Finacle Blog

Global recession is a thing of the past now - financial institutions across the world have entered into pre-recession era of growth and stimulation. While the financial behemoths in US and Europe are taking baby steps towards expansion currently, they have shown signs of much broader plans which would trigger growth for all the stakeholders. It is safe to say that today banks are cautious but not suspicious of the promise future holds.

Europe was the past, present belongs to US, and India and China holds the future. When everybody is closely watching the game, especially in case of India and China, it becomes univocally important that we operate in a kind of environment which promises growth which is inclusive and not exclusive and financial inclusion is proving to be an extremely important institutional and functional vehicle for economic transformation.

Banks have their own reasons to be vigilant before they put their step in rural or semi-urban market. Setting up capital intensive infrastructure, high NPAs in rural areas, lack of resources, weak delivery models and lack of product suitability are holding them back. High operation costs coupled by expensive technology further make the model complex and unprofitable. Lack of market understanding or the flawed delivery and implementation models could be reasons for limited success in this sector.  Clearly it is imperative to come out with leaner operation models, better management of assets and liabilities, customized product offerings and cheaper technology.

We can leverage upon India's 415 million mobile users out of which 46% don't have bank accounts. South Africa has set an excellent example where banks have developed many innovative and customized products using mobile and postal network and distribution to spread financial inclusion. Bio-metric can substitute ATMs to avoid the hassles in rural areas.
51% out of 100 Indians had bank accounts in 1993 and 17 years down the line, the number has marginally increased to 55%. Only 5.2% of India's 650,000 villages have bank branches. As on June 30, 2009, the seven new private sector banks had 275 branches in rural areas, or just 6.4 % of the 4,264 branches they have. It's an irony that people who need the financial services most are deprived of it. It becomes imperative to critically analyze the data and more importantly the ghosts behind it.

For past few years, banks have aggressively opened "no-frill accounts", that require very low or zero minimum balance but a recent study said only 11% of 25.1 million such basic banking accounts, opened between April 2007 and May 2009, are operational. Opening up bank account for under-privileged neither meets the purpose nor justify the intent to bank the un-banked. Banks should further facilitate the transactions and three most important transactions on such account are deposits, loans and remittances. Opening up new RRBs, tying up with existing RRBs or further consolidation by merging RRBs with banks can make the model viable. 

A panel of the Indian central bank has recommended that owners of provision stores and medical shops, public call office (PCO) operators, petrol pump owners, insurance agents as well as retired teachers should be allowed to act as business correspondents or BCs for banks in rural and semi-urban areas to extend the reach of banking services but the policy is yet to be approved. Ideas like this can totally change the landscape of rural banking.

With the help of all stakeholders, it is possible to achieve the daunting task to make rural and semi-urban banking profitable. Stakeholders need to come forward, design, innovate, devise strategies, and make recommendations to change the rule of the games to achieve an objective of changing the paradigms of banking in India.

Sources - http://indiamicrofinance.com, http://www.livemint.co, Skoch Development Foundation

Posted by Varun Goyal at 8:51 AM | Permalink | Comments (0) | TrackBacks (0)

In the recent past, the lending sector was suffering an exceptional weakness globally. But thankfully, hope has reared its optimistic head. The financial establishments in the present year are witnessing a slight growth in the market as compared to the decline witnessed in 2008. There was a 2 percent decline in the global retail lending segment in 2008 culminating in a value of $27,489.20 billion but it is predicted that 2013 will see that value escalate to $32,748 billion, shooting up by 19.1 percent from 2008. Mortgage lending leads the lending arena with a market share of 80.7 percent in terms of value and the U.S sit on 50.4 percent of the market value worldwide. 

Two troops largely govern the revival game namely the government and the regulators. It is crucial to understand and foretell their M.O.

Deposit insurance helps to avoid a run on banks thereby commanding the short term liquidity issues they have during tough times. Stock markets are the heart beat of financial sectors. Limiting short selling is an example of a step that has been applied to handle this section of the industry. This step aims to restrain and manage the bear emotions in the market and also takes care of investor fretfulness in a big way. The bank balance sheets are full of irregular assets portfolio on one side while the other side shows a lack of funds. The government can partake in direct capital infusion in a restricted manner only. Liquidity standing has gone a notch up with banks making an asset buy. Nationalization is a cruel step but it reboots confidence in investors and depositors.

That was about the government. What do regulators do? For starters, there is leveling of interest rates. They have enforced stringent guidelines on coverage to single line and section of businesses. There are higher compulsory disclosures and examination of enterprises and systems thereby stepping away from the routine of self regulation and chosen disclosures for banks. They will control the admission of new banks. There will be a marked increase in accountability and corporate authority shall be reinforced. The bar on improving the standard of credit shall be high. Urgent fund needs of the banks were met and this prevented the financial structure from utter ruin. These steps helped in the short run but it is maintained that for the financial sector to sail smoothly and independently, long term funding is a must.

While the above may not be a long lasting, nourishing strategy, central banks are serving debt guarantees to collect long term funding. The epicenter for long term funding for the longest time has been private equity investors but with a dip in confidence levels, there is a lot of hearsay about latent unrevealed losses. Spoilt asset portfolio management is another one. An effective measure would be that central banks fashion new setups to manage these assets and fund it directly and/or via bank syndicates. Also, debt guarantees by the government is not the best solution everywhere as sovereign ratings have dropped globally. Deficient budgets are poised to shoot up furiously and controlling interest rates is increasingly becoming important.

In the long run the challenge will be for the government and regulators to exit from the stimulus packages that are being offered to the financial institutions. Clearly, the timing of exit is very important as it cannot be too early as that may lead to recurrence of the problem and it cannot be too late else financial institutions will start having their strategies around the package expecting it to continue for longer time which is disastrous for the system.

Posted by Ashwini Kumar Achutha at 4:38 AM | Permalink | Comments (0) | TrackBacks (0)

If there is anything positive that's come out of recession; it is people taking a little more interest in the idea of saving money. Banking became technologically hip with electronic banking i.e. online payments and has now moved on to offering all services from account openings to online fund transfers to saving for a rainy day. The Internet has made it so simple and so easy. The analysts forecast that 40% of adult UK consumers will be lured in by the conveniences of online banking bringing the number to 22 million users by 2012. There has been a palpable reduction in walk-ins to the banks even though the British employ branch services more than their European counterparts.

It's not just the Internet, mobiles and self service booths are also encouraging usage of alternative channels for banking and the spread of these facilities. Mobile banking has become an important feature as it works very well for those who are not Internet-savvy but quick on their mobiles. One in every four customers banks using one of these channels. The banking customer is now younger, educated and in the high income bracket; a category that dominates the banking customer base.
 
The advantages can be seen in direct banking which has gone from being just online payments to a cache of banking facilities. Customers can fill their account opening forms online, be KYC verified and get onboard sans the banking staff. Basic deposits, mortgages, insurance packages, bundled home loans, credit cards, travel features - you name it. The convenience and the experience of direct banking are tough to match.
 
So, what is in it for the banks? Direct banking, as a feasible marketing entry point, has allowed banks try out new markets and to save on building a full fledged infrastructure beforehand. Banking via the Internet, mobile and IVR is cost beneficial to banks. This cost efficiency has translated to banks giving a higher rate of interest on online deposits. An assertive customer acquisition approach for the same has led to a rise in customer base and also rendered a chance to promote other products.
 
The biggest benefit of using alternative channels for banking has been the ability to cater to the unbanked and those located far. Conventionally, field agents from banks worked the remote areas and helped the unbanked open their online accounts but now mobile banking allows these consumers to do their basic banking independently through a simple instruction menu. Furthermore, state agencies are cutting functional costs for banks by issuing salary payments through the branchless mode.

Prior to this, customers opened their online accounts, unaided, using an Internet banking facility. Additional channels such as mobiles, call centres and IVRs has given the customer an option to choose what he or she is comfortable using. Online banking too has marked improvement with a lot more features, tools and aids to assist users in deciding their financials smartly. Add to this the benefit of differentiated customer experience to bring in a branch like experience even through alternate channels through the use of online analytics and tacit information. A potential customer can also get feedback on a new product or service by rummaging through online reviews, blogs, public forums and online discussion groups. What's more is that web 2.0/3.0 tools permit banking consumers to network and function indicating the teamwork angle with their colleagues over social lending and banking programs. Retail stores are offering 'in-store banking' to their clients seeking online and immediate loans to purchase electronics or vehicles. Customers who yet require interaction with a bank representative before making the purchase can exercise the bank's remote advisory service and get 'long distance guidance with a human touch' over a self-serviced channel.
 
Where once ATM was the forerunner, today technology has transformed alternative banking completely. Banks can influence SOA capability to enhance product launches and give tailor-made and special offers. Portal providers now offer multiple web applications from several providers on one window. Enhanced security through second and third factor authentication is now possible via token and biometrics based technologies. Cash and plastic take a backseat with mobile phones becoming digital wallets. Customized help over self assisted channels is available to users through integrated communications and web 2.0/3/0 tools. The non-branch banking model is poised to soar with the help of improvised technologies, rendering superb customer service with minimal human interaction. 
 
In the UK, there has been a rise of specialized banking facilities that allowed customers to carry out their businesses online. The achievement of such ventures has proven the promise of this business model. Top banks must look at offering seamless online banking facilities to capitalize on new prospects and handle such unsettling trends.

So as to tackle competition beneficially from successful banking firms that provide branch and branchless banking, these companies require obvious demarcating factors: taking regular customer feedback, using financial tools to empower customers and right-sell, risk alleviation, resolving grievances and of course advertising and promoting right.

While branch banking is not retiring, the future is in mobile, Internet and other modes of service. Banks have to cash in on these multi channels to the maximum driving sales through them while maintaining the branch to conduct advice-giving.  Banks must be equipped to handle security perils and non-personal services by ensuring all disaster management measures are in place. To outshine successful competition, niche online banking providers have to classify themselves.

Posted by Chandramouli Kundagrami at 4:00 AM | Permalink | Comments (0) | TrackBacks (0)