“We need to look at the technology needs from the perspective of global regulators and that of the bank” – By, Jaya Vaidhyanathan – CEO, BCT Digital (Bahwan CyberTek group)

1. What are the potential implications of the pandemic on the BFSI sector (economic fallout of COVID-19 and the lockdown)? 

Within the last few months, the COVID-19 pandemic has set events of catastrophic consequences globally. Analysts all over the world have revised growth estimates to negative. The Government and regulatory bodies, global organizations, private players, and banks are strenuously focusing on measures to recover and damage control.

Banks and NBFCs are in the center stage of impact – they are likely to see a spike in their stressed assets portfolio, drifts in asset quality, and increase in credit cost in the aviation, hospitality, tourism, and related industries. Banks are considering a shift in their exposures from corporate to other sectors as our banks are experiencing a high percentage of stressed assets in the corporate segment already. Retail and microcredit (SMEs) have dipped, and banks are likely to witness a series of defaults in these portfolios. Furthermore, the RBI has asked banks for excess 10 percent provisioning as contingent towards stressed sectors or on exposures that are availing moratorium. It could only place increased stress on the profit/loss of banks.

2. Can you give us an overview of BCT Digital, its solutions, and the company’s commitment towards ‘Make in India’? 

BCT Digital is a global FinTech specializing in Risk Management solutions with its mission to build products in India and bring back the product engineering DNA through reverse innovation. It all started in 2015 when the issue of NPA became national headlines shaking the trust of the public in India. When we were envisaging technology solutions, we did not want to force-fit global products. The Indian BFSI sector is unique and complex. We, therefore, identified the opportunity to build products for India to tackle the mammoth macro and socio-economic problems such as the NPA. We engineered the “Reverse Innovation” model for the two-fold benefit of enabling product engineering in India for both the Indian and global markets.

As a result, BCT Digital built its first product for credit monitoring – rt360-Early Warning System. We adopted a clear blue ocean strategy – we explored niches in the risk management spectrum that were not covered by the large global risk management products. Most global risk products currently offer a platform using which the banks have to create their solutions to address business problems in the risk space. Coupled with that, each country has a unique set of risk management concerns that a global outlook cannot resolve. Build local, go Global was our approach to product development along with a business first, technology agnostic approach. Our entire product philosophy was built on a framework of building for key and important adjacencies in the Governance, Risk Management and Compliance Management (GRC) space.

1. Credit Risks addressed by rt360 – Early Warning System
2. Estimation of Credit Loss through the rt360-IND AS suite
3. Pricing and Capital Allocation Risks addressed by rt360 – RAROC (Risk-Adjusted Return on Capital)
4. Liquidity Risks addressed by ‘rt360 – Asset Liability Management
5. Operation Risks addressed by rt360 – Enterprise Risk Management
6. Model Risks addressed by rt360 – Model Risk Management

The advantage is that these products have found its way to the global market, with numerous clients expressing interest – the outcome of the twin strategy of Make-In-India and Reverse-Innovation.

3. How can digital technologies like Predictive Analytics and Early Warning Systems aid in the profitability of financial institutions? 

We need to look at the technology needs from the perspective of global regulators and that of the bank. Let us take the case of NPA and the EWS solution for instance – in India, we have alerts that RBI has mandated, and that DFS has mandated. Over and above all these, banks may need much more microscopic alert system for instance they may want to review additional segments like retail, etc. To trigger these alerts, the volume, source, and complexity of data have to be taken into account while engineering the product.

RBI came out first with 42 alerts – and if you look at the underlying data that is needed to trigger these alerts we see that only 28% comes from core-banking and other systems internal to bank. The rest 72 per cent of the alerts need data from other sources and may need to touch about 3000 data points including external and internal sources and technologies. It is impossible for a human being to even attempt it considering the volume of corporate accounts that are a major part of a banks’ portfolio. What was then 42 RBI alerts, now has additional 82 alerts for the department of financial services (DFS) and things are further tightened.

This is where predictive analytics and early warning systems help navigate through the 3000 data points to enable banks with alerts that are mandated. EWS is probably the only solution with immediate return on investments. We can see that merely implementing a system for a bank size of say 50B, with an average NPA of 10% or 5 B,  can bring back at least 500 M back into the bank per year.

4. How can BCT Digital’s technologies help in detecting financial risks for banks and NBFC’s?

 BCT Digital specializes in leveraging the power of technology to identify potential risk areas for banks, based on customer/industry sectors, geographies, and associated linkages.

Our product rt360-‘Early Warning System’ uses predictive analytics to predict and counter incipient stress to defend against credit risk.  The product uses AI to compare, contrast, and strengthen portfolios; data mining to make intelligent decisions; multi-dimensional big data with the traditional data modeling; the product is built on scalable and future-proof next-generation technologies.

Similarly, ‘rt360-Model Risk Management’ (MRM) is implemented to contain or eliminate model risks. MRM enables an organization to set up a  model management framework, which includes model validation, estimating credit loss, accurate controls, and calibrations, and this can eventually lead to the sound financial health of the lender.

We also have other products to tackle other forms of risks like Asset-Liability mismatch, or liquidity risks, operational risk, pricing risks, and others. Our focus will continue to be to use disruptive technologies, like, AI/ML, Predictive Analytics, and Blockchain, to expedite India’s move to the next generation of banking.

Our credit risk management solutions are also seeing great interest from NBFC’s, as we keep in mind their considerations on infrastructure (cloud, as opposed to on-premise implementations for large banks), customer segment (more of mass market, low ticket loans rather than large corporate loans) as well as reliance on data from external sources  (due to lack of a transactional system like a CBS).

5. According to you, what are some of the drivers of digital transformation in 2020? 

As we move from 2020 to 2021, the emphasis will be on accelerating problem detection and pre-emptive action. High-quality data, emerging technologies and a robust FinTech strategy will be central to assisting bankers resolve bad loan scenarios and frauds.

Considering the economy and the financial sector, it is foreseen that banks may aggressively implement technology systems to control risks. Regulators will now want to intervene before other risks can manifest and thereby push for advances in regulatory guidance for Model risks, Liquidity risks and Operational Risks. This will lead to the need of a risk-optimised banking experience which will eventually rely on the strengths of game-changing technologies to redefine the FinTech arena.

6. What is the new normal for BFSI industry in the post COVID-19 environment? 

A new opportunity arises from every challenge. Likewise, pandemic experiences have brought us an opportunity to press the reboot button, start afresh and do things differently. Emergence of new or improved business models will take the centre stage in solving fundamental business challenges or problems. Prerequisites for better integration of risk with the core business processes of a firm, driving adoption of enterprise risk management systems is expected. With the impact of Covid-19, inclusion of a Business Continuity Plan (BCP) in the organization across the globe is highly endorsed by the regulators to ensure that there is no disruption in the risk management and business models, even if a catastrophe occurs in the future. Reliance on hybrid infrastructure that has the right blend of on-premise and cloud-based infrastructure to optimise costs, banks and financial institutions is definitely in the cards. Most of these innovative businesses that thrive in the management of Covid-led disruptions are expected to continue into the new normal, changing the way we function forever.