5 Undeniable Reasons To Adopt Blockchain In Indian Banking Now by Prof. Naveen Kandwal

Need of blockchain in Indian banking institution | Blockchainblogging.com
Need of blockchain in Indian banking Institution | Blockchainblogging.com

PM Narendra Modi targeting to make India a $5 trillion economy by 2025 do need the Implementation of Blockchain in Indian economy system starting from Blockchain in Indian Banking Institution. As it holds the potential implications for global commerce. RBI in this month has also given indications to implement Blockchain in Indian banking.

Banking institutions were created to connect groups of people together and allow all kinds of trade and commerce between them. Blockchain is a tool that can accomplish the same but on a global scale. Moreover, it’s secure and transparent. So here are the 5 Reasons which are going to make the requirement of Blockchain in Indian Banks to be implemented soon.

A recent World Economic Forum report predicts that by 2025 10% of GDP will be stored on blockchains or blockchain-related technology.

It could make trade more efficient by removing the manual and paper-based processes and introducing streamlined and automated ones instead. A public blockchain can be a great collaborative tool because it’s decentralized, and no single entity can own it. 

Blockchain in Indian Banks: Know your Customer (KYC)

Indian Institutions spending near 12608.14 Crore up to 31 December-2020 from 2009 year to keep up Aadhar Card (UIDAI: Unique Identification Authority of India ) to give unique identity to all Indians. UIDAI has a centralized ID Database for all the Indians that can be used anywhere for KYC. Unfortunately many times breach in the database of UIDAI has been identified.

Blockchain would allow the independent verification of one client by one organization to be accessed by other organizations so the KYC process wouldn’t have to start over again. The reduction in administrative costs for compliance departments would be significant.

KYC on Blockchain, Blockchainblogging.com
Source: devteam.space

How a KYC Blockchain application would work.

An institution, a bank, for example, sends a request to the blockchain platform to access your identity data.

In this new architecture, data access would be solely based on user consent. To grant consent, a user only has to log in, probably through a One Time Password (OTP) and allocate a private key to the data. Although the data can now be accessed by a third party (the banks in this instance), ownership of the data remains with the user.

The concept of the Blockchain-based KYC platform is already being implemented by IBM. The Shared Corporate Know Your Customer (KYC) project assures an efficient, secure and decentralized mechanism to collect, validate, refresh , store and share KYC information for customers.

blockchain-based KYC utilities will help bring cost savings to any industry that relies on identity verification. This is because the technology will allow banks and other financial organizations to rely on a more secure organized unified model of data handling

Identity Verification

With blockchain in Indian banks, consumers and companies will benefit from accelerated verification processes. That’s because blockchain will make it possible to reuse identity verification for other services securely. 

The most popular innovation in this area is Zero Knowledge Proof. Several countries and large corporations are now working on solutions based on ZKP.

Thanks to blockchain, users will be able to choose how they wish to identify themselves and with whom they agree to share their identity. They will need to register their identity on the blockchain only once. There’s no need for repeating that registration for every service provider – as long as those providers are also powered by the blockchain. Naturally, storing this type of information on a blockchain also ensures its security.

Blockchain in Indian Banks: Fraud Reduction

Even though blockchain is new technology, its potential to reduce fraud in the financial world is getting a lot of attention since 45% of financial intermediaries such as stock exchanges and money transfer services suffer from economic crime every year. Check the 2019-20 Annual Report shared by RBI of Indian Banks fraud cases.

RBI Annual Report 2019-20 of Fraud Cases
Image Source: Bloombergquint

Advances or lending operations constitute 98% of all fraud cases, as reported by banks. The share of frauds involving other areas like off-balance sheet and forex transactions declined during the last year. Card and internet frauds, though constituting a very small amount of the total frauds, increased 174% to Rs 195 crore in 2019-20 from Rs 71 crore in the previous year.

Read more at: https://www.bloombergquint.com/business/rbi-annual-report-2019-20-bank-frauds-more-than-double

Most banking systems around the world are built on a centralized database that is more vulnerable to cyberattack because it has one point of failure rather than many—once hackers breach the one system they have full access.

The blockchain is essentially a distributed ledger where each block contains a timestamp and holds batches of individual transactions with a link to a previous block. This technology would eliminate some of the current crimes being perpetuated online today against our Indian Banks.

Blockchain in Indian Banks: Smart Contracts

Because blockchains can store any kind of digital information, including computer code that can be executed once two or more parties enter their keys, blockchains enable us to have smart contracts. This code could be programmed to create contracts or execute financial transactions once a certain set of criteria has been achieved—delivery of products could signal an invoice to be paid for example.

World Bank : Smart Contract Technology and Financial Inclusion

The World Bank on July 08,2020 has looked into the benefits of smart contracts and found the blockchain instruments to be a “limited” financial tool.

  • In a July 8 blog post summarizing a recent report called “Smart Contract Technology and Financial Inclusion” the international financial institution looked at the role smart contracts could play in improving financial services in poorer nations.
  • Smart contracts are pieces of code that automatically execute the terms of a contract based on a specific set of rules.
  • The World Bank looked at two main areas of financial services including index-linked insurance and short-term unsecured loans.
  • On the insurance side, the institution looked at penetration, or the ratio of policy premiums underwritten over a 12-month period against the gross domestic product (GDP) of a given nation.
  • The post stated that smart contracts would not help fix many common issues with insurance penetration, but could assist in determining whether a particular insurance product was suitable as well as increasing trust in the product amongst stakeholders.
  • Examining short-term loans, the World Bank found that while smart contracts could increase efficiency with the different phases of a loan cycle, those phases are already highly automated and therefore the new technology would be redundant.
  • The post’s authors said a major factor in the costs of consumer credit was based on consumer risk and that smart contracts would be of “limited” benefit in improving borrowers’ credit ratings.
  • The World Bank was founded in 1944 for the purpose of providing loans to governments of developing nations in order to tackle poverty.

Blockchain in Indian Banks: Payments

By establishing a decentralized channel (e.g. crypto) for payments, blockchain in Indian banking institutions can use emerging technologies to facilitate faster payments and lower the fees of processing them. By offering higher security and lower cost of sending payments, banks could introduce a new level of service, bring new products to the market, and finally be able to compete with innovative fintech startups.

Moreover, by adopting blockchain, Indian banks will be able to cut down on the need for verification from third parties and accelerate the processing times for traditional banks transfers.

Credit and Loan Distribution

Traditional banking institutions underwrite loans by using a system of credit reporting. With blockchain in Indian banking, we’re looking at the future of peer-to-peer loans, faster and more secure loan processes in general, and even complex programmed loans that can approximate syndicated loan structure or mortgages. 

Banks that process loan applications evaluate the risk by looking at factors such as credit score, homeownership status, or debt to income ratio. To get all of that information, they need to ask for your credit report provided by specialized credit agencies.

Such centralized systems are often harmful to consumers because they contain erroneous information. Moreover, concentrating such sensitive information within a small number of institutions makes it very vulnerable. For example, last year, one of them, Equifax, got hacked, and exposed the credit information of over 145 million Americans. Now you can see why blockchain offers a more secure, efficient, and cheaper way of processing loan applications.

Blockchain in Indian Banks: Trading Platforms

It’s exciting to contemplate the changes that might occur with our trading platforms if they relied on blockchain-based technology. Blockchain in Indian banking could enable bank transactions to be settled directly and keep track of them better than existing protocols such as Society for Worldwide Interbank Financial Communications (SWIFT). An average bank transfer takes a few days to settle because it’s limited by the way our financial infrastructure was built. 

A decentralized ledger of transactions like blockchain in Indian banking could enable banks to keep track of all the transactions publicly and transparently. Banks won’t need to rely on a network of custodial services and regulatory bodies like SWIFT. They could simply settle transactions directly on a public blockchain.

Assets Management

Buying and selling assets like stocks, commodities, or debts are based on keeping track of who owns what. Financial markets accomplish this through a complex network of exchanges, brokers, clearinghouses, central security depositories, and custodian banks. All of these different parties have been constructed around an outdated system of paper ownership. As you can guess, the system is not only slow but riddled with errors and prone to deception. 

Blockchain in Indian banking will revolutionize financial markets by creating a decentralized database of digital assets. A distributed ledger allows transferring the rights of an asset through cryptographic tokens that can represent such assets off-chain. Currencies like Bitcoin and Ethereum accomplish that with purely digital assets, but many blockchain companies are now working on solutions that would help us tokenize real-world assets such as gold or real estate. Cutting out the middleman will also lower the asset exchange fees and accelerate the process significantly.

The future of blockchain in Indian banking

Banking executives believe that blockchain in Indian banking will have to fulfill several conditions before becoming a mainstream technology. To make the most of blockchain, banks need first to develop the infrastructure required to operate a global network using matching solutions. Only a widespread adoption of blockchain will lead this technology to disrupt the sector.

Once fully adopted, blockchain in Indian banking institutions is expected to enable to process payments faster and more accurately, all the while reducing transaction processing costs. All in all, blockchain-enabled banking applications will deliver a better customer experience and help traditional Indian banking institutions to compete with futuristic startups.

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