Page 39 - Banking Finance February 2025

ARTICLE

time consumption and inefficiencies, which in turn creates
customer dissatisfaction and security risks.

To address these issues and to create defences against
evolving cyber threats, banks require robust solutions.
Moreover, as more and more individuals are joining banking
marketplace and requesting for loans, the need to track
credit history and risk profiling is increasingly pressing,
creating a scope for processes, which are innovative to
address bad debts and enhance regulatory compliances.
Another stiff competition for the banks is newly emerging
Fintech industry, which has increased its presence in the India
by keeping pace with the latest digital technology.

Here comes the role of Blockchain technology, which can
be permissionless or permissioned, varying as per the
requirement of the processes. This technology helps banks
modernise operations upholding the trust and transparency,
method is also prone to severe inaccuracies, fraud, and data
which drives the core culture of the bank. Few are the cases,
breach. Chances of technical glitch, cyberattacks and human
where Blockchain technology can be found useful:
errors are also there.
Clearing and Settlement Systems
To avoid the situation, Banks can leverage blockchain
Cross- border banking transactions take on an average three applications to eliminate layers of multiplicity. Since
days for settlement. This process is cumbersome and human Blockchain works on single ledger system, it empowers Banks
effort invested in the process is also very high. The process to reduce the layers along with reduction in errors and
goes through complex mechanisms of banks and custodial reinforced security.
services before reaching the recipient.

Blockchain technology, with its decentralized ledger system, Loans and Credits
offers several advantages in banking and finance. Banks traditionally rely on a credit reporting system to
Transactions on a blockchain can be processed much faster underwrite loans. This is because they need to assess the
compared to traditional banking systems, which often potential risk they might face if a borrower fails to repay
involve intermediaries and multiple steps for verification and the loan. To make this assessment, banks rely on factors
settlement. Immutability provides a high level of accuracy such as the applicant's credit scoring, Asset-Liability details,
and trust in the transaction data. Another feature of and Debt to Income ratio. All these information is kept in
Blockchain is decentralized network of communication, central database, which can sometimes be unfavourable to
which makes transaction more efficient as there is no chance customers, as this process is time consuming and requires
of single point failure. lots of paper formalities.

Fraud Prevention and Security However, the introduction of blockchain technology in
Banks need to verify a significant amount of data when it banking offers an alternative lending system. This system is
comes to managing stocks and commodities owned by an efficient, cost-effective, and secure, making it easier for
individual, banks need to maintain accurate and up-to-date customers to obtain loans. Thanks to a decentralized record
records from various entities such as exchanges, brokers, of payment history, the loan application and approval
clearing houses, and custodian banks. process becomes more straightforward for consumers.

This is to be noted that while this system is necessary, it can Customer KYC
also be complex, time-consuming and cumbersome. This KYC is a mandatory process followed by Banks as well as

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