External Environment
Key external drivers and our response
Just as the global economy prepared to leave behind the pangs of the pandemic (despite uncertainties associated with subsequent waves and rising inflationary pressures), the Russia-Ukraine conflict escalated. The consequent imposition of sanctions on Russia kept the global economy and financial system on tenterhooks. Further, China’s slowdown, Sri Lanka’s crisis and other geopolitical issues continue to weigh on the economic recovery, clouding India’s near-term growth outlook as well.
The Indian banking sector, supported by regulatory and Government interventions, has remained resilient and sufficiently capitalised. Measures such as moratorium on payment of loan instalments and restructuring of loans, among others, alleviated the stress while helping banks to continue lending to productive sectors. The pandemic has accelerated the technology-led transformation in the financial services space, with new customised products and services being delivered using digital technologies. However, it has also elevated the risks related to data privacy and cyber security which need to be mitigated on an ongoing basis.
Global economic growth set to moderate
The protracted Russia-Ukraine conflict, Sri Lanka’s sovereign default and structural slowdown in China are weighing heavily on the global economic recovery. Inflationary pressures have increased, as supply chains remain in disarray and trade sanctions on Russia push up energy prices. While Brent crude oil is hovering above $120/bbl, natural gas price has risen by more than 50% since March 2022. In response, many central banks including the US Federal Reserve, have tightened their monetary policy. Against such a backdrop, the IMF expects global GDP growth to moderate to 3.6% in 2022 from 6.1% in 2021. Among advanced economies, the US is expected to grow at 3.7% (vs. 5.7% in 2021), while Euro area growth is estimated to halve from 5.3% in 2021 and the UK economy is estimated to grow at 3.7% in 2022 vs. 7.4% in 2021. While Russia is expected to record a negative output growth, China is expected to grow at 4.4% vs. 8.1% in 2021.
In India, export growth may see a moderation post a good performance last year. Inflation is expected to remain high due to rising input costs, lingering supply disruptions and elevated energy prices. The recent rate hikes by the RBI may put upward pressure on interest cost and weigh on investments and consumption. Additionally, global liquidity withdrawal presents a risk for foreign capital flows. In India, GDP growth is estimated at 7.3% in FY23 vs. 8.7% in FY22, with risks tilted to the downside. Encouragingly, despite the slowdown, in FY23, India is likely to perform better than its Emerging Market peers. While zero COVID-19 policy and related lock downs are likely to drag down China's economy, developing European countries (like Poland) are likely to suffer due to the ongoing war.
Our response
We undertake topical stress testing based on prevailing geopolitical/macroeconomic/sectoral and other trends. One such topical stress analysis was conducted to estimate the impact – direct and indirect – of the Russia-Ukraine conflict on our portfolio. We do not see any significant risk, based on the current information available. We, as part of our continuous and robust country risk monitoring, have proactively taken steps to limit our exposure to Sri Lanka. Nonetheless, we are closely monitoring the overall situation both at the global and India level and are modifying our course of action accordingly.
3.7%
EXPECTED GLOBAL GROWTH IN 2022
Government and regulatory interventions
During the two waves of COVID-19, the RBI announced Resolution Frameworks (RF) 1.0 and 2.0 to provide relief to borrowers and lending institutions. While the restructuring of large borrower accounts under RF 1.0 could be invoked by December 31, 2020 and implemented within 180 days from the date of invocation, they have time till September 30, 2022 to achieve the operational parameters. On the other hand, resolutions under RF 2.0 for individuals, small businesses and MSMEs could be invoked before September 30, 2021 and the resolution plan had to be implemented within 90 days from the date of invocation.
Our response
MSMEs are considered an important economic growth engine and are one of the largest employers in the country. The Bank’s Assets in the MSMEs segment stood at `3,13,919.49 Crore as on March 31, 2022. Its Micro Enterprises Assets alone stood at `1,12,564.77 Crore. We continued to extend support to our customers through ECLGS and ECLGS extension schemes and also provided ad-hoc enhancements as needed. Your Bank emerged as a star performer under the ECLGS 1.0, 2.0, 3.0 and ECLGS extension schemes. We disbursed loans amounting to `17,100.89 Crore to over 0.78 Lakh customers under various ECLGS schemes. This swift support enabled our customers to run their operations smoothly while fulfilling their financial obligations.
`3,13,919.49 Cr
ASSETS IN THE MSMEs SEGMENT AS ON MARCH 31, 2022
Climate change and ESG
Climate change has emerged as an overarching concern, enveloping all aspects of humanity.
Naturally, this concerns the financial sector too. With the disruptive impact of climate-related events already evident, there is a worldwide movement to embed sustainability practices in business operations across Environmental, Social and Governance (ESG) aspects. The financial services industry is expected to factor ESG and climate-related physical and transition risks in decision-making. Further, India reiterated its commitment to climate action at the United Climate Change Conference (COP26) in November 2021 at Glasgow. In line with this, the RBI published a statement to support the greening of India’s financial system. This may significantly impact the policies and processes of the financial services industry.
Our response
We have a comprehensive ESG framework to address and mitigate climate-related and other ESG risks. It consists of a robust governance structure that ensures oversight over ESG matters at the highest level. We have made progress on energy consumption, emissions and tree plantation initiatives and aim to stay the course in the coming years. In FY22, we pledged to become carbon neutral by FY32 and are putting in place an implementation framework to achieve carbon neutrality. We are also in the process of adopting a broad range of technological solutions and operational measures to reduce energy consumption at our operating locations.
Evaluation of environmental and social risks is an integral part of our overall credit appraisal and approval process. Large industrial/infrastructure projects that require long-term financing (greater than `100 Million and longer than 5 years) are covered under our Social & Environment Monitoring System (SEMS). SEMS necessitates an assessment of Environmental, Health, Social and Safety risks in addition to other risks as part of the overall credit appraisal process. Further, we continue to invest in renewable energy and energy efficiency projects to lower our carbon footprint. We also encourage customers to make ‘green banking’ choices.
Data privacy and cyber security
The exponential growth of digitisation and technological transformation in financial services has escalated cyber security risk and data privacy concerns. There is a growing regulatory focus on safe practices and stringent polices within organisations to ensure that customer interest is safeguarded. With the advent of open banking, ecosystem banking, digital payments and lending, the importance of having a robust IT infrastructure with resilient systems and stringent policies cannot be over-emphasised.
Information Security Group
FORMED TO ADDRESS ISSUES RELATED TO DATA PRIVACY AND CYBER SECURITY
Our response
We have a dedicated Information Security Group headed by the Chief Information Security Officer and an Information Security Committee chaired by the Chief Risk Officer for exercising governance over these matters. We have devised and implemented data privacy policies with respect to customer data which includes usage of the Bank’s digital platforms. We are committed towards protecting privacy of our customer’s personal data. Our Data Privacy program provides a common set of requirements for processing personal data within Bank. Through our Privacy Notices, we attempt to explain in a transparent way how and why we collect, store and use personal data; how it might be shared, and legal grounds for processing personal data.
We have stringent policies and processes in place to ensure information and cyber security. We undertake routine vulnerability assessments that include patch management, penetration testing and network security processes to ensure a robust system and IT infrastructure.
We have implemented 24x7 defacement monitoring and vulnerability management of the Bank’s internet properties. This minimises the surface area for cyber security attacks. Further Security Orchestration, Automation & Response (SOAR) is being used to reduce the incident response time by connecting security solutions with each other and automating the incident lifecycle.
Digital innovation in financial services
The pandemic has brought about a shift in digital technology adoption, opening up many opportunities in the financial sector. Digital lending is one such opportunity, where many platforms have emerged to offer hassle-free loans to retail individuals, small traders and other borrowers. Many large multinational corporations whose primary business is technology (e-commerce, social media, payments enablers, etc.), popularly known as BigTechs, have started lending either directly or in partnership with regulated financial entities.
Further, the Indian fintech market is slated to grow significantly due to large unpenetrated geographies and rapid digitisation of the economy. With ~6,000 fintech players, the services offered are spread across investment, insurance, payments, lending, and banking infrastructure. With cutting-edge technology and niche target markets, these fintechs offer customised and user-friendly services that appeal to the growing techsavvy customer base. The regulatory environment is providing the necessary impetus with initiatives such as the e-RUPI, a person and purpose-specific digital payment solution launched in August 2021. In the Union budget of 2022-23, India has announced plans for a Central Bank Digital Currency (CBDC). Additionally, open banking trends and a spurt in the number of off-the-shelf APIs available for banks and third-party apps to build upon is changing the dynamics of financial services industry.
~6,000
FINTECH PLAYERS OFFERING SERVICES ACROSS INVESTMENTS, INSURANCE, PAYMENTS, LENDING AND BANKING INFRASTRUCTURE
Our response
We are focusing on building new competencies under Digital Factory, Enterprise Factory and Enterprise IT. We are fully geared up to launch the next phase of our strategic initiatives to provide seamless customer journeys. We are continuously innovating to provide differentiated customer offerings. Through digitisation we are offering solutions to enable ease of business across our diverse customer base. We are focusing on end to end digital journeys with omni channel touchpoints designed around the needs of our customers. We launched ‘Xpress Car Loans’ – our new car loan journey for existing customers as well as non-customers, resulting in loan initiation to disbursal in less than 30 mins. We are fostering innovation with strategic partnerships with multiple cutting edge startups, Fintechs and BigTechs to increase the breadth of such holistic offerings. Benefits such as an enhanced digital customer experience, more intuitive user interfaces and neo tech stacks are pivotal enablers in our partnership journeys. This has recently been demonstrated through the roll out of our Smart Hub Vyapar offering for merchant ecosystems and our revamped Customer Experience Hub, an AI/ML Powered Omni Customer Experience Transformation program. Our core technology transformation program is continually strengthened with new age technology advancements being built into our roadmap including our Cloudification, API, Automation and App modernization journeys.