Technological forces are not just changing the traditional business of finance but also posing challenges to the traditional centres of finance. RBI’s recent decision to open its Innovation Hub (RBIH) in Bengaluru marks a first step towards positioning the city as a financial centre of the future.
In 2017, an RBI working group on finTech and digital banking (chaired by Sudarshan Sen) recommended that RBI should establish sandboxes and an innovation hub. The purpose of an innovation hub was to ‘promote innovation across the financial sector by leveraging on technology and creating an environment which would facilitate and foster innovation’. The sandboxes were to allow live or virtual testing of new financial products and services. Following the recommendations, RBI invited applications under the first sandbox in 2019 and we already have the fourth sandbox cohort by 2021.
In 2020, RBI announced that it will constitute RBIH, which would have a 10-member governing council and appointed Senapathy (Kris) Gopalakrishnan, co-founder andformer co-chairman, Infosys, as its first chairperson. The other nine members have been drawn from academia, industry and policy. Recently, RBI inaugurated the hub as a fully owned subsidiary with an initial capital contribution of Rs 1 billion.
RBI governor Shaktikanta Das in his speech mentioned that choice of Bengaluru was driven by the ‘availability of skilled personnel, innovation eco-system, linkages with academia/incubation centres etc.’ This is not the first time RBI has established an institution outside Mumbai. In 1997, it established an institution similar to RBIH—Institute of Development and Research in Banking (IDRBT) in Hyderabad. It was instituted to develop banking technology and one can say that the seeds of the developments we see in banking and payments today were sown at IRDBT. However, the difference is that Hyderabad was not a technology hub back then and Bengaluru is a well-established technology hub today.
Technology has become such a pervasive part of finance that the future of finance will be driven by not just traditional financial centres but modern technology centres as well. Given Bengaluru’s technological prowess, it became the natural choice for the RBIH headquarters. Will this move alone help Bengaluru emerge as a financial centre?
In 1974, Charles Kindleberger identified the following factors which lead a certain location to become a financial centre— a centralised location and an administrative capital; home to headquarters of multinational corporations and economies of scale; the presence of the culture and tradition of commerce; and home to the central bank and financial policy.
How does Bengaluru fit on the above factors? While it ticks the first three boxes, it is the fourth which has turned in favor of the city. With RBI establishing its innovation hub in Bengaluru, this is the first time a major policy push has been taken to leverage its tech skills in the financial sector. The location of a central bank often is the turning point in shaping the history of most financial centres. There is a historical precedent in India too. In 1935, the Government established the headquarters of RBI in both Calcutta and Bombay as both were prominent commercial and political centres. However, the RBI Governors preferred to remain in Bombay as they saw the future of finance in the city. Eventually, they had the final say. In 1949, the central bank closed its Calcutta office and made Bombay as the only headquarter. This led all the future financial activities and policies to be based out of there.
Given Bengaluru ticks all boxes, there is a possibility that it can be shaped as a new financial centre in India. It is already home to many fintech companies; however, one should not make the mistake of seeing Bengaluru as a competitor to Mumbai. Mumbai will remain the largest financial centre as it has a long history and continues to be home to many banks and businesses. Instead, Bengaluru can be pitched as complimenting Mumbai by providing technological support and giving ideas for shaping future financial services. RBIH should act as a bridge between RBI and financial markets in Mumbai’s and Bengaluru’s fintechs and tech players. With the government also supporting GIFT City as an international financial services centre, India could have multiple financial centres, and can then be like Switzerland, with financial centres in Geneva, Basel, and Zurich.
There is one catch in the above discussion. Kindleberger also cited transport as an important factor for financial centres. Mumbai has slipped significantly on the infrastructure front in the last few decades. On this count, shifting financial services to Bengaluru is welcome, but Bengaluru’s infrastructure is hardly any better, and perhaps is worse. For realizing its potential as a financial centre, one needs support and quick action from policymakers from the infrastructure space.
Overall, one can be excited to see this first draft of history (a phrase borrowed from former foreign secretary Nirupama Rao). If done right, Bengaluru could be shaped as a new financial centre in India. Obviously, this is a long haul, as financial centres are not built in a day.
Source : https://www.financialexpress.com/opinion/rbis-innovation-hub-in-bengaluru-a-new-financial-centre-for-india/2482730/