omorrowhbyShriShaktikantaDasGovernoriatheBankofBarodasAnnualBankingConferenceinnJulyringatofBarodafororganisingthiseventandforhavingchosen‘BankingBeyondTomorrow’asthethemeoftheConference.Giventhatthebankinglandscapeiswitnessingfar-reachingchangesinthebackdropofrapidinnovation,disruptionandevolutionofnewbusinessmodels,Ibelievethisthememeritsactivediscussion.2.Inmyaddresstoday,Iproposetotouchuponthecurrentmacroeconomicsituation,followedbyhighlightingthespecialroleplayedbythebanksandthenewtrendsinthebankingsector.Ishallalsoattempttohighlightwhatbankingbeyondtomorrowmaylooklikeandtheopportunitiesandchallengesitmaybringalong.omicSituationwherewestandtodaythepandemichaverenderedtheglobalmacroeconomicoutlookhighlyuncertain.Countriesarefacingunexpectedlyhighinflationincludingndsupplyimbalancesinproductandlabourmarkets.Centralbanksaretighteningmonetarypolicyatarapidpace,raisingfearsofimminentrecession.Commodity2HigherinterestratesintheUSalongwithincreasedriskaversionamongglobalinvestorshavefuelledsafehavendemandandstrengtheningoftheUSDollar.CurrenciesofEmergingMarketmeAdvancedEconomiesAEsaredepreciatingvis-à-vistheUSdollar.Consequently,inflationarytighter,posingfinancialstabilitychallengesinemergingmarketeconomies.Overall,theglobalsituationremainsgrimamidstfluidgeopoliticalsituationwhilethewarandthepandemicaddtotheforcesofdisintegrationandfragmentationoftheglobaleconomy.4.Insuchanenvironment,theIndianeconomyremainsrelativelyerplaceddrawingstrengthfromitsmacroeconomicfundamentalsThefinancialsystemiswell-capitalised,assetqualityindicatorshaveimproved,balancesheetsarestronger,andbankshavereturnedtoprofitability.Wearealsoseeinghealthypickupincreditdemand.Theexternalsectoriswell-bufferedtowithstandtheongoingtermsoftradeshocksandtheportfoliooutflowsTherecentlyreleasedFinancialStabilityReportoftheRBIhighlightsthattheIndianfinancialsystemremainsresilientandsupportiveoftheongoingeconomicrevival.Banksarewell-positionedtowithstandevenseverestressscenarioswithoutfallingbelowtheminimumcapitalrequirement.TheReserveBankcontinuestoremainwatchfuloftheheadwindsandshallbetiveintakingmeasuresasnecessarytoensurefinancialstabilitydebate,includingpredictionsoftherupeedroppingtorecordlowsas3foreignportfoliofundsexitIndia.Iwouldliketoaddresstheissueinabalancedandfactualmanner.6.First,itisimportanttorecognizethatspilloversfromtheglobalmonetarypolicytightening,thegeopoliticalsituation,thestillelevatedcommodityprices–especiallycrude–andthelingeringeffectsofthepandemic,allcomingtogether,havebecomeoverwhelmingforallcountriestheworldover.EvenreservecurrenciessuchastheJapaneseyen,theEuroandtheBritishpoundsterlinghavenotbeensparedPortfoliofundsaresellingoffassetsandfleeingtosafehaven.ownscomplicatingmacroeconomicmanagementinthesecountries.beenrelativelymodest.Infact,theIndianrupeeisholdingupwellrelativetobothAdvancedandEMEpeers.Thisisbecauseourunderlyingfundamentalsarestrong,resilientandintact.Therecoveryisgraduallystrengthening.Thecurrentaccountdeficitismodest.TheexternaldebttoGDPratioisdeclining.Theforeignexchangereservesareadequate.8.Third,inrecognitionofthefactthatthereisagenuineshortfallofarketrelativetodemandbecauseofimportanddebtservicingrequirementsandportfoliooutflows,theRBIhasbeensupplyingUSdollarstothemarkettoensurethatthereisadequateforexliquidity.Afterall,thisistheverypurposeforwhichwehad4accumulatedreserveswhenthecapitalinflowswerestrong.And,maybuyanumbrellatouseitwhenitrainsFourthapredominantpartoftheoutstandingECBsiseffectivelyhedged.Letmeelaborate.AccordingtotheJune2022FinancialCBsofUSbillion,44percentorUS$79billionisunhedged.ThisincludesaboutUS$40billionliabilitiesofpublicsectorcompanies–mainlyinthepetroleum,railwaysandpowersectors-whichhaveassetswithanaturalhedgecharacter.Besides,beingpublicsectorentities,theirforeignexchangerisk–ifany–canbeabsorbedbythegovernment.Suchacontingencyisunlikelytoarise.TheremainingUS$39billionBrepresentsofthetotalECBsoutstandingEventhisincludesborrowingsofthosecompanieswhichhaveanaturalhedge,i.e.earningsinforeigncurrenciesThiswouldleaveaverysmallportionofthetotaloutstandingECBsthataretrulyunhedged.Corporateentitieseventuallyfaceatrade-off:iftheyhedgetheirforexexposurecompletely,thecostofborrowinggoesupandtheadvantageofstOntheotherhandtotheeratiowhichcalculatestheproportionofhedgingthatmimimisesthevarianceoftheportfolio.ForIndia,ourinternalresearchestimatestheandtheexposureofpublicsectorcompanies,theoptimalhedgeratioconditioniscomfortablysatisfiedinthecaseofthestockofECBsinIndia’sexternaldebt.5themovementsoftherupeehavebeenrelativelysmoothandorderly.Byeschewingsuddenandvolatileshifts,wehaveensuredthatexpectationsremainanchoredandtheforexmarketfunctionsinastableandliquidmanner.Wewillcontinuetoengagewiththeforexmarketandensurethattherupeefindsitslevelinlinewithitsfundamentals.Iwouldliketoreiteratethatwehavenoparticularleveloftherupeeinmind,butwewouldliketoensureitsorderlyevolutionandwehavezerotoleranceforvolatileandbumpymovements.ialExpectedtobePermanentEntitiesBanksarespecialandnotlikeanyothercommercialentity.Theyarenotjustthecustodiansofshareholders’interestbutmorefundamentallythetrustofthedepositors.Depositorsareattheverycoreofthebankingsystem.Protectionofdepositors’interestisparamounttoarobust,reliableandstablefinancialsysteminthecountry.Itisimportantforbankstoalwaysrememberthatthefundstheydeploybelongtodepositorsandthisshouldreflectinproperriskmanagement,governanceandinternalcontrolsystems.12.Banksarealsoexpectedtobepermanentinstitutionsaftertheyobtaintheregulatorylicence.TheyaregovernedbysoundregulatorysorypracticesThebiggerresponsibilitylieswiththebanksthemselvestoensurerobustgovernanceandriskmanagementwhichareintegraltothefunctioningofabank.Goingbeyondregulatoryprescriptionsintermsofcapital,liquidityandprovisioningnorms,andevenexceedingthemwouldbeasignofgoodgovernanceandrobust6riskmanagement.Thiswillfutureproofthebanksandenablethemtofallbackontheirownbalancesheetduringsituationsofstress.13.Itneedstobeemphasizedthatwhileshareholders’interestisortantinthebusinessofbankingevenmoreimportantistheminvestorstolookataforthevalueitwouldgenerateoverthemediumtolongrun.Thisapproachwillusherinanewparadigmofbankingandwillstandingoodsteadforoureconomy.rTomorrowanking14.Thebankingsectorisgoingthroughaperiodofchurning.Thepreferenceswithenhancedexpectationsfromthebankingindustry.EachofthedevelopmentswouldpresentuniqueopportunitiesandthatsometimesthedisruptionscanbesosuddenthatitisimpossibletoanticipatethemTomehoweveritseemsreasonablethatBankingBeyondTomorrow’wouldrevolvearound(i)theadoptionofemergingtechnologies,customisationofproductsandservices,enhancedbusinessandprocessautomation;and(ii)developmentofsuitablebusinessmodelswithstronggovernanceframeworks,betterinformationmanagement,changesinthemodeofworking,buildingofenhancedresiliencecapabilitiesandamoreresponsiblesocietaland7environmentalroleforbanks.Letmedwellupontheaboveinsomemoredetail.IncreasedDigitalisationofferingpersonalisedservicesandchsngesintermsofmarketstructureandcompetition.Theincreasedadoptionoftechnologybytraditionalbanksthroughself-upgradationorcollaborationwithFintechsisresonatingwiththeideaofnew-ageroductsandservicesandnewermakingtheirpresencefeltwithinthefinancialservicesspace.Today’scustomers,especiallytheretailcustomers,expectbankstoprovidethemquick,reliableandpersonalisedservices.Therefore,tostayrelevant,bankswouldneedtoembracenewerandtestedtechnologiesforeffectiveandtimelyinessdecisionmakingunderstandingtheneedsoftheircustomersanddeliveringpersonalisedservicestothem.Bankingbeyondtomorrowwouldnecessitatesignificantinvestmentintechnologyandorganisationalcapability.16.Globally,bankingisbecomingmore‘Open’facilitatedbytheavailabilityofnewertechnologiesandapplicationprogramminginterfaces(APIs)thatallowinteroperabilityamongbanksasalsoFintechs.Thisdevelopmentpresentsuniqueopportunitiesforcollaborationamongvariousparticipantsforfasterandimproved8deliveryofproductsandservicessuitedtothecustomer.Unlikeotherdevelopedcountries,IndiahasembracedahybridmodelwhereboththeregulatorandthemarkethavecollaboratedforthedevelopmentofOpenBanking.UPImarkedawatershedinthecommencementofOpenBankinginIndia.WiththesuccessofUPI,implementationoftheaccountaggregator(AA)frameworkandthemassadoptionofdigitalbankingservices,Indiaiswitnessinganemergenceofnewbusinessmodels.Moreandmorebanksareopeningupforcollaborationwithacilitatingcustomerstomakebetteruseoftheirdataandavailawiderandrichersetofservices.UserFriendlyApps,WebsiteNavigationandEnhancedCustomertech-savvycustomers,banksmustalsostrikeafinebalancebetweendigitalandpaperbasedformsofcommunication.Whiletheappsandwebsitesofbankshavegrowninleapsandboundsovertheyears,thereisstillsubstantialscopeforfacilitatingeasynavigationforcustomers.Simplifyingdisclosuresandaccesstoinformationandinnovativedeploymentoftoolssuchaschatbotstohelpcustomersavigatethroughthewebsitesandmobileapplicationswillgreatlyenhancethebankingexperience.ancialInclusion18.FinancialinclusionhasbeenpursuedvigorouslywithsteadyimprovementsasreflectedintheFinancialInclusionIndexintroducedbytheReserveBank.Receivingdigitalpaymentssuchaswage9payments,governmentcashtransfersanddomesticremittancesarecatalysingthefinancialinclusiondrive.ThepushprovidedbytheJAMtrinityhasresultedinincreasedaccesstobankingservicestotheunservedandtheunderserved.Whiledigitaltechnologiesarealsoofferingapowerfulwaytoovercomebarrierstoaccessbankingandfinancialservices,wealsoneedtobesensitivetotherequirementsofourpeopletoavoiddigitaldivide.ThepresenceofhumantouchinaneedforprovidingtimelyandseamlesscredittoagricultureandMSMEsectors.WhiletheRBIisengagedinencouraginginitiativesinareassuchasMSMElendingthroughitsRegulatorySandbox,otherstakeholderssuchasbanksandfintechcompaniesarealsocollaboratingtoprovidedigitalcreditdeliverymechanismincost-effectiveandhassle-freemanner.edUseofSocialMediaandInformationMediums19.Socialmediaisanalternativeplatformforreachingmillionsofcustomers.Indians,onaverage,spendabout2.4hoursdailyonsocialmedia1.Further,thenumberofsocialmediausershasbeengrowingsteadily.Theanalysisofsocialmediausehasthepotentialtohelpbanksinreviewingtheirstrategiesintermsofcustomersegmentation,customeracquisitionandfurtheringfinancialinclusionplans.Socialmediacanalsobeusedincustomergrievanceredressmanagement.1GlobalWebIndex’sSocialMediaTrends2019reportcurity20.Withadvancementindigitalbanking,cybersecuritywillremainanimportantchallengeforallstakeholdersTheincreasinguseofITsystemsbybanks,remoteworkingarrangements,accelerateddependenceonthirdpartiesforvariousserviceswouldwarrantenhancedresiliencecapabilitiestoensurebusinesscontinuity.Thiswouldincludebuildingstrongdefencesagainstcyber-attacksandmaliciousattemptsatdisrupting,disablingordestroyingacomputinginfrastructureorstealingconfidentialinformationanddata.Bankswouldneedtoundertakeconstantupskillingofpersonnel.Continuousknowledgeacquisitionandstayingaheadofthecurvewouldbecomeevenmorecrucial.omprehensiveandStrategicApproachtoClimateRelatedRisks21.Climate-relatedriskswillbeafocusareaintimestocome.Suchriskswillimpactthebusinessmodelsofbanks.Theincreasedrequirementsoffundingbusinessesandindustryfortacklingclimatechangewouldbegreatlyinfluencedbytheglobalmoveonclimaterelatedriskmanagement.Variousstakeholdersalreadyconsiderenvironmental,socialandgovernance(ESG)asani