BCT Digital is the digital wing of Chennai headquartered Bahwan CyberTek. The company, founded in 1999, provides digital transformation solutions in the areas of predictive analytics, digital experience and digital supply chain management. BCT Digital is mainly engaged with providing solutions to banking and financial services companies in the area of regulatory technology, also referred to as regtech.
As CEO of BCT Digital and president of BFSI and related strategic initiatives within Bahwan CyberTek, Jaya Vaidhyanathan, has been engaged in spearheading functions such as financial services, risk management, outsourcing advisory and technology implementation across companies such as Accenture and Standard Chartered Bank for close to 20 years.
Apart from BCT Digital, she also is part of the board of directors for Mahindra Sanyo Steel, Spice Mobility and French engineering solutions giant Altran.
Vaidhyanathan spoke to TechCircle on the importance of regulatory technologies, the loopholes in the current guidelines, where the technology is headed and how the recent Punjab and Maharashtra Bank (PMC) scam could have been avoided with the implementation of the right set of regulatory solutions.
What is the importance of regulation technology today?
People ask why technology is needed in regulation and there are a few ambits to it. One is that the regulatory guidelines are extremely complex. Today data isn’t generated only by a few systems and the data sources are enormous. They will just become noise if the data is not translated into intelligent decision making.
Originally, to tackle issues, banks looked at traditional data such as core banking or your loan origination data to set up alerts. However the insights from data sources needed today to tap into intelligent decision making can only be processed by technology.
As an example, if a corporate is diverting funds, the traditional way of analyzing the default is after the funds have been disbursed. We gauge where has the money been sent to and then conduct a pattern analysis.
In a technology driven process, through big data collected from different sources, we can assess if the corporate that has been set up as a beneficiary is in the news for the wrong reasons. We can analyze the frequent audits on the company, if they have undergone any sort of tax raids or if the directors are dumping their shares in the market.
There is so much real time data that can be looked into and utilized for intelligent decision making.
Let us assume there are 3000 data points that are available. A human being will not be able to process all of the data and make decisions. Technology helps turn quantifiable data into insights that can be substantiated. In technology terms, we use an AI layer that analyses these 3000 data points and measure with 96.5% accuracy that there is indeed a diversion of funds that is taking place.
Secondly, in a country like India, a lot of the bad loan frauds came from a phone call from somewhere requesting to sanction a loan. With the help of technology, the power is given back to the banker. The decision making process now can track alerts and go through a regulatory body which can provide quantifiable evidence on which grounds a banker can deny a potential bad loan.
How do you view the current guidelines and how was the scenario before all of these technologies came into the picture?
From a rules perspective there is lack of a reasonable amount of guidelines. Only when these guidelines become a compliance do banks get serious and take it up. As we move forward there are tighter regulations that are necessary to be implemented and this is not yet seen in the country.
Worldwide, the industry is closely examining the loopholes in terms of the leakages and these are quickly translated into compliance guidelines, which are turned into audited compliance requirements.
I wouldn’t say the current guidelines are bad but we need to monitor international guidelines, where we can improve and keep adding to our compliance requirements.
All of these recent events in India’s banking sector have put the spotlight on regulatory technology. Do you think the government needs to hasten its process in adopting new regulation strategies and technologies?
There are two aspects to your question. Are there gaps in regulation? Yes there will always be. Second, are there gaps in regulation technology? Absolutely. The tighter the rules are the more compliant the technology will be as it is an enabler driven by a business requirement. If the regulation guideline is clear, technology will enable the guideline.
I wouldn’t say it is necessarily a lapse in technology, it is a lapse in regulation guidelines. Most of the leakages occur not because the technology failed to detect the leakage but because the guidelines weren’t stringent enough.
More audits, more periodic testing and more adoption of best practices can ensure that the technology is effective. However, the antecedence of most of these slippages will mostly stem from guidelines not being implemented correctly.
Talking about the PMC scam, what could’ve been done to prevent it? What precautions or solutions could’ve been implemented?
Having an early warning system in place is important for most banks. A lot of due diligence is done when onboarding a customer. The customer did not go from a really bad customer to a good customer overnight. There is an incipient stress in the loan book. Stress can come from loan defaulting or stress can come from an inability to pay. Both instances needs to be treated differently.
The crisis is occurring due to willful defaulting, which is where most of the money is sucked out by a few users rather than a bulk of the loan depositors.
The problem stems from a few people causing a bank run (a bank run occurs when many customers withdraw their money from a bank very quickly on fears that the bank may cease to function in the near future). A lot of bad lending decisions are made when you don’t have the right models in place. The model should be able to compare risks posed by different clients and take the right decisions, this method is called as ‘model risk management’.
The model risk management is a high-tech solution, based on predictive analytics and statistical data modelling. Banks must ensure that they have a robust system in place to ensure that the models by which they lend are accurate and are at par with global norms.
Today there is a lot of lights turned on when it comes to the public sector units and large private banks. However for some reason we have not spread enough attention as part of the ecosystem onto the cooperative banks, or the systems such as NBFCs (non-banking finance companies).
I think the attention needs to come from a regulatory perspective which needs to shed light on the cooperative banks and NBFCs. The RBI mandate for NBFCs is a welcome move but it has come a bit late.
If we compare India to US, the cooperative banks have the same regulations from the central bank (the Federal Reserve System) perspective. The oversight in terms of regulating the smaller banks seems to have been missed back in India.