While the technology for financial inclusion is available and there are vendors who can execute, the challenge is to streamline banks’ internal processes, writes Sudhir Ahluwalia
Financial inclusion is both a social and political imperative. The Government of India wants this to be commercially viable too. While issuing new bank licenses, preference will be given to those corporates who include financial inclusion as one of their key banking services.
Through its flagship and revolutionary Aadhar unique identity number program, the government is seeking to gradually push all subsidies and payments electronically direct to citizens. This will require a massive up scaling of banking services and extending these to unbanked areas of the country. Success of this critical program rests on a successful financial inclusion program.
Given the size of the country, the cost of doing this by traditional means is prohibitive. Technology is the only option available. There are a few critical issues that require immediate address.
Reluctance of major vendors
The primary reason for reluctance is unwillingness of banks, especially public sector banks, to share risk with vendors. The request for proposals and contracts are one sided, with the onus lying squarely with the service provider.
Bank CIOs and management have not done adequate return of investment modeling before floating of RFPs. Most vendors find these projects financially unviable. Those mid-sized or small companies who are desperate for work, find themselves in substantial financial stress when they start implementing these programs.
The Earnest Money Deposits and liability clauses in contracts lead to blocking of substantial sums of vendors for extended period of time adding to the projects’ financial unviability.
These issues can be easily addressed in a collaborative manner between the RBI, Banks and vendors.
Not just technology projects
Financial inclusion solutions and implementation is both technologically and socially complex. Last mile connectivity requires mobile connectivity solutions that are effective in areas with poor connectivity too. Application functionality has to have stripped down retail function capabilities like account opening, crediting, cash withdrawal, credit issue etc.
Rural ATMs that operate off grid and on grid require to be installed at key locations in villages. Interface with rural communities requires a different approach to urban customers. Trust and local custom knowledge plays a critical role.
Intra-bank issues
Coordination and seamless working between three major institutions of financial inclusion namely Bank organization, vendor and BC is critical. Technology, when introduced in a business environment, is often disruptive. It challenges current operation processes and forces change in the organization. Change is often resisted and policy and the management’s will is necessary to overcome this.
Seamless operation of financial inclusion projects requires the back end bank organization to be nimble. A bank in traditional banking plays a front end role. Here, the roles are reversed with the vendor and the BC taking the customer interface role with bank performing account reconciliation, treasury operations, regulatory and risk compliance and other such functions.
In order to successfully implement financial inclusion operations, there are several fundamental changes in procedure that are required. The current complex bank authorization procedures, KYC norms, procedures to handle rural credit and disbursal all need to be simplified.
Technology is not being adequately leveraged upon and there is an insistence on having a brick and mortar service bank for every eight to ten BCs. This is proposed in the name of risk mitigation and service quality. Not only does this lead to higher costs, but is also difficult to implement as bank staff are unwilling to relocate to remote locations with poor social infrastructure.
BCs play a critical role. For the community, they are an extended bank staff and have to be treated as such. Due diligence of BC’s is still inadequate and background checks necessary to ensure people with integrity and trust, need to be given greater prominence.
The technology is available, vendors are available who can execute technology solutions, but the challenge is to streamline bank internal processes so to reduce cost of servicing. Financial inclusion is waiting for this change.
– Sudhir Ahluwalia is a business expansion consultant.