Effective risk management in the ever-changing regulatory environment is central to economic stability and progress in the banking, financial services and insurance (BFSI) industry domain. However, while rules aim to create a fair and transparent environment, constant changes in the sector have caused regulations to fall behind. As a result, BFSI companies have been finding it difficult to effectively manage these risks.

BFSI services and products are now technology driven. Disruption by FinTech, the growing influence of the sharing economy and the need for regulators to embrace technology are three of the ten different influencers identified in a PwC survey.

BFSI services are presently simplified and customers find it easy to access them. This simplification has been made possible solely by advances in technology. However, regulators have their work cut out for them, and are finding it increasingly difficult to match the pace of technological developments behind advanced products.

In the present regulatory environment, the focus continues to be on a set of anti-money laundering rules and Know Your Customer (KYC) compliance. However, in the digital world, the faster a payment is processed, the greater is the possibility of risks, as losing control of vulnerabilities will permit frauds to conclude faster. The Reserve Bank of India (RBI) has initiated a series of transformative measures to deal with the changes in payments, financial services and other general purpose technologies that form the bulk of FinTech. But the fast-paced changes in the business environment and macroeconomic conditions will keep posing new challenges, requiring new guidelines to be continuously implemented.

The Indian ecosystem also has certain inherent cultural challenges. Until very recently, bank accounts were opened on the basis of introductions by other account holders. The shift to KYC in account-opening formalities indicates a shift to enhanced methods of compliance. However, bigger challenges remain —especially in changing the cultural mind set to ensure effective implementation of regulation of digital services and products such as UPIs, IMPS and CBS.

Moreover, the challenges faced by the Indian BFSI sector in effectively managing risk are not limited to the local environment. For instance, the imposing of sanctions by one nation on another nation can affect a third nation that deals with both. Similarly, non-performing assets (NPAs) have become a new challenge in the regulatory ecosystem. India has the highest level of NPAs among BRICS nations and identification of NPAs has become possible only because of the RBI’s new guidelines in 2015. The RBI continues to issue guidelines from time to time, to enhance operational risk management and create early warning thresholds.

Trust is the most important factor in the BFSI industry. BFSI enterprises can build and maintain trust by showcasing compliance with regulatory frameworks and instituting a dynamic risk management strategy. To do so, the industry will need to accept the dynamic nature of the business environment and sufficiently prepare itself for these changes.

Dhruv Chawla and Dhritimaan Shukla are Partners - Forensics Services at PwC India.

First Published:Aug 6, 2019 6:00 AM IST