Traditional banks have long been the go-to source of funding for MSMEs. However, for many securing a loan from a bank can be a frustrating and time-consuming process, often hindered by stringent collateral requirements and lengthy approval times. This limited access to capital can stifle growth and innovation, hindering the immense potential of the MSME sector. The financial landscape is evolving, and a wave of innovative financing models is emerging specifically to address the financing needs of MSMEs. Peer-to-peer (P2P) lending – This platform allows borrowers to connect directly with individual lenders via online platforms. It eliminates the intermediary, which lowers costs and increases MSMEs’ access to capital. According to Industry ARC, the India P2P lending market size is expected to reach $10.5 billion by 2026. Besides P2P, crowdfunding has become a favoured method for MSMEs to secure capital. One notable trend in the Indian crowdfunding market is the emergence of specialized platforms tailored to specific industries or causes. These platforms focus on supporting startups, social enterprises, and creative endeavors, reflecting the diverse interests and needs of Indian consumers. This trend underscores the growing acceptance of crowdfunding as a viable alternative to traditional funding avenues. Invoice financing – This model helps businesses manage cash flow issues without waiting for customers to pay their invoices. Firstly, it provides immediate access to cash flow by allowing businesses to obtain advances against their outstanding invoices, addressing liquidity challenges, and enabling timely payments of operational expenses. Secondly, it eliminates the need to wait for customers to settle invoices, thereby accelerating the cash conversion cycle and enhancing working capital management. Additionally, invoice financing does not add to the company’s debt burden, as it is not considered a loan, making it an attractive option for businesses seeking non-dilutive financing. Overall, invoice financing enables MSMEs to maintain steady cash flow, improve financial stability, and seize growth opportunities more effectively. Industry estimates suggest that the invoice discounting ecosystem in the country per month is about Rs 1 lakh crore. Supply Chain Financing – Supply chain financing (SCF) involves optimizing the flow of capital across the supply chain. Financial institutions and fintech firms offer SCF solutions such as reverse factoring, dynamic discounting, and trade credit. According to the Global Supply Chain Finance Forum, the SCF market could reach $2.7 trillion by 2025. SCF benefits include improved liquidity, lower financing costs and strengthened relationships through collaboration between buyers and suppliers. Innovative financing models are transforming the landscape for MSMEs, offering alternatives to traditional banking that are more accessible, flexible, and tailored to their needs. As these models continue to evolve and gain traction, they hold the potential to bridge the financing gap and drive sustainable growth for MSMEs worldwide. Policymakers, investors, and financial institutions must continue to support and promote these innovative solutions to foster a more inclusive and dynamic economy.
Tag: finance
Role of AI in Supply Chain Finance Management
India’s supply chain, an essential component of its quickly developing economy, is presently going through a significant digital revolution. Artificial Intelligence, which is drastically changing the field of supply chain finance, is leading this transformation. India is leading the way in creating a more inventive and robust financial ecosystem within its supply chains by utilizing AI to increase operational efficiencies. AI in Supply Chain Finance Artificial Intelligence is revolutionizing Supply Chain Finance (SCF) in India by using its capability to process vast volumes of data with unparalleled speed and precision. Here’s how AI is transforming the landscape: Credit Risk Assessment: AI-powered algorithms are redefining credit risk evaluation by analyzing extensive financial data, payment histories, and market trends. This enhanced analytical capability allows for more accurate and efficient assessments of creditworthiness, facilitating quicker decision-making and minimizing risk for lenders. Fraud Detection: AI excels in identifying anomalies within transaction patterns, serving as a robust defense against fraudulent activities. By detecting irregularities early, AI safeguards both lenders and borrowers from potential financial losses and ensures greater security in financial transactions. Invoice Processing: AI-driven optical character recognition (OCR) technology automates the extraction of data from invoices, significantly reducing manual input and minimizing errors. This streamlines the invoicing process, enhances accuracy, and accelerates payment cycles. Predictive Analytics: With its advanced predictive capabilities, AI can forecast cash flow, demand patterns, and potential supply chain disruptions. This foresight enables businesses to make proactive decisions, optimize working capital, and better prepare for future challenges. Supply Chain Optimization: AI identifies and addresses inefficiencies within the supply chain, such as inventory mismatches or transportation delays. By offering actionable insights and recommendations, AI helps businesses reduce costs, enhance operational efficiency, and achieve a more streamlined supply chain. In summary, AI’s integration into supply chain finance not only enhances accuracy and efficiency but also provides a strategic advantage in navigating the complexities of modern financial operations. Impact on Indian supply chain finance While the full potential of AI in India’s SCF is yet to be realized, early indicators are promising. A study by McKinsey Global Institute estimates that AI could add up to $1 trillion to India’s GDP by 2030. While specific data on the impact of AI on SCF in India is limited, the broader trend of digital transformation and the increasing adoption of AI across sectors suggest a significant positive impact. Despite the immense potential, challenges such as data quality, infrastructure, and regulatory hurdles need to be addressed for widespread AI adoption in SCF. However, the opportunities for innovation and growth are significant. AI has the potential to revolutionize supply chain finance in India by improving efficiency, reducing costs, and mitigating risks. As the technology matures and becomes more accessible, we can expect to see even more groundbreaking applications in this space.
The Impact of Open Banking on consumer finance
Open banking is reshaping the financial landscape by revolutionizing how consumers interact with their banks and financial services. Greater openness, competition, and innovation are being promoted by this revolutionary approach to banking, which resulted from changes in regulations and technical breakthroughs. Open banking is fostering the development of a more vibrant and diverse financial ecosystem by permitting third-party providers to access financial data with consumer authorization. Increased Openness in Finance The rise in financial transparency is one of open banking’s most important effects. Because they can now have a more complete picture of their financial information, consumers are better equipped to make judgements. A survey published by Accenture states that new financial services enabled by open banking are of interest to 57% of worldwide consumers. This transparency also extends to more efficient comparison of financial goods and services, since open banking platforms frequently compile information from various accounts to present a cohesive picture of one’s financial situation. Increased Innovation and Competition By enabling new fintech businesses and third-party suppliers to enter the market, open banking promotes competition. As a result of the increased competition, innovative financial products and services that are suited to the demands of customers are developed. According to research by the UK’s Financial Conduct Authority (FCA), the number of fintech businesses entering the market increased by 30% after open banking policies were put into place. Personalized financial management tools, improved credit score algorithms, and creative payment methods are some of these advancements. Enhanced Credit Accessibility Through the provision of more thorough and accurate financial information to lenders, open banking greatly improves consumers’ access to credit. Customary credit scoring algorithms frequently depend on sparse data, which may omit people with weak credit histories. More data, such as transaction histories and spending habits, are available to lenders through open banking, which helps them create more precise credit evaluations. According to a Deloitte research, the use of open banking by 60% of lenders resulted in better credit risk assessments and lower loan default rates. Enhanced Security and Consumer Control Robust safeguards are established to protect customer data, ensuring that security and control remain top priorities in open banking. Regulations such as the UK’s Open Banking Initiative and the EU’s PSD2 (Payment Services Directive 2) enforce stringent data security standards. Consumers have the autonomy to select which third-party providers can access their data and can revoke this access at any time. According to a survey by the Open Banking Implementation Entity (OBIE), 87% of consumers feel confident about the security of their data within open banking environments. Challenges and Future Outlook While open banking offers numerous benefits, it also presents challenges, including data privacy concerns and the need for robust cybersecurity measures. As the open banking ecosystem evolves, ongoing efforts are required to address these issues and ensure a secure and equitable financial environment. Looking ahead, the impact of open banking is expected to grow, with more countries adopting similar regulatory frameworks and technological advancements.
Best Practices for Financial Institutions Seeking Entry into SCF Space
Globally, supply chain finance (SCF) remains an untapped market. According to McKinsey, more than 80% of eligible assets do not benefit from working capital finance. Even the remaining assets are undercapitalized. Digital usage has facilitated changes in MSME financing, increasing the accessibility and availability of SCF. SCF benefits corporate purchasers by securing inventory with extended payment terms, and suppliers can gain security for forward orders. Banks and NBFCs providing SCF enjoy recurring transaction volumes that allow them to push more capital market products. The RBI has implemented a number of efforts to encourage SCF growth in order to assist MSMEs. The Trade Receivables Discounting System (TReDS) and Account Aggregator (AA) frameworks integrate collected financial data to promote transparency while protecting privacy. This enables providers and buyers to use numerous financing choices in a seamless manner. SCF’s Hybrid Fintech Strategy Banks continue to struggle with SCF, owing primarily to the traditional approach. Cloud computing, artificial intelligence, machine learning, and blockchain approaches can all help financial institutions strengthen their fintech strategy. Banks must devote more time and resources to SCF, owing to the information asymmetry between SMEs and financial institutions. As a result, the priority must be to ensure consistent operations while strengthening security. Legal Compliance Fintech technologies will assist financial institutions in reinforcing legal compliance. Furthermore, these banks and non-banks should carefully consider their strategies in light of competition activities. In some circumstances, a cautious approach may be appropriate. An aggressive strategy will aid in capitalizing on the market’s potential. However, the fintech strategy should guarantee that risk tolerance is determined correctly. Decentralized Technology When new options are investigated, technology should be used in such a way that existing customers are maintained. Fintech entrepreneurs can construct decentralized blockchain platforms with well-researched business strategies and suitable partners to increase trust among SCF players. Security Financial institutions’ major priority is security. The fintech platform must provide traceable transaction records and ensure trustworthy data storage. Integration More attention should be paid to integrating legacy systems and new fintech platforms so that the SCF platform does not become more complex. Banks can leverage the co-lending model to issue loans while offloading operational costs to NBFCs, which already thrive at exploiting technology APIs. SCF at the highest level Lending banks should use a deep-tier SCF approach to help MSMEs avoid supply chain constraints. This strategy will aid in the funding of smaller suppliers, who serve as the backbone of the supply chain ecosystem. AI and ML automation Firms in need of capital and lending banks can be more precisely matched by applying ML and AI models on TReDS platforms. To eliminate duplicating funding, centralized data storage and access should also become required. Currently, corporations launch SCF programs in collaboration with banks. Multi-funder solutions that bring together multiple financial institutions will boost SCF resilience in the future. AI-powered fintech solutions enable banks to better analyze credit health for modern credit ratings. According to IBEF, more than 70% of MSMEs require working capital loans; SCF can help these businesses grow by providing a suitable funding solution. Once SCF is established, those in need of cash help can fulfill their demand in a matter of hours, allowing the business to spread.
Alternative Finance Instruments: How Do They Help SMEs Grow?
Alternate financing describes a category of financing products that includes venture capital, invoice finance, cash flow loans, and debts. In India, such solutions are now primarily favoured by SMEs and startups. This pattern is a component of the broader drive towards financial inclusion, which aims to increase access to formal banking institutions for more individuals. According to the World Bank, financial inclusion is ensuring that companies have access to practical, reasonably priced financial solutions that satisfy their needs in an ethical and sustainable manner.India accounts for around 81.3% of the South Asian market. By 2030, digital lending in India is estimated to reach $1.3 trillion. Artificial intelligence is used by digital lenders to analyze creditworthiness, allowing these fintech firms to reach underserved populations. National digitization activities also contribute to the expansion of alternative financing. The Rise of Alternative Financing Start-ups and SMEs must adapt to the increased requirement for remote working as a result of the pandemic. Due to the requirement for scaling, SMEs sought alternative funding sources. With the advancement of technology and the advent of artificial intelligence, organizations continually require financial resources to compete in today’s market. This growth in innovation has always resulted in a diversity of finance strategies to assist SMEs. Alternative financing solutions for small enterprises include peer-to-peer lending, cash flow, crowdsourcing, and invoice financing. Alternative Financing Drives SME Growth SMEs that have been denied funding from traditional loan providers such as banks and financial markets look to alternative financing sources to obtain the capital they want. In developing nations such as India, it is estimated that over 83% of SMEs lack appropriate finance. The growth of the fintech industry has prompted SMEs to invest in fintech services and seek other forms of financing. The emergence of fintech and alternative finance models has resulted in a faster loan approval procedure, the acceptance of smaller loans, and a reduction in the cost of capital and transactions for SMEs. Fintech has played a significant role in increasing the number of investors due to its diverse financing structures and growing array of investment methods. Peer-to-peer lending has gained popularity, aided by fintech websites. Interested investors can use P2P platforms to connect with borrowers looking for loans, eliminating the need for a financial institution. Competition from the peer-to-peer sector will also motivate banks to use fintech services to provide financial support to SMEs. As of March 2022, the lending market in India rose by 11.1% This expansion is due to the lending sector’s shift towards alternative finance, which is aided by data-driven lending. As a result, SMEs and small firms are no longer restricted to the traditional bank loaning structure due to the availability of alternative financing options. In this modern age of growing fintech services and AI models, the funding system has been positively impacted as it has attracted a large number of new investors who would not have been players in the market if not for the variety of different investments and return on investment options.
How Are Payment Innovations Redefining the Indian Finance Market?
Payment innovations are transforming the Indian financial system by making transactions faster, easier, and more secure. It’s thrilling to see India’s transformation from a cash-based economy to one known for its sophisticated digital payment infrastructure. The payment industry is undergoing a digital transformation, fueled by forward-thinking regulatory compliances, technical breakthroughs, and increased mobile internet usage. Implementing modern digital payment solutions such as mobile wallets, Unified Payments Interface (UPI), and electronic wallets has increased the availability and simplicity of access to financial services for both individuals and businesses. Unified Payments Interface UPI transactions are popular among consumers and businesses due to their convenience and speed. According to the Ministry of Electronics and IT (MeitY), the number of digital payments in India increased by 33% year on year in the fiscal year 2021-2022. During this period, a total of 7,422 crore digital payment transactions were recorded, a considerable rise from the previous fiscal year’s (5,554 crore transactions). By 2030, the Unified Payments Interface (UPI) is expected to reach US$ 253 Billion from US $165 Billion in the year 2022, growing at a CAGR of 5% Digital Wallets Mobile wallets like Paytm, Google Pay, and PhonePe have also gained popularity in India. Users can use these digital wallets to store money online and pay for goods and services. They are convenient for small transactions and have grown in popularity as a substitute for cash. E-wallets such as Amazon Pay and PayPal are also gaining popularity in India. Users can use these digital wallets to store money electronically and pay for goods and services online. They are especially beneficial for online shopping and have grown in popularity as a viable alternative to credit and debit cards. According to a CLSA estimate, digital payments in India are expected to exceed USD 1 trillion by 2026. The rise will be driven by an increase in online consumption and the use of the Unified Payments Interface (UPI), with a compound annual growth rate (CAGR) of 27%. Digital payments are estimated to account for 30% of Indian consumption. Buy Now, Pay Later (BNPL) is now a modest fraction of digital payments, accounting for USD 15-20 billion, or 5-6%. It is predicted to expand fivefold to USD 90–100 billion by 2026, accounting for around 10% of digital payments. CDBC The Reserve Bank of India (RBI) recently launched a pilot program for issuing Central Bank Digital Currency (CBDC) in the retail market, which is a significant step. This pilot program, which will be carried out in conjunction with commercial banks and technology suppliers, intends to provide useful insights into the technological, legal, and regulatory concerns surrounding the issuing of a CBDC. The potential benefits of a CBDC in the retail segment are numerous. The increased security and resilience provided by a CBDC can greatly enhance the stability and reliability of the financial system. The improved access to financial services enabled by a CBDC can greatly enhance financial inclusion for individuals and businesses. The greater efficiency in the financial system brought about by a CBDC can lead to cost savings and increased productivity for all stakeholders. It is worth noting that this initiative is in line with the global trend of central banks exploring the potential of CBDCs, as many countries are investigating the use of digital currencies to improve financial inclusion and increase efficiency in the financial system. Payment innovations are playing a critical role in changing the Indian finance market. Industry experts predict that a variety of global trends, including better customer journeys, digital wallets, embedded payments, augmented reality, new features of Buy Now, Pay Later (BNPL), and even a rise in digital currencies, will bring innovations to the market. As a result, the Indian finance market will be more efficient and inclusive than ever before.
The Significance of Regional Rural Banks in India
The Regional Rural Banks (RRBs) were established in India in 1975 with the objective of developing its rural economy through inclusive banking services. RRBs are jointly owned by the Government of India (GoI), the respective state government and a sponsor bank with the intention to elevate and empower the population under their governance. When the foundation of RRBs was laid by the Narsimham committee, 5 RRBs were set up with a total authorized capital of Rs 1 crore which was later increased to Rs 5 crore. The 5 commercial banks picked to sponsor RRBs were Punjab National Bank, State Bank of India, Syndicate Bank, United Bank of India and United Commercial Bank. The equities of rural banks were divided in a proportion of 50:35:15 among the Central Government, the Sponsor Bank and the concerned State Government, respectively. With a clear intention to upraise rural areas, RRBs were put in place to ensure the following responsibilities were undertaken and achieved – Taking the banking services to the doorstep of rural masses, particularly in unbanked and underserved rural areas. Identify the financial need, especially in rural areas. Making available institutional credit to the weaker section of society who had by far little or no access to cheaper loans and had been depending on informal credit sources. To enhance banking and financing facilities in backward, unbanked or underserved areas. Mobilize rural savings and channel them for supporting productive activities in rural areas. To provide finance to the weaker sections of society like small farmers, rural artisans, small producers, rural labourers, etc. To create a supplementary channel for the flow of the central money market to the rural areas through refinances. To provide finance to co-operative societies, Primary Credit societies and Agricultural marketing societies. Generating employment opportunities in rural areas and bringing down the cost of providing credit to rural areas. Enhance and improve banking facilities in semi-urban, rural and other untapped markets. If driven correctly, the elevation will also result in attaining financial inclusion since it has the capability to tap the rural population till the last mile. Apart from this, it ensures a financial safety net for the customers willing to avail of services from RRBs while increasing the supply of money and mobilizing savings in the rural market. The safety net encourages public confidence in the financial system and thus helps to increase its network so as to reach every segment and level of society. Understanding the significance of RRBs RRBs have played a pivotal role in driving financial inclusion in rural areas where the population was largely underserved. Bringing banking services to their doorstep was indeed a revolutionary step that set the rails for other financial institutions to join forces. This has further also led to the creation of employment opportunities in rural areas. With more financial service providers tapping the said market, rural individuals are able to launch and grow small-scale businesses that are leading to employment opportunities at large. Furthermore, it is a known fact that infrastructure is a challenge in rural areas and hence, many financial institutions, banks, NBFCs, etc. refrain from catering to rural needs. The acquisition cost coupled with the infrastructure cost and slow growth has forever been a hindrance. However, RRBs are bridging the gap by simply existing in rural areas and giving other banks and NBFCs a push in terms of infrastructural assistance. This has further helped in the development of industries, agriculture, small-scale businesses, etc. The entire existence of RRBs has helped in bringing financial stability to rural areas by channelizing their savings into productive investments and by also providing credit facilities to small-scale entrepreneurs. In spite of all the pros we’ve understood until now, RRBs have their own set of challenges, here’s what – Over the years, the GoI has played a significant role in involving other institutions and individuals to build on this goal. Whether it was establishing NABARD to support sustainable growth or currently formulating a roadmap to introduce 22 more RRBs, the GoI is working tirelessly to uplift the segment in conjunction with RRBs. As per data, the government has contributed Rs 4,084 crores towards RRB recapitalization in 2021-22, of which Rs 3,197 crores has been released to 21 lenders with a focus on financial inclusion by leveraging technology. Collaborating with technology has been a ‘super move’ that will take the growth trajectory at twice the speed. However, for now, RRBs have been instrumental in bringing banking services to rural areas, promoting agricultural development, creating employment opportunities, developing rural infrastructure, and providing financial stability to the rural financial system. They continue to play a significant role in the development of the rural economy in India.
Introducing Supply Chain Finance
Supply Chain Finance (SCF) is a technology solution that lowers financing costs for buyers and sellers. It tracks invoice approval and settlement and automates transactions to improve the efficiency of all the parties involved in a sales transaction. The supply chain financing market is expected to reach a CAGR of 17.1% by 2024. According to Mckinsey reports, SCF eligibility will increase from less than 40% to as much as 80% in the upcoming years as supply chain leaders are looking for better solutions. By 2031, the supply chain finance market is expected to reach $13.4 billion. Indian Supply Chain Financing Ecosystem Challenges Compared to global trends, India’s supply chain financing (SCF) is still nascent. Indian MSMEs employ more than 11 crore people and contribute 29% of the GDP. Also, 70% of MSMEs require working capital funds. However, SCF remains inaccessible due to the legacy banking systems. Many MSMEs don’t meet the banking requirements criteria. The estimated credit gap is Rs. 20-25 trillion. This credit gap forces the MSMEs to approach third-party lenders, which results in higher costs, stunted growth, low profitability, and a volatile business model. The COVID economic disruption doesn’t help either. The low-cost SCF option provides extended financing for MSMEs and helps lenders manage credit risks. Source: Allied Market Research According to the new Factoring Regulations Act 2011, more than 182 NBFCs can now offer factoring services. Previously, NBFCs could meet only 20% of the funding requirements for MSMEs. Digitisation Is Paramount To SCF Innovation Digitisation is the key to achieving seamless SCF solutions for Indian MSMEs. Businesses will have access to more customised SCF products that help increase the working capital. Apart from invoices, businesses can benefit from other fintech offerings such as a letter of credit, import and import bills, shipping guarantees, performance bonds, and more. Technology innovations such as fintech digital delivery, industry utilities, API technologies, and blockchain bring supply chain financing closer to SMEs. With the non-availability of credit history, lenders can use AI-based risk assessment solutions to evaluate creditworthiness. Such solutions also predict business growth, enabling lenders to offer SCF financing. Source: PWC Fintechs can bring about innovation in SCF solutions in the following ways: Incorporate API-enabled services using a customer-centric tech stack. Use data to understand supply chain networks to innovate new opportunities. Use blockchain-distributed ledgers to improve the transparency of the financing platform. Introduce innovative products such as CAPEX discounting, invoice discounting, warehouse receipt finance, dynamic discounting, early cycle discounting, and SCF securitisation. Various initiatives from the Government of India encourage SCF. The fintech platforms can use the existing rails to improve their SCF offerings in the following ways: Leverage TReDS and GSTN linking to understand MSME cash flows for invoice financing better. Use the AA framework to provide financing options for suppliers and buyers. India’s addressable supply chain market is estimated to be Rs. 60,000 crores, while the total market value is Rs. 18 lakh crore. Digital supply chain solutions facilitate fully trackable transactions to seamless trading between buyers and suppliers.
7 Types of Risk Management You Must Know About
The COVID-19 pandemic has caused major disruptions in banking operations. Consumers have become more demanding and so, risk management must be robust. According to leading banking professionals participating in the Deloitte Banking Risk & Regulatory Academy, financial institutions must focus more on credit risk management. The banking structure must restructure and be prepared for forbearance. Apart from commonly known risk management strategies, leading banks also focus on Environmental, Social, and Governance (ESG) by improving data management strategies and analytics. Moving to the cloud is the next inevitable step to navigating complex risks and ever-changing regulatory requirements. Types Of Risk Management Risk in the banking sector refers to unplanned incidents with major financial consequences, such as reduced or lost earnings. Risk management involves establishing a series of protocols and multi-step procedures that can precisely and accurately mitigate risks. Risk management planning should help financial institutions to recognise threats, assess the damage, and take control measures to prevent risk and minimise the damage. 1. Liquidity Risk Management Banks must safeguard long-term asset funding using short-term liabilities. Funding risk for banks increases when the net outflows increases. This can be due to the non-renewal of different types of retail and wholesale deposits or unexpected withdrawals. Funding institutions must also be prepared to deal with time risk when the expected fund inflows are delayed. Risk management is essential when the non-performing assets increase. Call risk happens when contingent liabilities crystallise, and no viable business opportunities are available. 2. Interest Rate Risk Management Determining the right interest rate that is beneficial for the banks and also for the customers is always challenging. NBFCs that offer lower interest rates to beat the competition must be careful because the adjustments must not result in reduced Market Value of Equity (MVE). The interest rate risks can affect the banks’ earnings and the economic value of the off-balance sheet. 3. Market Risk Management Market fluctuations can lead to market risk when the mark-to-market value of trading portfolios goes down. Also called price risk, the market risk can dramatically increase when the transactions have to be liquidated. Different factors, such as volatility in commodities, equities, currencies, and interest rates, can influence market risks. 4. Credit Risk Management As NBFCs try to capture market share by disbursing more loans to underserved markets, their credit risk increases dramatically. The NPA level of the Indian banking system is high. When the borrowers fail to fulfil their obligations, the counterparty risk and country risk for banks increase. Loan portfolio management and detailed evaluation of borrowers are crucial to managing credit risks. 5. Operational Risk Management Banks risk a huge financial loss when internal processes and systems fail. Global financial links have increased as the banking and financial sector adopt automation. As a result, the potential for operational risks also increases. Transaction risk can result in failure in business continuity. Compliance risk can affect the integrity and credibility of banks. 6. ESG Risk Management ESG risk is the new age risk for financial institutions as they have to comply with inclusion and diversity policies. The pressure from multiple governments to contribute to climate change policies also affects investment value for the banks. Proactive risk management using models that integrate ESG and climate data must be used. 7. Reputational Risk Management In the highly competitive banking sector, reputational risk can result in a loss of trust by customers and stakeholders. This risk can be caused by poor customer service, corruption, and fraud. Banks can prevent class-action lawsuits and other punitive damages with proper reputational risk management. Mitigate Risks With Risk Management Framework Banks and financial institutions must build a robust and scalable risk management model. The framework should include all risk parameters with adequate risk grading. The framework should be updated continuously based on updated risk tolerance levels. The model risk management framework must be built into banking operations for effective risk mitigation.