The year 2020 has carved a niche for itself in recent history in terms of the sheer disruption and unexpected chaos it brought on. But beyond its reputation as one of the darkest years of our time, 2020 also offered a few pleasant surprises.
Our increasing reliance on technology paid off, and it was one of the biggest allies in our fight to keep businesses going and productivity levels high. But, despite our best efforts, many businesses accumulated formidable losses and caved under the pressure of the pandemic.
It's hard not to compare the global disruption caused by the COVID-19 pandemic with the 2008 Lehman Brothers crisis and the chain of events it triggered. Back in the day, the crisis had led to a shift in the economic regime, calling for stark changes in the way business and governance was being done. We're at a similar juncture today.
Even before the pandemic hit, India's banking system was grappling with systemic issues, like the rising levels of non-performing assets (NPAs) as well as the impending global slowdown. The threats looming on the horizon were already very real and disturbing.
To add to these woes, over the course of 2020, we saw one of the biggest "black swan" events of our lifetime - the COVID-19 crisis - cripple our industries. Banking was one of the worst affected, and the same holds true as the second wave of the pandemic hits our shores.
In light of growing uncertainty, banks today are focusing heavily on the use of technology to enhance their risk monitoring and management capabilities. 2021 will be reimagined by some of these advanced technologies and their impact on all aspects of banking and enterprise risk management.
Key technology trends driving banking and financial services in 2021
The events of 2020 forced transformation into India's banking sector, which was already at the cusp of change. This transformation will be underpinned by developments in the public and hybrid cloud space, blockchain, microservices-based architecture, and artificial intelligence, going into 2021.
i. Architectural transformation: India's banking sector is gradually moving away from the clumpy rigidity of a monolithic set-up. The banking architecture of 2021 will be remarkably distinct from that of the previous era. With customer experience gaining traction in the industry, next-generation banks need to be fluid as well as highly responsive. The adoption of a lighter and flexible microservices architecture will be critical to achieving this.
ii. Exploring new horizons with cloud: For banks that are still on the fence about cloud adoption, there are many flexible options to choose from. Hybrid Cloud, for one, offers the convenience of lower Capex, along with the security of on-premise set-up. With the advent of better cloud security, banks could even look at public cloud ecosystems as viable, long-term options.
iii. Blockchain to safeguard data sanctity: We are also seeing trends favouring the inclusion of blockchain in banking. The shared infrastructure of blockchain ensures the veracity of information, making it easier for banks to detect fraud and eliminate risks. With the potential to reduce operational costs while improving efficiencies, blockchain will be a potential gamechanger in the near future.
iv. Open banking gains in popularity: As customers explore ways to bank as per their preference and convenience, we expect radical developments in the open banking space. API banking is already accelerating processing times, reducing go-to-market cycles, and improving decision-making and responsiveness. All roads in open banking will eventually lead to data democratisation and socioeconomic upliftment.
v. AI turns humane: AI-driven financial models have proven their worth in the last decade or so. But they are not free of controversies. Most of them are spurred on by the fact that AI-enabled models are essentially black-boxes that leave no room for transparency. With the emergence of feedback-enabled AI, we will see this paradigm change. Responsible and trustworthy AI will allow banks to uphold ethics and governance and minimise model risks, while driving continuous efficiencies.
Key banking risks and 2021 outlook
i. Credit Risk
In this pandemic-fuelled era, digital security has replaced our dependency on physical verification and related practices. As ease of doing business gains prominence, we will see a steep increase in credit risks, for example, those involving fraudulent or suspicious transactions. Additionally, digitisation of borrower data would mean tighter KYC norms and more background checks.
In 2021, banks will adopt a real-time, rules-based system that alerts them of stress much before the issue blows out of proportion. The centralisation of credit approval processes is a step in the right direction, leaving room for less subjectivity and more data-driven processing. Cloud-based technology platforms will enable banks to rapidly roll out enhancements and adhere to new regulatory compliances with least disruption to service.
ii. Model Risk
The highly anticipated rollout of Ind AS 109 and other moves, such as the accelerated adoption of open banking, will increase the banking sector's reliance on advanced financial models. Sophisticated models - involving big data algorithms - carry with them huge risks related to awareness, accuracy and validation. For instance, pandemic-related events have no algorithmic precedent, and hence risk management in this context will be done on limited data, using state-of-the-art, self-learning AI/ML models.
For this reason, it's fair to expect that model risk management will undergo comprehensive changes in 2021. This will be triggered by fast-paced developments in automation, feedback-enabled AI and the like. In addition, ground-breaking developments in analytics will help build out financial models that are more risk-averse and competitive. Manual methods of model validations will be replaced by faster and more efficient automated validations, leading to higher accuracy and transparency.
iii. Enterprise Risk Management
In 2021, the Indian banking sector will focus on setting up an effective ERM function to reduce risk, accelerate performance, and meet regulatory demands. Acceptance of ERM as part of the overarching and multi-dimensional governance framework will work in favour. Experts have been calling for a unified and strategic approach to risk management. This is in stark contrast to the compartmentalised approach that is currently followed.
For ERM to evolve into a value-adding, business-driven function in 2021, the ability to quantify operational risks and gather actionable insights in advance becomes invaluable. It has urged organisations to accelerate technology adoption.
We also expect to see more emphasis on IT risk management as an area that is independent of business continuity, vendor risks and other functions.
In the last decade or so, we watched as technology turned our world on its head. With the advent of ultra-high-speed connectivity, the way we engage with customers has also evolved. Today, even the smallest of transactions involve multiple touchpoints and complex multi-layered interactions.
Business has become more intricate than ever before. To remain competitive and risk-free, technology-enablement in decision-making indispensable.
The unpredictability of the situation we are in today highlights the need for us to be diligent in all aspects of risk management. There's no turning back from the slippery slope we are in.
But timely and efficient risk management can help us navigate these troubled times with minimal losses. Technology-enabled risk management has become indispensable to help banks mitigate the impact of the pandemic, in addition to the inherent systemic issues.
(The author is CEO, BCT Digital.)