As gateways like the recently launched UPI platform gather momentum in 2017, they will generate digital intelligence, with the market for e-finance providing one of the biggest opportunity for the banking and financial system
As far as banks and financial institutions are concerned, 2016 was an eventful year, to say the least. Game-changing developments on both the global and domestic fronts came thick and fast.
The role of institutions in fostering economic growth has successfully entered the modern policy discourse. After all, institutions help lay down the rules of the game, create transparency, weed out populist discretion, improve efficiency and, most important, make the process of economic growth sustainable. The year 2016 saw the foundation for three structural institutional pillars being laid by the government.
GST: The GST is expected to be a potent tool to address the current inefficacies of indirect taxation in India while allowing the states and the Centre to adhere to the path of fiscal consolidation. After getting cleared by both houses of the Parliament, the GST Council has managed to take a unanimous decision on many issues, including the finalisation of rates, threshold for exemption, compensation to states among others.
GST is expected to maximise the size of economic pie by minimising the deadweight loss caused by double taxation and lead to efficiency gains of at least 15% and, most important, enhancing potential output by over 1%.
Watch: 2016 Was All About Transformational Shifts In Finance; Here’s Why
MPC: After the adoption of flexible inflation-targeting framework in 2014, the next reform in monetary policy-making is the creation of the Monetary Policy Committee (MPC). The combination of rules-based policymaking, with committee-based action and accountability, has boosted the central bank’s credibility.
The Bankruptcy Code: In May last year, Parliament cleared the Insolvency and Bankruptcy Code, in operation since December. It is expected to ensure time-bound settlement of insolvency, enable faster turnaround of businesses and create a database of serial defaulters.
The last few weeks of the year were dominated by the ongoing de-legalisation of high denomination currency notes, which will eventually pave way for demonetisation. This is a master-stroke by PM Modi.
Undertaking a step like this requires immense political courage to impose the transitional adjustment costs on the economy, while having the perspective to lay the foundation for sustained future benefits.
With incentives being put in place, the desired behavioural impact has already started to manifest. Use of cash alternatives like debit/credit cards, cheques, mobile/internet banking, e-wallets, have zoomed since the second week of November. Additionally, the process of demonetisation will help boost household financial savings, enhance monetary policy transmission mechanism, and in conjunction with the GST, help establish a transparent financial trail for transactions, thereby benefiting government’s fiscal position in the medium-term. Overall, the demonetisation exercise will help to usher in a new transactional era with multiplier effects via the financial sector.
Even as the overall domestic macro-situation improved in 2016, the banking sector continues to face challenges due to lack of recovery in asset quality, capital constraints and sluggish profitability. Nevertheless, 2017 could be the inflexion year for the banking and finance sector with support from the policy and regulatory environment.
The ongoing demonetisation exercise will incentivise financial inclusion; moderation in currency circulation will help lower cost of handling cash and the the bankruptcy framework will help ensure in a quicker resolution of stressed assets. The GST framework will further formalisation of the economy while stimulating consumption and investment.
The year 2017 will also be important as the introduction of new IFRS accounting norms will kick in. While this may lead to some tightening in capital provisioning, the overall system is expected to gain in terms of better disclosures and increase in transparency and robustness. 2017, thus, will offer opportunities for the nimble-footed in the banking and finance sector. At the same time, it will pose requirements for re-platforming of PSU banks and exploring out-of-box ideas for monetisation of idle PSU assets.
India is fast becoming an active incubation centre for e-commerce with such ventures expected to reach 10,500 by 2020 as per NASSCOM. With thrust on programmes like Digital India and Startup India, entrepreneurial economy characterised by DICE—Design, Innovation & Creativity—is flourishing. The technological penetration of the banking and finance sector will improve further in 2017 in order to support this new-age commercial requirement. The JAM trinity is a silent revolution that will transform India in the coming years. As gateways like the recently launched UPI platform gather momentum in 2017, they will generate basic digital intelligence, with the market for e-finance providing one of the biggest opportunity for the banking and financial system.
With 2016 laying the foundation for critical reforms in the country, we are at the cusp of transformational shifts in the future with the banking and finance sector being an important change agent in this exciting journey.
The author is MD & CEO, YES Bank. Views are personal