Jaya Vaidhyanathan is the CEO of Chennai-based BCT Digital, a division of the $300-million turnover Bahwan CyberTek (BCT), a global technology company specialising in digital transformation, predictive analytics, and the Internet of Things (IoT). She joined as an ‘intrapreneur’ and began their fintech initiatives. This was to build global quality products for the Indian banking system keeping in mind the unique challenges and culture of the banking system in India.

BCT Digital is driving digital transformation for the BFSI sector through its rt360 product line. rt360 is an end-to-end risk management product suite to manage the entire risk portfolio of banks and financial institutions. BCT Digital’s client list includes both Indian public- and private sector banks, among them Canara Bank, HDFC Bank, Bank of India, and IDBI Bank.

Its rt360- Real-Time Early Warning System for Credit Monitoring product is an AI-based innovative upgrade to the current EWS product suite. Real-Time EWS has the potential to detect and prevent suspicious or fraudulent transactions, effectively paving way for a transition from detective to preventive credit risk monitoring.

In an interview with Fortune India, Vaidhyanathan talks about the product suite, the risk management situation in Indian banks and what has changed with the Covid-19 pandemic. Edited excerpts:

Give us an overview of how you see your business at this point, and how the pandemic has changed the outlook.

See, we are in the line of managing risk. We actually take a more centre-stage role with the crisis. So while companies could have thought of us as a compliance need, the more progressive companies could have thought of that as active risk management, now we are more centre stage. Because unless you’re in the pharmaceuticals or grocery type of retail properties, you are making losses now. So it’s more about how actively you manage risk that becomes your identity going forward. Risk management is a competitive advantage.

Let me explain with a few examples. Let’s say you’re a company that’s making losses. It’s not enough to say I’m making losses, it’s important to say how long it’s going to last, which depends on a number of external factors not in your control. In the Coronavirus case, for instance, it could be about whether a vaccine is found in September, versus September of next year: it’s a whole range of theories being propagated and a lot of that is speculation. So as an investor in a company, or a bank giving a loan to a company, I need to know if this really lasted a year versus six months versus six weeks, what are you going to do to stem those losses. The business of quantification of losses is a huge thing even for the government, forget about companies and banks. For the government it’s important to know what kind of sectors will make what kinds of losses, and therefore what kind of sops will help them come back to normal. Risk, therefore, becomes a competitive advantage.

So what do we do, specifically? I can pick a few things. One is the business of computation of losses, which is expected loss computation, or ECL. We can tell you this is the kind of loss you’re looking at given various scenarios, which is very accurate. It’s not going to be lockdown for ever, but even if the situation lasts for a year you would still say these are the things that’ll recover and these are the things that won’t. So [it’s a] complete strategic analysis of what your losses are, and most importantly a number attached to it, and that’s very important.

Is this mainly for the financial sector?

We are doing it primarily for them right now, because it’s like an extension for banks. But having said that, it can be applicable to any corporate sector. Only thing you need is a few parameters, such as accounts receivable-accounts payable, data about supply chain disruptions, etc. We will use more of macroeconomic data also… we will look at who supplies to you and who are you supplying to in turn. So we will do the analysis of your company and model this to tell you this is the kind of delays and losses you could have. Right now we are taking it to a bank because that’s our client base today. All the rest of the software that we do is with banks, so banks are proactively reaching out and saying this is how our corporate book looks like, these are our clients and their sectors… We can come back to say you have 20% exposure to aviation, 20% to retail, another 10% in pharma, so based on how the lending pattern is, we can tell you what’ll be the losses fairly accurately. That’s not subjective, but more objective based on mathematical sciences.

Tell me a little more about your early warning signal (EWS) product in particular.

Most banks say they had a gut feel earlier… there was a guy in the credit monitoring department looking at different loans and some cases had payments frequently bouncing. That would mean the asset is stressed. Now you have a lot more data at your disposal, you have a lot more sense coming out of data analytics, etc, which you must use. Let me give you an example. Now, RBI came out first with 42 alerts of which only 28% data came from current legacy systems such as loan origination systems, core banking system etc. Where is the remaining 72% data coming from? You could say that is coming from the “atmosphere” like the web crawlers, credit bureau information etc. For instance, earlier you could get away with pledging the same collateral with multiple banks. But with the credit bureau data fed into an alert, you could say this is the credit bureau data on this particular person. And that’s one more means of structured data. We can take clean data even from textual data. Third is, as soon as you put in the name, it goes and checks whether they are in the news for the wrong reasons, what kind of corporate actions are there against that, are any members of the board dumping shares, etc. In case of gut feel of a person, if the person moves from the headquarters to a branch, it’s gone. Now people want real-time alerts. The step-change which is coming now is wanting to see things real-time. So you can’t mess with the system.

Now what they’re saying is banks can set their own threshold. Like you can say if there are 20 alerts on a guy, don’t do it. Right now the threshold is left to the banks, but I don’t think it’ll be that way for long. They are gradually tightening things. First they said 42, then they said 82 additional alerts which are for the department of financial services (DFS). It’s going in the direction of further tightening.

NPAs are expected to rise sharply after the moratorium on loans is lifted. Is that a business opportunity for you?

Absolutely. It’s like a doctor saying they are in business because the patient is unwell. It’s not a good business to be in that sense, but that’s where we are. If NPAs go up, and RBI is tightening the noose, it’s good in terms of adoption of the business at large not just in India but globally. Secondly, people think it’s a spend, but it’s one of those spends with the biggest payback. Most people think risk is a spend where it goes as a report to RBI or some authority. But in this case, just by putting a system in place there’s enormous savings for the bank. For instance if a bank has $50-billion asset size, 10% NPA, which is $5 billion, so just by putting in place a system where you get say even 1% savings which is very very conservative, it gives you $500 million back and that too within three months of installation. So most of what we’ve spoken of, like quantification of losses, is instant payback. Even customers won’t complain about it or look at it as a spend.

What is the total size of the market if you add up all your products… the risk business?

The [global] market size is much larger. We have a total addressable market (TAM) and a serviceable addressable market (SAM). We have estimated the sector’s TAM to be upwards of $50 billion but SAM could easily be $5 billion and serviceable obtainable market (SOM) at $500 million.

And what’s your India share at this point?

See we are the leaders as far as EWS is concerned. Mphasis partners with CRISIL; none of the others have their own product. All of the biggies partner with some of the smaller credit providers and deliver it. But for us the product is ours and the implementation is also ours. Completely end to end.

I know it’s a strange question to ask during a pandemic, but where do you see your company in the next couple of years, given it’s in the risk business?

In a pandemic situation, people typically will say prepare for the worst and hope for the best. So we are very much in the prepare for the worst scenario, but hope for the best. So it is more about getting you ready in terms of quantification of losses, so you can work with the government, and RBI on the respective sops. Even the ministry is going to the industries and asking what do you want from us to get started. You can directly tell them if this sop is given, we would go under the curve for a while but recover six months from now. Or if you didn’t give us this, we would go down right now. Quantification helps in all that. We are actually preparing you for the worst with the hope that you’ll get there much better. And pretty much everything—whether it is moral risk, expected computational loss, EWS... Asset-liability mismatch also we have a product… how to manage that better, when to say yes or no, we are preparing banks for all that.

How do you think banks are now looking at risk?

I think banks have always been in a loss scenario, figuring out what to do with their NPAs etc. I was in a discussion with the finance minister a couple of days ago and a lot of different people were asking for changing the NPA classification. I don’t think that’s a solution to the problem. Now you have the issue with the ‘bad bank’. People want to say it’s no longer my problem, and report numbers saying I am healthy. But that problem was created by you. There’s no ownership of the fact that you put them in the bad bank in the first place. I think it can’t be let go like that because it’s public money after all, and discounting is very steep when it goes into a bad bank unlike regular stressed assets. I think there should be a strong pushback on this. It worked in some scenarios where those weren’t big countries like ours. Ours is a completely different scenario and I don’t think it’s apples to apples.

Jaya Vaidhyanathan

A new era in financial accounting

‘Risk management spends have the biggest payback’