India’s private banks are facing significant cost pressures amid the rapid rise in digital transactions across the country. IT has now become a recurring expense for banks, constituting up to 10% of their operating costs in some cases. This marks a shift from the previous scenario where banks incurred one-time capital expenses during the migration to core banking systems.
Bankers have responded to inquiries about their IT capabilities in light of the RBI’s action against Kotak Mahindra Bank, which halted digital onboarding and credit card issuance. They emphasized that investing in IT is a continuous process rather than a one-time effort.
Previously, technology primarily replicated manual tasks. Now, investments cover a broad range of areas, such as processing billions of transactions monthly across multiple channels, integrating with other businesses and services, using analytics for personalized sales, and employing artificial intelligence for customer service without human involvement.
Implications of Rising IT Costs
The increased IT expenditure impacts banks’ profitability, requiring careful management to avoid eroding their margins. Smaller banks may find it more challenging to compete with larger institutions that have greater financial resources to invest in advanced technologies.
Potential Strategies to Manage IT Costs
To manage these expenses, banks are increasingly turning to cloud-based solutions, which offer scalability and cost savings. Partnerships with fintech companies provide access to innovative technologies without the need for heavy upfront investments. Additionally, the adoption of automation and AI can significantly reduce operational costs while enhancing service delivery.
Impact on Financial Health and Customer Service
While the rising IT costs pose financial challenges, they also bring substantial benefits. Enhanced IT capabilities lead to faster transaction processing, personalized customer services, and robust security measures. These improvements can drive customer satisfaction and loyalty, ultimately benefiting the banks’ financial health. However, underinvestment in IT can result in severe consequences, including cybersecurity breaches and operational disruptions.
Case Studies and Examples
Yes Bank reported a 17% increase in its IT expenditure to Rs 1108 crore in the financial year 2024, accounting for nearly 30% of the bank’s staff expenditure. This investment includes both operational spending and depreciation, highlighting the ongoing nature of IT investments. Other banks that have strategically managed their IT costs have seen improved operational efficiency and customer engagement, while those that failed to invest adequately faced regulatory penalties and operational setbacks.
In light of the RBI’s recent action against Kotak Mahindra Bank for deficiencies in IT management, bankers emphasize that investing in IT capabilities is a continuous process. The RBI’s concerns about managing IT equipment, software updates, user access control, vendor risk management, and data security are now integral to banks’ compliance checklists.
The Reserve Bank of India remains vigilant about the increasing use of technology, ensuring that banks have robust systems in place to manage transaction volumes, prevent fraud, and maintain backups. This proactive approach aims to safeguard the financial system while fostering innovation and customer trust.
Data provided by the National Payments Corporation of India (NPCI) indicates that in April, there were 1,330 crore UPI transactions, marking a 50% growth compared to the previous year. The total transaction value amounted to Rs 19.6 lakh crore, showing a 40% increase year-on-year.
The Immediate Payment System (IMPS) has also witnessed growth, with 55 crore transactions in April amounting to Rs 5.9 lakh crore in value. This represents a 14% increase in volume and an 11% increase in value compared to the previous year.
The growth of digital payments extends beyond individual advantages, significantly impacting businesses and economies at large. By enabling faster transactions and diminishing the dependency on cash, digital payments can boost economic activity. This surge in activity can result in increased investments, job creation, and overall economic growth. Additionally, digital payments pave the way for innovative business models. For example, online marketplaces heavily depend on cashless transactions, opening up new opportunities for entrepreneurship and job creation. This contributes to a more vibrant and competitive business environment.
But it also impacts banks with additional costs to comply with RBI guidelines, aimed at mitigating the potential risks of data and financial misuse by ensuring data privacy.
In short, the rise of digital transactions in India presents a dual challenge and opportunity for private banks, necessitating strategic IT investments to comply with regulations and enhance customer experience. Despite cost pressures, leveraging technology can lead to improved operational efficiency and innovative service delivery. Proactive measures are essential to ensure data privacy and security while capitalizing on the growth potential of digital payments.
