Information Technology

October 27, 2006
What’s IBM got to do with rural banking?

Sufia Tippu

BANGALORE -- If you thought that nationalised and foreign banks are wary of investing in villages and rural parts of the country, you could be mistaken.

Rural areas are growing “hot spots” not only for banks like Yes Bank, ABN AMRO but also traditional banks such as Syndicate Bank and ING Vysya.

Given RBI’s thrust in this direction, banks are looking at technology to provide banking services at low cost – and this includes rural banking too.

With over 600,000 villages in the India and about 700 million people living there, industry estimates indicate that there are at least 200 million which would form an “unbanked” population. This is a section of the population that may not have large sums of money but who can afford to save some at least. And it is this section that is being targeted by the banks today.

Rural banking, has become a key driver for banks to increase their customer base as well as innovate in strategic directions. Traditionally banks were not too keen to explore this market where the majority of the population is economically challenged.

But today, different models are emerging to take on rural banking and IT companies like IBM are helping banks to put together software packages that would enable them to meet the challenges one faces in the rural banking domain.

When you are looking at the rural banking scenario you first have to understand this – there is a farmer community ( who has large tracts or a small piece of land) and the farm labourer, who has no land at all.

The agencies that offer credit are :

• Co-operative banks with the assistance of self-help groups that cater to the rich farmers who have acres of land.

Says Subrata Dasgupta, Head - Strategic Solutions, BFSI, IBM India, “ Today, there are a few models that are emerging which people are looking into in the rural banking domain. And the basic premise is the KYC factor – “Know Your Customer” factor. The MFIs are now looking at a novel mode – called agency banking where an agent is appointed who knows the customer personally. He could be from the same village, same community, a friend of a friend and so on. But the only challenge in this type of a relationship is the limitation factor – it is not possible for him/agent to know more than 200 families in a village.”

So how do you enable more customers to come into the banking fold?

“Some banks are providing a vehicle that goes to the village with a computer, collects all the data – names, addresses and land details and feeds it all into a central database and also gets this validated by the neighbour of the person whose details are being keyed in. The next time the vehicle comes back -- it has the details of the bank which the customer can choose and if he is rejected by that bank, he always has the options of 2-3 other banks that are also offering loans to farmers. Not only is the farmer able to avail the loan but there is a healthy competition between banks too,” Dasgupta explained.

The other model that is being explored is the distribution of smart card with biometric ( thumb impression in this case) and the hand-held that needs to be connected to get the entire solution going. “This is a full fledged project that has been deployed across the country by a leading bank and we (IBM India) are hosting the back-end functionality of entire solution,” says Dasgupta.

The challenge here is in trying to get the pricing right – both for the smart card as well as for the handheld and this is what the banks needs to iron out.

Interestingly, the recent RBI circular had stated that scheduled banks could use MFIs to acquire liability accounts has also given an impetus to the rural banking sector. Say, if a farmer has taken a loan from a MFI and used it to raise crops, got a good yield and once he has paid up that loan and would like to deposit the money in a fixed deposit or any other instrument, he could be able to get an account going with a scheduled bank through the MFI route.

It’s the volume game that banks are going to bank on in the rural banking segment. Although each transaction amount would be small, the number of transactions that would come in would add up to a substantial figure.

Interestingly, once these concepts are stabilized, they could be used even in metros and bigger cities which have a large “unbanked” population – say like drivers, coolies and day labourers who would like to save but have no means to do so. Banks and telecom companies can exploit synergies by having a joint due diligence done before issuing mobile numbers or opening bank accounts and IT companies like IBM could play a key role as a player in the middle-layer, both as an integrator and as a consultant for collaborating IT-enabled applications and aligning processes.