[Reader-list] “Regulatory compliance requirements will drive future technology spending”

[Taha Mehmood]

http://www.expresscomputeronline.com/20090810/market05.shtml


“Regulatory compliance requirements will drive future technology spending”

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.