Vertical: IT in Cooperative Banks: Unbanked, on the Radar

Even as Indias banking sector has grown by leaps and bounds over the last decade, but somehow the banking services could not make inroads into the rural India. Despite the fact that India at present boasts of a sizeable number of banks including 26 public sector banks, 7 private sector banks, 15 old private sector banks and 31 foreign banks that brag to own more than 80% market share, yet half of Indias population is still deprived of the benefits of a savings account. The irony of the situation is that many people in not just the rural areas but urban areas too hesitate to walk into a bank owing to varying reasons.

However, cooperative banks in both rural and urban areas have helped to bridge the gap and tried to bring these people into the banking fold. And since the RBI (Reserve Bank of India) has issued the directive to cooperative banks asking them to automate their processes, the cooperative banks have started competing with the national and private sector banks.

RBI Directive Driving Automation

Cooperative banks did not adopt technology unless the RBI tightened the regulatory noose by entering into agreements with states. Now, the RBIs regulatory directive has started to drive demand in this segment. Many of the cooperative banks have automated their banking processes using a core banking solution. They are equally competing with the mainstream banks by offering an array of services like net-banking and ATM services.

In addition, the RBIs mandate of higher current and savings account (CASA) deposits and know your customer (KYC) norms has forced cooperative banks to prepare a data trail and information pertaining to it. Cooperative banks have to comply to the norms. The central banks has already imposted penalties on 48 small banks recently for violating KYC guidelines. Among the banks which had to pay a penalty are Kolhapur District Central Cooperative Bank, Municipal Cooperative Bank Ahmedabad, Ahmedabad Mercantile Cooperative Bank, Surat Peoples Cooperative Bank and Shreenath Cooperative Bank, etc. In addition, the RBI is also strict about AML (anti-money laundering), where it wants to bring transparency with regards to bank accounts and has penalized cooperative banks that do not comply to its norms. These steps by the RBI has pushed the majority of tech adoption in cooperatives.

The RBI has certainly played a key role in driving the technology adoption in many of the cooperative banks. Until the RBI had not issued a directive, there were very few banks that had gone in for core banking solutions, avers Hanuman Tripathi, MD, Infrasoft Technologies. However, the RBI needs to do more in this side in order to bring further transparency into their processes.

Paving for the Cloud Route

Most of the cooperative banks are small in size and often face difficulties in building up IT infrastructure. This has been the reason that many of them did never chose to implement IT. But things have changed, given the RBI directive. There are cooperative banks that are single branch or a little larger. To these banks, IT automation has never been a priority. And implementing on-premise core banking solution has been out of question, says Venkatramana Gosavi, AVP & regional manager, Finacle, Infosys Technologies.

But shared infrastructure has helped many cooperative banks to automate their banking processes. We suggest cooperative banks to use the shared infrastructure for core-banking solutions. Vendors like us offer core banking software over the cloud, allowing cooperative banks to pay per use. Today many banks have adopted the solutions. Even single branch banks are able to offer real-time banking services to their customers, tells Tripathi.

There are mainly two things, namely, business efficiency and operational flexibility that inspire cooperative banks to evaluate the need for hosted model. IT-as-a-service, scalability and, above all, cost effectiveness in terms of performance are the main requirements when we interact with cooperatives, says Gosavi. The hosted model has freed the banks from investing into IT heavily. In addition, it is none of their problem to manage the network.

In addition, the availability of CBS solutions on the hosted model has enabled cooperative banks to incorporate AML and other complex solutions. Companies like IBM are working in association with Indian SIs like Infrasoft to deploy CBS in many cooperative banks. Even Infosys Finacle Lite, designed for small banks, is a solution which the company has made available on the cloud and deployed in many cooperative banks.

The headache of maintaining and upgrading core banking solution is not theirs. System integrators like us take this trouble for the banks. It allows them to focus on their core areas of dealing with finance, says Tripathi. This looks sensible when you see that cooperative banks do not have expertise in handling instruments like derivatives and credit default swaps, etc. In addition, cooperative banks on an average facilitate transactions of 1 lakh as compared to 20 lakhs by a regular bank. Thus their core needs differ from the main banks. The cloud or hosted solutions offer a viable option even for banks as small as single branch.

Helping Cooperatives Expand

Propelled by CBS and automation process, many cooperative banks have ably gone ahead with their business and expansion plans. The Surat District Central Cooperative Bank having used core banking solution has generated a turnover of Rs 7 crore in merely 1.5 years. We plan to extend our services into many talukas, says IC Mahida, managing director, The Suraj District Central Co-operative Bank.

A number of cooperative banks are offering 24x7 financial services either through netbanking or mobile banking along with ATMs that boast to behave as the one-stop shop for all of their financial needs.

Another bank, the Himachal Pradesh State Cooperative Bank also began the anywhere and anytime banking facility after embarking on the core banking solution. The banks turnover also crossed Rs 7,000 crore during the last financial year having earned a profit of Rs 82 crore. The bank opened as many as 27 ATMs and will soon open fifty more. Because of the core banking solution it has reduced non-productive assets from 15% to 9%.

Similarly there are a number of cooperatives that have tuned their business to the new systems and also overcome the challenges such as workforce, etc.

The Challenges Continue to Irk

Although vendors are riding on the cloud and hosted models for these banks. The segment continues to suffer from inherent challenges that force their managers to evaluate the meaningfulness of implementing a core banking solution. The small size and limited focus area is a big concern. Many cooperative banks that want to operate only in a given territory are resistant to change or adopt IT. Changing the mindset is a big concern. Even today you see many banks arguing the automation part. In almost 130 banks where we have done the implementation, we came across such questions and faced resistance levels. However, once the solution was implemented we saw change in their attitude, adds Tripathi.

In addition, the second challenge is the low understanding of technology. Understanding of new technology at the employee level is limited. Due to limited knowledge of new technology, the banks are mostly apprehensive when it comes to adopting hosted solution. Their primary concern is technology. Convincing them is a challenge itself, says Gosavi. Many of the banks also argue that in rural areas people do not know how to use ATMs, netbanking or mobile banking per seareas in which a CBS solution helps them. In addition, in most solutions vendors have to cater to an individual banks need. Since many cooperative banks operate into their core areas which are different from regular banks, vendors have to do a lot of customization into the core banking solutions. For example, a cooperative bank does not normally need a risk management or investment banking solution.

Contributions in Financial Inclusion Drive

Cooperative banks are around since the British Era and have a direct reach in the rural areas. The RBI and the government both realize this fact and want these banks to play an active role in the financial inclusion drive. Their role in financial inclusion becomes even more important when the fact that more than half of the Indians do not possess a savings bank account. But it is only important when these banks make use of modern technology like core banking solutions. Plus this will allow them to be eligible to bid for other government related schemes such as MNREGS and UID, through which the government aims to achieve financial inclusion by 2012 of at least villages with a population of more than 2,000. Cooperative banks have a big role to play in the financial inclusion. But their resistance to technology will throw them in the backseat. If they are on core banking, they can be eligible for a lot of government aid to implement many financial inclusion schemes in the form of MNREGS and UID, says Tripathi.

With core banking in place, our bank introduced Banking on Wheels service to connect with the unbanked population in the remote areas of Suraj district. The CBS solution has changed the way we operate and helps us contribute in the financial inclusion drive, adds IC Mahida of The Suraj District Central Co-operative Bank.

In a nutshell, a number of cooperative banks have automated their processes, given the RBI directive. But there is a long way to go, since a large number of banks are still to join the club. However, it can be regarded as a good beginning. The banks which have deployed the on-premise solution can further curtail their IT management costs by going in for cloud solutions. At present cooperative banks merely cater to 14% of the banking sector, which they can enhance. But first of all, it is important to shed the old-school thinking.