Responsible Management Education

Digitalization – A new reality for Finance and Business

By the year 2020, the entire generation will grow up in a primarily digital world. Increasing reliance on technology and demands for the things that are fast, easy and mobile is driving a movement toward digitalization. Digital trends are changing consumer’s demands and expectations, the way the business must operate and the talent dynamics in the market. Digitalization will reach a high point in the next few years due to three significant forces; i.e. Consumer Pull, Technology Push and Economic Benefits.

Changing consumer behaviour and preferences has forced the financial institutions to develop such practices that will allow smooth functioning of digital channels, providing seamless experience.

Since decades, the financial industry has experienced a continuous evolution in service delivery due to digitalization. But there has been a shift in the focus of digitalization from improving the delivery of traditional tasks to introducing fundamentally new business opportunities & models for financial service companies.

In today’s digital world, finance has become more agile, forward looking and decision centric. Digitalization of finance is dramatically altering the existing finance industry and changing the nature and conduct of business thereby shifting the value prepositions. Finance leaders today have a huge opportunity to play a lead role in shaping the digital agenda of the organization. Digital transformation of finance holds the key to make this shift work towards a digital organization.

Financial services organizations must look outside the customer experience box and ensure that the business comes together to define how the organization can successfully create the “digital umbrella” across the whole organization.

In India and around the world, banking industry is going through changes with major shifts in technology, digitizing the entire banking process and redefining new ways of doing business. Payment banks and small finance banks are also entering the system thereby increasing the battle for customer loyalty and growth. Financial services needs to go beyond commonly-held notions of being digital.

Although the digital technology has changes the face of banking. But innovation just for the sake of innovation is a waste; it must have a genuine customer benefit. Jumping into whatever is trending will not ensure relevance and engagement; it’s better to get things right and offer a flawless experience within existing channels rather than provide an average-quality service across a myriad of channels.

The banks should ensure a superior experience in existing delivery channels before launching additional ones to bring perfection in execution of existing channels and focusing on the service quality.

Today’s advanced technologies are poised to transform the entire financial services industry. Indeed, as they reassess their customer strategies in light of this fast-evolving technological landscape, leaders see boundless opportunities to implement a wide array of differentiating customer capabilities and experiences.

With the digital shifts in core business, finance needs to enable and drive the change rather than being stuck in the past.

Should Credit Ratings alone be used for Investment Decisions??

Credit ratings are not investment recommendations rather they serve as one of several tools that investors can use when making decisions regarding investing in debt funds or any other investments. The ratings agencies only provide an independent opinion on the credit quality of the investment instruments issued by the issuers. Therefore, the investment decision should be based on many other factors such as liquidity in the market and interest rate fluctuations apart from credit risks. The credit rating provides information regarding the companies in the form of rating symbols which is easily recognizable by the investors to perceive risk involved in investments.

Credit ratings are useful for evaluating any investment, but the investors should not base their investment decisions solely on rating symbols or treat credit ratings as if it was an advice to invest in a particular security. This is because credit ratings also have certain limitations of their own.

Credit ratings provide only an alternative viewpoint to the financial analysis and enable the investor to compare risks in investment portfolios. Also credit ratings address only credit risk and give no insights on other risks associated with an investment such as liquidity risk, market risk etc.

Due to the subjective nature of credit ratings, their accuracy and performance is not measurable, thus making it difficult to compare them across different industry sectors.

Securities and Exchange Board of India (SEBI) has completely changed its position on the importance of the credit ratings given by the credit ratings agencies in India. From time to time, SEBI has imposed many regulations and circulars for regulating the credit rating agencies in India and to protect the interest of the investors. Despite of the fact that SEBI circulars & regulations plug many loopholes but some lacunae remains.

What should investors do ?

  • Investors should not rely only on the credit ratings given by the credit rating agencies.
  • Investors should consider the financial performance of the company before investing in securities.
  • Investors should also track news and developments about the companies whose debt funds they have invested in.
  • Investors should check with suppliers regarding the financial distress which might affect the payments.
  • Investors should also enquire from the customers of the company regarding product and services.

In short, investors should consider the credit ratings given by various credit rating agencies to have a diverse view on the creditworthiness of an investment. The investors must understand that the credit ratings should be used as supplement and not as a replacement of their own judgment, research and analysis for taking any investment decision. Therefore, the investor must understand the nature of the investment and should only invest in what he understands.