Regulatory compliance requirements will drive future technology spending

Express Computer: August 10, 2009

Kalpesh Desai, CEO, Agile Financial Technologies, spoke to Nivedan Prakash about trends in the banking industry and his company's foray into the Indian microfinance business

Has the Indian banking industry come of age and what role has IT played in it?

I think we must give credit to the RBI for inducting IT into Indian banks through its two committee reports on the subject (known as the Rangarajan Committee reports) in the 1980s, which was characterized as an era in which Indian banks embraced IT. The growth driven by expansion to untapped geographies continued unabated, resulting in near backlogs of management information systems (MIS).

At this time, there was virtually no competition in the Indian banking market, which by IT usage was divided into foreign banks, large Indian banks with product level automation in branches, some rudimentary corporate computerization and a large expanse of private and co-operative banks in manual mode. The in-house IT infrastructure in most Indian banks at the time consisted of software running on UNIX boxes and terminals installed at controlling offices. They were largely used for batch processing using COBOL. All software running on these UNIX boxes was custom built.

Then came the 1990s and the first change was the adoption of Basel I recommendations that brought credit risk management and capital adequacy into sharp focus for the first time. Further in 1994, new private banks were allowed to incorporate. Towards the close of the decade, Y2K doomsday fears largely fuelled the demand for IT services and products in the Indian banking industry. It was the RBI, once again, which prompted action. In 1994, it forced public sector banks to begin total computerization of their branches and made it a pre-condition for granting licenses to new private banks. This paved the way for the entry of branch banking software enabled by Core Banking Solutions (CBS). Electronic Bill Presentment & Payment (EBPP) and Internet Banking offerings also made their appearance.

What are the key technologies that have been used by Indian banks?

While leading foreign banks and a few next generation private banks in India had adopted centralized banking products in the 1990s, the centralized banking scene in India got its wind up in the beginning of the current millennium, once the Y2K battle was over. Then came the phase (which still continues) of compliance and risk related software products such as anti-money laundering, analytics, and the associated infrastructure, including data warehousing and data mining capabilities. In the last few years, almost all banks in India have adopted CBS technology, and gone on to set up ATM networks, Internet banking, RTGS systems, and mobile banking. A number of banks today are considering investments in niche software that will allow them to tap existing opportunities in microfinance. With banks now falling over each other to acquire customers, [both retail and corporate], customer relationship management systems are seeing a lot of traction.

Additionally, the need for regulatory compliance will drive future technology spending. The centrestage has therefore been captured by risk management, payment systems, business intelligence and managed services.

Do you see a market opportunity in the Indian microfinance vertical?

As in other developing countries, most Microfinance Institutions (MFIs) lack the infrastructure, both technological and physical to ensure that their objectives of financial inclusion are covered. We desire to collaborate with financial institutions that can reach into rural and urban areas and offer our software as a platform through them to service these MFIs. The key pain areas of these MFIs are the absence of appropriate technology for customer/member enrollment; strong credit scoring tools particularly since there is little or no collateral provided by micro-entrepreneurs; limited reach into the rural and urban areas to facilitate collections and other transactions; the need to deploy biometric/smart card authentication technology for member identification and verification; compliance with statutory bodies; and reporting back to donor institutions. We can resolve these issues by provisioning our software as a service solution and provisioning of mobile handheld devices that would help in capturing transactions in the field. Working with partner institutions that can collect moneys and deposits on behalf of the MFIs, the model that we will pursue is to share in the fee income of these institutions. Agilis Universal Microfinance Solution is multientity and can help a partner financial institution to service multiple MFIs.

What solution do you have for the Indian microfinance industry?

A microfinance institution is a sustainable business considering the spread between the cost of sourcing funds and the interest/profit charged to borrowers. The non-performance asset ratio is substantially low in this sector, particularly due to the peer pressure present amongst borrowers, who tend to approach MFIs in groups. We can ensure that our state-of-the-art technology can be made both accessible and affordable for MFIs to adopt, allowing them to become a lot more agile in their operation and focus on their core business of financial inclusion and welfare. Our pricing mechanism which is to partake in the fee income would ensure that there are little or no upfront costs for the MFIs, leaving much needed capital to be deployed where it was original intended, which is to increase the lifestyle of the micro-entrepreneur and to facilitate the micro-business.