K C Chakrabarty: Technology, financial inclusion and the role of urban
cooperative banks
Address by Dr K.C.Chakrabarty, Deputy Governor of the Reserve Bank of India, at the
Foundation Day and Inauguration of the "Core Banking Solution Project" of the A.P. Mahesh
Co-op Urban Bank Ltd., Hyderabad, 9 August 2009.
* * *
Hon'ble Finance Minister, Govt. of Andhra Pradesh, Shri Rosaiahji; Chairman, A.P. Mahesh
Co-operative Urban Bank Shri Ramesh Kumar Bung; Sr. Vice-Chairman Purshotamdas
Mandhana; Vice-Chairperson Smt Pushpa Boob, Board of Directors, Senior Executives, Staff
Members, Ladies and Gentlemen,
I am delighted to be here this evening amongst all of you on the occasion of the 32nd
Foundation Day Celebrations of The A.P. Mahesh Cooperative Urban Bank Ltd. I would like
to thank you for inviting and giving me an opportunity to share some of my views on the
current pressing issues, the challenges and the opportunities in front of the urban
cooperative banks today. Let me first congratulate all of you on the occasion of the
Foundation Day and the technological achievement on the eve of inauguration of the Core
Banking Solution Project of the bank. This single step will enable the A.P. Mahesh
Cooperative Bank to serve better the needs of its traditional constituency, the middle and
lower middle classes and the marginalized sections of society spread over its 30 branches -
22 in the twin cities of Hyderabad and Secunderabad and one each at Khammam,
Vijayawada, Guntur, Rajahmundry, Visakhapatnam, Warangal in Andhra Pradesh, Jaipur in
Rajasthan and Mumbai in Maharashtra. I am fully aware of the significance of this
achievement of the bank and I do hope that it will give a new fillip to the overall growth,
enhancement in efficiency and bringing excellence in the cooperative banking sector in the
country.
The A.P. Mahesh Coop Bank has been a forerunner amongst urban cooperative banks
(UCBs) by its performance and setting the benchmark as a good success story in the
cooperative banking. The growth of the bank has been impressive as the bank has achieved
the milestones of business crossing Rs.1000 crore and Core Banking Solution being rolled
out across its network of 30 branches. The bank from its Primary Cooperative Society status
in June, 1977 has moved from strength to strength by becoming a Scheduled Bank in
October, 1996 and later a Multi State Cooperative Bank in May, 2001.
As there has been spurt in the technology adoption by the urban cooperative banks in India
in recent times, thereby inducing the inclusive growth process, I felt that it would be more
appropriate if I share my views on the topic "Technology, Financial Inclusion and the Role of
Urban Cooperative Banks" for achieving the inclusive growth in India.
Importance of UCBs
In India, like many other countries in the world, cooperative movement started as a means of
ensuring that the poorly equipped citizens have similar advantages that better placed
persons were able to command. This was ensured by the pooling in of their individual
resources. The principle of mutual aid, which is the basis of cooperative organisation, and
the practice of thrift and self-help which sustain it, generate a feeling of self-reliance and
empowerment which is of utmost importance in a democratic set up like us. I believe that
these are the core objectives for which we are striving for from most of our initiatives of the
various developmental projects and programmes. We recognise and are aware of their
importance in the entire banking system in expanding the outreach of the system and
increasing access to credit. The High Power Committee on Urban Cooperative Banks
constituted by RBI in 1999, has aptly commented that the cooperative credit endeavour was
the first ever attempt at micro credit dispensation in India. The type of reach cooperative
banks has in our country and the type of customized services they can offer at the local level,
the potential is tremendous. But, the question is have we achieved the true potential? The
answer to the question in my opinion to a certain extent is negative. The same is evident if
we look at the market share of deposits and advances of the Scheduled Commercial Banks
(SCBs), UCBs and RRBs. The SCBs share in the total bank deposits has been 92.1, 93.0
and 93.3 per cent in the year 2006, 2007 and 2008 as compared to UCBs 4.9, 4.2 and 3.9
per cent in the corresponding period, displaying a downward trend. The SCBs share in the
total bank advances has been 93.2, 94.0 and 94.4 per cent in the year 2006, 2007 and 2008
as compared to UCBs 4.4, 3.8 and 3.4 per cent in the corresponding period, again displaying
a downward trend.
Uneven geographical dispersal of UCBs in few states such as Maharashtra, Gujarat,
Karnataka, Andhra Pradesh and Tamil Nadu account for over 80% of urban cooperative
banks presence and 75% of their total deposits. Predominant concentration of Urban
Cooperative Banks in these 5 states is mainly on account of emergence of strong
cooperative leadership.
UCBs normally confine their area of operation to localised geographical regions, but over a
period of time, their area of operation has crossed the frontiers of districts and in some cases
the states of their registration. Continuing the ideals and beliefs of cooperative pioneers,
UCBs seek to bring about an alignment of human and social development with their business
objectives. At present, the bigger question is can we extend or diversify the development of
strong, vibrant and financially sound UCBs to the other regions of the country as well to cater
to the requirements of the people at the base level and bring them under the banking fold.
There is a clear indication as per the available data as mentioned earlier that a huge
potential exists for the UCBs to play a more proactive role in the banking sector in the
coming years.
The potential exists, but how important a role the UCBs can play in our scheme for an
inclusive growth? Why should we have more thrust on the role played by the UCBs? In a
regime of planned development, sound cooperative banking movement is an instrument,
which while retaining some of the advantages of decentralisation and local initiative, will yet
serve willingly and readily the overall purposes and directives of the developmental plans of
the government in the identified sectors. It is an indispensable instrument of planned
economic action in a democracy. The client profile of UCBs today predominantly comprise of
priority sector segments viz. Small business establishments, SSIs, retail traders,
professionals, self-employed persons and SRTOs, etc. who would not normally find it easy to
have access to large commercial banks. In urban areas, however, there are a number of
underbanked people like artisans, labourers, small business men, retailers, etc. of smaller
means who find it difficult to organise themselves in keeping with the requirements of modern
times. It is highly desirable on social as well as on economic grounds, that members of this
class should be enabled to be brought into the banking fold and the UCBs certainly can take
a lead into this.
Role of RBI - efforts to ensure sustainable growth and functioning of UCBs
While the cooperative banking sector had shown spectacular growth during the 1990's
exhibiting substantial potential for sustained growth, there were also concerns regarding
inherent weakness of some of the entities over the years resulting in erosion of public
confidence and causing concern to the regulators as also to the sector at large. Various
Committees and Task Force set up over the years, notably the Committee headed by Shri K.
Madhava Rao on UCBs and Shri Jagdish Capoor on the rural cooperatives Task Force on
Urban Cooperative Banks have also recommended for enabling all the stakeholders to work
together for a strong vibrant and stable system. It is in this critical context that, the Reserve
Bank committed itself to strengthening the sector and to protect the depositors' interests. The
Reserve Bank's Vision Document for UCBs brought out in March 2005 with the objective of
maintaining the viability and competitiveness of the cooperative sector. The document also
envisaged:
•
Putting in place a mechanism to address the problems of dual control,
•
Putting in place a consultative arrangement for identifying weak but potentially viable
entities and nurturing them back to health, if need be through a process of
consolidation, and
•
To identify unviable entities in the sector and provide them an exit path.
To address these issues, RBI felt the need to have more effective interaction with the State
Government to address some of the systemic issues hindering the growth and functioning of
the cooperative banks. In view of this, RBI has signed Memorandum of Understanding (MoU)
with 26 States so far, which provides the basis for constitution of Task Force for Urban
Cooperative Banks (TAFCUB), the forum for consultative decision making process. The
various TAFCUB meetings across the States have generated the desired effects and have
helped in strengthening of the UCB sector as a whole.
RBI's role in empowering UCBs
In order to empower the cooperative banks in their commercial / managerial functioning, RBI
in its MOUs with the State Governments has committed to facilitate the development of
human resources and skills and to provide assistance in IT initiatives undertaken by the
UCBs. The UCBs here have to take a lead and play a more pro-active role in order to utilise
the services and assistance provided by the Reserve Bank to make themselves more
competitive by bringing efficiency in their functioning. This has to be achieved through
cultivating Capital Adequacy and NPA Provisioning Standards; better Corporate
Governance; introducing Professional Management and following best practices in Banking
operations.
Role of technology
The use of technology in expanding the banking outreach has been an area of focus for the
Reserve Bank. Technological innovation has not only enabled a broader reach for consumer
banking and financial services, but has enhanced its capacity for continued and inclusive
growth. Banks and financial institutions rely on gathering, processing, analyzing information
in order to improve its service and meet the expectations of customers. Banks have been
quick to realize and adopt technology in a big way. The visible benefits of IT in day-to-day
banking in India are quite well known. The "Anywhere Banking" through Core Banking
Systems, "Anytime Banking" through new, 24/7/365 delivery channels such as Automated
Teller Machines (ATMs), and Net and Mobile Banking, etc. are also increasingly becoming
an integral part of the services provided by the UCBs. In addition, IT has enabled the
efficient, accurate and timely management of the increased transaction volume that comes
with a larger customer base.
Another important aspect with regard to technology implementation for internal purpose in
UCBs is the Management Information System (MIS). The MIS reports so generated help the
top management as an effective risk management and a strategic decision making tool.
Use of IT reduces the costs of financial transactions, improves the allocation of financial
resources, and increases the competitiveness and efficiency of financial institutions. Most
importantly, it enables to take any product or service to the general masses. The challenge
now lies in taking greater advantage of new technologies and information-based systems
and expanding the coverage of the Indian banking and financial system to under-served
markets in rural and semi-urban areas. The use of Smart Card technology, mobile ATMs,
coverage of post offices under electronic payments networks in remote areas could play
significant role in providing financial services to unbanked and underbanked people. Today,
we all should understand that poor people are bankable and there is tremendous potential for
the business growth of financial institutions by providing banking services to them. What we
need right now is the appropriate business delivery model which will facilitate taking the
banking services to the doorsteps of the people at a lesser cost. The technology based
solution would go a long way for achieving inclusive growth in India.
India is experiencing an explosion in the use of mobile communication technology. Mobile
phone users now belong to all strata of society, spread across metropolitan, urban,
semiurban and rural centres. Banks and financial service providers can leverage the advantage
by reaching out to people through this medium for providing various financial and banking
services. The mobile phone can function as a multi-application smart card, thus making
banking services available to virtually every mobile phone owner. This holds substantial
promise as the delivery vehicle of the future - there is huge potential and an exciting
opportunity. However, the expansion of such capabilities must be accompanied by a
minimum level of essential security features and continued compliance with established
covenants and international standards relating to privacy of customer transactions in order to
enhance the customers' confidence in the mobile and internet banking by controlling the
fraudulent transactions.
In order to enhance the deployment of technology in UCBs, a Group was constituted to
examine the various areas where IT support could be provided by the Reserve Bank of India.
Based on the recommendations of the Working Group which looked into ways of supporting
IT initiatives of the UCBs, IDRBT is being asked to facilitate UCBs availing of Core Banking
Platform on an Application Service Provider (ASP) model. With this, the UCBs will be able to
put in place cost-effective, modern technology so as to render better customer service and
sound regulatory compliance.
Challenges before UCBs
The success of cooperatives ultimately depends upon their ability to perform their duties and
fulfill the expectations of their members. The loyalties of the members can be retained not on
the basis of monopoly, agreements or under duress but on the strength of the goodwill
secured by rendering service. Banking Cooperatives are sometimes organised and
administered by those who lack both the qualifications and the experience necessary for the
job. This factor alone accounts for a large number of cooperatives' failures and the uneven
development of the movement, in the country. The importance of efficient management
cannot, therefore, be over emphasised.
Functioning in a highly technologically advanced banking environment in the country is in
itself a challenge and an opportunity for the UCBs to upgrade to a computerized environment
so as to focus on more business opportunities and render better customer service. These
technological platforms provide an impetus for growth. The role of training and educating not
only the staff but also the customers about the various technology based banking and
financial services also plays an important part here. Being a movement essentially
dependent on the ability of persons in humble walks of life, who are often amateurs in the
handling of business operations, the need for training and education is greater to optimally
utilise the technological platform. RBI is also trying to facilitate the imparting of training to the
key players responsible for the growth of UCBs. To improve the professional skills and as
part of the commitment made in the MoUs with the State Govts., free of cost training courses
for Directors, CEOs and other officials of UCBs are being conducted by the Reserve Bank at
regional locations and in local languages for the convenience of banks. As of now, 1307
directors have been given training apart from 1004 CEOs, 2078 officials and 341 liquidators/
administrators/auditors including Chartered Accountants.
Financial inclusion for an inclusive growth
Traditionally, we have seen and observed that the poor have not been welcomed to the
banking fold by the banks and financial institutions with a misconception that they are not
bankable and there is no business opportunity in offering services to the under-privileged and
poor people in the semi-urban rural and slum-dwellers in the metropolitan cities. Banks and
financial institutions had been till recent times financially excluding these people on the
pretext that:
•
They have no or few assets,
•
They have nothing to offer as collateral,
•
They have no business experiences,
•
They cannot be trained for availing financial services,
•
They have no credit history, and
•
They cannot understand the nuances of banking due to illiteracy or less education.
Given the belief that Credit is a Human Right as advocated by Nobel Laureate Professor
Muhammad Yunus, and the poor can overcome poverty by generating their own employment
and income, we have to develop a financial system which takes care of the needs of the poor
on an urgent basis. Access to affordable financial services - especially credit and insurance
- enlarges livelihood opportunities and empowers the poor to take charge of their lives. Such
empowerment aids social growth and sustainable growth of the economy. Apart from these
benefits, Financial Inclusion imparts formal identity, provides access to the payments system
and to savings safety net like deposit insurance.
Today, we need to understand that Financial Inclusion is critical for achieving inclusive
growth in the country. To achieve that, we have to expand our scope of financial inclusion
initiatives to reach out to people at the grass-root level. We may consider achieving that in
three ways:
•
Through State-driven intervention by way of statutory enactments (for instance, the
US example of the Community Reinvestment Act; and in France making it a statutory
right to have a bank account).
•
Through voluntary effort by the banking community by evolving various strategies to
bring within the ambit of the banking sector the large strata of society, and more
importantly;
•
Creating a demand by the people themselves to pull the banks, financial institutions
and other service providers towards them to offer banking and financial services at a
competitive and affordable rate. This will go a long way in not only financially
including and empowering the people but also as an avenue of providing excellent
business opportunities for the financial market payers.
Generally, we associate the term Financial Inclusion with our initiatives of bringing poor
people in the rural areas into the banking fold; however, we have to realize that there are still
a large number of people in the urban area who are financially excluded. They have the need
for availing the various types of banking services, especially the savings and money
remittance services. This section of financially excluded people in the urban areas provides a
good opportunity for the UCBs to step in and fill this void. This is a challenge and a big
opportunity for the UCBs at the same time; and I reiterate that if UCBs are not able to grab
this excellent opportunity, new institutions will come up to fill this void and UCBs will lose a
good business opportunity.
RBI and financial inclusion
RBI has been giving adequate attention and has stepped in whenever it felt that the banking
community as a whole has missed out or not given the desired attention to certain areas.
This is the reason why the Reserve Bank is placing a lot of emphasis on financial inclusion.
In India, the focus of the financial inclusion at present has been confined to ensuring a bare
minimum access to a savings bank account without frills with a limited overdraft facility to all.
RBI has framed guidelines with a view to achieving greater financial inclusion, to make
available a basic banking "no frills" account either with nil or very minimum balances as well
as charges that would make such accounts accessible to vast sections of the population. The
nature and number of transactions in such accounts would be restricted and made known to
customers in advance in a transparent manner. Efforts are being made so that all banks give
wide publicity to the facility of such no frills account to ensure greater financial inclusion.
Banks and financial institutions have to take a lead here for achieving our objective of
reaching out to people.
In order to ensure that persons belonging to low income group both in urban and rural areas
do not face difficulty in opening the bank accounts due to the procedural hassles, we have
simplified the KYC procedure for opening accounts for people who intend to keep balances
not exceeding rupees fifty thousand (Rs. 50,000/-) in all their accounts taken together and
the total credit in all the accounts taken together is not expected to exceed rupees one lakh
(Rs.1,00,000/-) in a year.
Cooperative banks and regional rural banks being local level institutions are well suited for
achieving financial inclusion. Being local institutions they are ideally suited for achieving
Financial Inclusion. The use of IT solutions for providing banking facilities at people's
doorsteps holds the potential for scalability of the Financial Inclusion initiatives. Many Pilot
projects have been initiated in various States using smart cards for opening bank accounts
with bio-metric identification. Here, the link to mobile or hand held connecting device ensures
that the transactions are recorded in the bank's books on real time basis. The outcome of
these Pilot projects has been promising. However, we have to now ensure that the gains and
lessons from these Pilot projects are translated into an achievable, affordable and
implementable plans on a pan India basis to leverage the benefits of inclusive growth,
otherwise all our hard work in recent years would fizzle out without many tangible benefits.
Conclusion
Today, our focus should be to simplify the technology which can operate on any platform.
The technology solution to the business needs should be user-friendly without much
thirdparty or IT vendor intervention or support requirement for operating the same. In this context,
the banks need to redesign their business strategies to incorporate specific plans to promote
financial inclusion of low income group treating it both a business opportunity as well as a
social responsibility. We can achieve our goal of inclusive growth if all the available
resources including technology and expertise available with the banks, the support of the
government, the optimum utilization of the Micro Finance Institutions (MFIs), NGOs and Self
Help Groups are geared towards including more and more people under the banking net.
Initially, it may appear that taking banking to the sections constituting "the bottom of the
pyramid" may not be profitable but as various study conducted reveals that even the
relatively low margins on high volumes can be a profitable proposition. Banks therefore need
to work out their appropriate business delivery models and financial products to cater to the
needs of the people.
It is important that banks should give wide publicity to the facility of no-frills account. Banking
services need to be "marketed" to connect with large population segments and these may be
justifiable promotional costs.
Mobile phones, POS terminals, "simple to use" cash dispensing and collecting machines akin
to ATMs, etc. with operating instructions and commands in vernacular language would
greatly facilitate the financial inclusion of the semi-urban populace at an affordable cost, and
cooperative banks with a local touch and feel can address these issues in a big way.
The Reserve Bank's endeavour has been to strengthen the UCBs so that they run on sound
principles without posing any systemic problems. Our focus is also geared towards
facilitating the process of computerization in UCBs, especially those who are not yet
computerized to enable them to take advantage of technology to increase business
opportunities, improve customer service and increasing the coverage of its services.
Financial Inclusion as a holistic benchmark of a country's advancement and its commitment
to meet the aspirations of its disadvantaged franchisee is a "Goal" to pursue by all the
concerned players. All of us, the RBI, the banks and financial institutions, the fringe players
facilitating the financial inclusion process have to work hard for the sustainable inclusive
growth, both social and economical. We indeed have an important role to play and contribute
towards the development of this great nation.
I am sure The A.P. Mahesh Cooperative Urban Bank's technological initiatives will go a long
way in contributing to our goal of achieving 100 per cent inclusive growth in India. I wish you
all the best for all your future endeavours and initiatives.
Thank you.