India is going through a digital transformation and rapidly evolving into a digital behemoth. Being a digitally native country, it is best placed to maximise the benefits from this transformational change and charter a path of inclusive growth.
The emergence of India Stack on the back of JAM (Jan Dhan Yojana, Aaadhar and mobile phone) has significant disruptive potential. With a digital identity and digital service channel, the distribution and channel costs could be brought down significantly. This is expected to foster greater financial inclusion as innovation would lead to the emergence of a new business architecture riding on low-cost digital channels. Today, there is an opportunity to ride on the digital infrastructure to strengthen payments, trade and information flow to aid sustainable and inclusive growth.
While digitisation would impact all aspects of our lives, I particularly believe that the four biggest focus areas to leapfrog into a digital economy are:
- promoting transparency;
- digitisation of payments and riding a financial infusion wave on the same;
- channel innovation and using digital data/footprints for credit delivery; and
- enhancing ease of doing business by bringing in speed and transparency in trade flows.
Digital can be one of the best ways to ensure that there is a trail of cash flows, timelines to approvals or rejections. It is a noted fact that with digitisation the level of corruption goes down in each sphere of business, as actions can be remotely tracked and conscious delays or inappropriate action can easily be red-flagged. The tracking of workflows, single window clearance, direct benefit transfer and various government initiatives to promote ease of doing business couldn’t have been possible without the underlying focus on digital and transparency.
India needs a continued focus towards making processes transparent. For instance, the government may decide that all its payments (including government companies) shall be on an electronic trade platform. This would not only ensure timely release of funds upon closure of work order, but also allow enterprises to raise the much-needed funds for growth.
Digitisation Of Payments
The payments space has witnessed large-scale disruption in the last 12–18 months driven by digital. Digital payments are growing at an unprecedented rate and are reshaping the paradigm. Digital payments have significant data and relationship opportunity – as a fuel that cooks many dishes. The biggest challenge is to get people to use digital modes of payments on a continuous basis. As that happens, people will start with saving with banks and then move to other financial investments and also purchase risk protection products. Government schemes like the Pradhan Mantri Jeevan Jyoti Bima Yojana, providing insurance cover of Rs 2 lakh would significantly depend on the success of digital payments for wider penetration across the country.
It is understood that around 65-70 percent of MSME transactions are in cash. With the digitisation of payments, MSMEs/individuals would create transaction histories which ultimately could be used for anchoring credit delivery as well.
Channel innovation and using digital data/footprints for credit delivery – high customer acquisition and servicing costs are key reasons that have kept a large number of MSMEs and individuals at bay from formal credit access. For the next phase of growth in retail and MSME lending, efficient use of information technology infrastructure towards customer acquisition and servicing, coupled with tools to make data collection would not only reduce the cost of credit delivery but also enhance the credit decision-making for financial lenders.
Given the credit losses and non-performing assets over the past few years, banks have become risk-averse to taking on new loan exposures. One of the causes for the presumed weakness in credit decisions in earlier years was a large information asymmetry between borrowers and lenders. While CIBIL has significantly resolved the issue for retail lending, MSME and corporate lending still need consolidation of digital insights about the customer.
The need of the hour is to enhance the scope of credit information companies whereby they can access data like income tax filings, Goods and Services Tax data, PF, utility payment, digitally usable corporate returns, comprehensive borrowings from sources like banks, mutual funds, NBFCs, insurance companies, and others.
This would make lenders have greater confidence in underlying business models, reduce default rates and potentially lower the perceived risk of lending and hence cost of borrowing.
Digitisation Of Trade Process Workflows
The current process of trade finance is largely paper-denominated, sometimes takes significant time and is not really efficient. Using end-to-end (E2E) digital documents would make the process quick, enable better reporting, bring cost effectiveness and predictability, and more importantly ensure timely payments. Security and authenticity could also be enhanced through the implementation of new technologies like blockchain. These technologies will use sophisticated embedded encryption and not only help lower costs of trade documentation but will also improve compliance, lower fraud, and curb tax evasion.
A major component of improving India’s ratings on the ease of doing business relates to growing foreign trade. The same benefits would also accrue by migrating stamp duty payments online. Digitisation of trade and integration with GSTN would provide significant visibility of receivables and trade to lenders and assist in better credit assessment.
The adoption of recent initiatives like Trade Receivables Discounting System (TReDS) for receivables financing could bring significant transparency in trade flows.
Along with the opportunity, the digital transformation will also pose challenges on several fronts and a failed experiment may dent confidence. Thus, the strength of our IT systems becomes very important and we cannot under-invest in the reliability of IT infrastructure and cyber security. While treading on the path of digitisation for increasing ease of doing business, aiding transparency and achieve sustainable growth, all stakeholders – government, regulators, organisations, and executives – will require a vision which imbibes the fast pace of change as the only constant.
Shikha Sharma is the Managing Director and Chief Executive Officer of Axis Bank.
The views expressed here are those of the author’s and do not necessarily represent the views of BloombergQuint or its editorial team.