts of our workforce, we were able to take several actions that not only helped the bank navigate these turbulent times, but will also stand as massive learnings for the future.
Now the key is to understand how the future will unfold. Where do we all go from here? Will we go back to the 'normal' of 2019? To be honest, no one knows. But a few, very broad, predictions can be drawn, based on current trends.
The first is the unfortunate fact that pandemics of various kinds are here to stay, powered by global warming and a hyper-connected world. We will have to learn to deal with them. The good thing is that human ingenuity and ability to innovate will also increase and allow us the ability to combat such pandemics faster. Who could have imagined that just nine months into Covid-19, we could have multiple vaccines ready to fight the virus? Second, the world around us has changed, perhaps irrevocably. While coronavirus vaccines will immunise humanity in 2021, the threat of future pandemics (or even the Covid-19 virus mutating) means that behavioural changes such as wearing masks and social distancing will persist. Third, is that the future is digital. AI/ML will decide how enterprises work, make decisions, and face the future. Those organisations that can do this will thrive, while others will falter.
Even before the pandemic struck, digital technologies were starting to play an increasing role in both parts of a bank's business - assets and liabilities. In banking jargon, assets refer to loans - ranging from unsecured loans like credit card spends to large corporate lending - and liabilities refer to bank accounts and deposits.
The pandemic has vastly accelerated the move to digital. Take bank accounts, for example. Over 75 per cent of our savings accounts and FDs today are sourced online. During Q2 of FY20, we opened 70 lakh new savings accounts, the bulk of them digitally. Banks have rolled out several services, unheard of before the pandemic, including virtual relationship managers, FD renewals through voice-bots, card-less cash withdrawals through ATMs, and WhatsApp banking, among others.
On the assets side, today, 58 per cent of our personal loan disbursals are end-to-end digital. At Axis Bank, we have built the capability to underwrite and disburse loans in four clicks and under seven minutes.
When it comes to loans, there are three other critical areas where technology plays a crucial role - underwriting, monitoring and collections. Even before the pandemic, banks had started using Artificial Intelligence and Machine Learning (AI/ML) to analyse large amounts of data for these functions. The pandemic has dramatically accelerated this process, increasing efficiency across the board.
For example, at Axis Bank, data analytics has taught us which channel to use to remind which set of customers about upcoming payments. We realised, reminding digital-first customers using digital channels leads to 12 per cent more (and often full) payments; if we used traditional methods of communications for customers who prefer that option, it led to 17 per cent higher collections.
'People' are an organisation's biggest asset. Ultimately, they determine the success or failure of important initiatives, projects and the long-time prospects of any organisation. The pandemic saw a huge shift in how people work. It led to remote working as the only logical solution for most businesses - commonly referred to as work from home (WFH). Benign as it may sound, it can create its own stress levels.
This stress can come from a range of factors. First, for example, is the issue of not having enough isolated space for WFH. Alternatively, it could also be because both spouses are WFH while still trying to take care of the kids who are also confined at home because schools have been shut. The other issue has been that as human beings, we are social animals. The lack of 'coffee machine interactions' can have a negative impact on morale. However, the learning from this phase of WFH is that employees can be more empowered, self-driven and there's no need to have a single control centre.
One thing remote working did is that it brought us closer. Let me explain. Though there used to be a lot of light-hearted banter between juniors and seniors even before the pandemic, these interactions were still taking place in an 'office environment'. Remote working has allowed us a glimpse into people's personal lives. You could have a colleague's child walking into a video-conference or a dog jumping around. This pandemic-enforced WFH has given all of us better visibility and understanding of our colleagues. It helps us better appreciate that we all have a sensitive side and our families are a part of it. This sense of intimacy is far more potent than any team-bonding exercise.
The pandemic took all of us by surprise and hit us hard. Many businesses got a jolt and it took them months to find their feet on the ground. Some could not manage the transition and even perished. The reason for this is lack of planning. Every organisation needs to have a robust Business Continuity Plan to survive. This is non-negotiable given the current uncertainty and the volatile business environment that is likely to persist.
Business Continuity Plans for a full-service bank are far more complicated than other organisations. This is because you straddle the entire value chain - Business to Business (B2B), Business to Business to Customers (B2B2C) and Business to Customers (B2C). The needs of each of these segments are different, and you must ensure that whatever the disruption, you continue to add value.
The first element is capital, which is even more critical in an economic crisis as it allows you to deal with it robustly. As the pandemic-induced headwinds got stronger, many banks raised capital. We raised Rs 10,000 crore via QIP in August. This resulted in our capital adequacy ratio increasing from 15.84 per cent in March 2019 to 17.53 per cent in March 2020 to 19.4 per cent in September 2020.
We also reacted to the pandemic by keeping a proactive buffer/additional provision and shoring up the provision coverage, maintaining enough surplus liquidity, conserving capital and prudently managing credit and operations risk. Our coverage ratio rose from 76 per cent to 124 per cent year-on-year. We hold over Rs 34,000 crore of excess SLR.
The second element is customer service. Again, when it comes to banking, this goes far beyond just a jargon in management books. Millions of retail customers have entrusted us with their savings. Similarly, thousands of MSME and corporate customers are dependent on us for our services. Banks, in a sense, are providing the lifeblood to the financial well-being of these customers. At any time, and especially in a time of economic crisis, we had to do everything to safeguard their interests.
In Axis Bank, we did two things. Our Central Emergency Response Team (CERT) ensured that we could seamlessly move to a WFH environment for a majority of our 75,000-plus workforce by enabling IT systems and critical infrastructure. Additionally, we strengthened our digital channels, including our mobile app, internet banking portal, Axis Pay (our UPI app), chatbot and our website. It ensured that our customers received uninterrupted access to over 250 products and services seamlessly. Ninety nine per cent of our branches and 96 per cent of our ATMs, back offices and call centres were functional during the lockdown.
So, What Happens Next?
We do have a few learnings on our side, with which to gauge the future. But, as they say, change is the only constant and situations will keep evolving. I may sound bleak, but if you think about it, it is an extension of what humanity has been battling since we diverged from the apes - just the tools and rules are changing. If starting from the Rift Valley in Africa, we as Homo Sapiens were able to conquer and colonise every habitat and ecosystem, it was because of our problem-solving ability. With far more advanced technologies at our command than our ancestors, there is absolutely no reason why we can't improve on our success!
(The author is CEO, Axis Bank)