Regulating Microfinance Institutions in India : A complex task

The Indian microfinance industry comprises of numerous microfinance providers who are spread all across the country. The starting point of complexity in regulating the industry lies in the diverse nature of institutional forms they are registered as, viz. – NBFC-MFIs, cooperative societies, non-profit organization, trusts, all subject to different laws. The Draft Micro Financial Sector (Development and Regulation) Bill was tabled in the Parliament in 2007, but it failed to become an Act. Since then, there has been no clear consensus on whether MFIs should have their own legislation, or be subjected to the same norms as banks and NBFCs. The Finance Ministry and Nabard are again renewing efforts to put a clear regulatory structure in place. Recent reports about MFIs offering loans without adequate background checks on borrowers’ repaying ability, the amorphous ways of fixing the interest rates have raised questions about corporate governance in the industry, thereby alerting the regulators. Recently it was suggested that the RBI regulate the MFIs by capping the interest rates that are charged, or by applying NBFC norms. It is a complex task, since there is no clear way of knowing what the right interest rate to charge is, given the country’s large geographical expanse and the great diversity among borrowers’ credit profiles. Moreover, any attempt to regulate the MFIs has to tread a fine balance, since a large part of the rural populace is already a part of the system, and therefore has a direct bearing on rural economic activity. An appropriate way of bringing structure to the microfinance industry at this juncture might be to just lay down prudential norms for the industry for an interim period, and mandate all microfinance institutions regardless of their institutional forms to report to one single authority (RBI or Nabard). Greater information sharing might be the simple answer to improving corporate governance at MFIs.

ASP Model Implementation of Core Banking in India – The Next Big Opportunity?

The core banking wave hit the Indian financial services around a decade ago and a majority of both public and private sector banks have implemented a modern centralized processing system. The focus now shifts to the cooperative banks, both urban and regional banks, which are numerous in number and spread across the span of the country. The cooperative banks are small in size and are typically cash-strapped for heavy IT investments. For a large number of cooperative banks, investing on hardware and software components for a core banking system and upgrading/maintaining them would overshoot their budgetary limits. The solution for this comes in the form of Application Service Provider (ASP) model implementation of a core banking system, where the hardware is maintained in a shared Data Center owned by a third-party vendor. The Data Center can host the core banking systems of all the contracted banks in the same hardware but with separated databases. This method is popular in North America and some parts of Europe, but has not caught up in other geographies. The ASP model is not new to India and had been introduced around the mid 2000s to the financial sector. However, it never took off well because of the apprehension among banks regarding the security of the data. However, many leading core banking vendors including TCS, Infosys, Oracle, Infrasoft etc are now providing their core banking solutions in the ASP model, thus building the trust among the smaller banks. The model is beneficial to regional rural banks, which are being sponsored by larger banks like SBI and Central Bank, as they can host their data in the IT infrastructure of their sponsor bank. Almost all the core banking vendors offer ASP implementations of their solutions and make it customizable according to the banks’ needs. The market is wide open for system integrators who are experienced in implementing core banking solutions across the branches of RRBs, urban cooperative banks, state cooperative banks and microfinance institutions. The vendors providing the data center would ultimately be responsible for the maintenance, providing connectivity and offering uninterrupted reliable service for a negotiated cost, thus relieving the small banks of a major chunk of their capital expenditures. The Reserve Bank of India expects all the RRBs to move to a modern core banking system by 2011 and the ASP model provides an excellent opportunity for the small banks to opt for. The only question is – are the banks comfortable of hosting their data in external servers?

Home loans: Major contributor to retail banking segment in India

Banks experienced single digit growth in home loan sector during last couple of years due to shock wave and post crisis effects from developed financial markets. However it did not take long for top 10 banks in India to accelerate the growth to hit 13.8 percent during 2009-10. Though the industry average for home loans remained at 8 percent, major players have experienced astonishing growth rates like SBI (32%), HDFC (74%) and Axis bank (41%). Home loans have been one of the rapid growing segments in retail banking in India. Banks are adopting teaser home loans wherein the bank offers fixed interest rates for the first couple of years and then switch to floating rates thereafter. While SBI initiated this scheme in August 2009 and was followed by other public and private sector banks. SBI offered homes loans at 8% in the first year, 8.5% in the second and third year. After 3 years the loan, it will be automatically converted and calculated on floating rates depending on the prevailing interest rate in the market. While banks are rolling out new schemes to offer and attract customers, teaser loan is the flavor of the season; this however depends on the liquidity of banks to offer fixed and floating interest rates despite market volatility and without affecting the net interest margin of banks.

Electronic Invoicing in Asia

Electronic invoicing is a low-cost transaction processing system that leverages information technology to transform a manual and paper-oriented billing process into a faster and more efficient electronic version of data messaging. As of today, it can loosely mean anything from scanned copy of a bill sent through an email network to a highly sophisticated electronic document sent through dedicated channels and maintained in an organization’s integrated system. The idea of electronic invoices stems from the increasing focus on paperless trading. Depending upon the nature of transaction, the process of paperless trading can involve a number of agents like insurers, transport organizations, excise and customs departments, banks, and financial organizations. Needless to say, the government authorities play an important role in this chain. Therefore, to facilitate greater efficiency among all participants, these public departments must set certain standards regarding components and formats of electronic bills/invoices, their transmission processes, and their legal status. From a logistical perspective, electronic bills and invoices help to reduce the amount of paper used for documenting and storing transaction information. Through e-invoicing, billers can dispense with a number of manual processes including printing, mailing, documenting, storing, and reconciling paper invoices. The adoption of electronic invoicing standards offers faster and more efficient data transfer, reducing the duration of billing cycles. Timely notifications and updates on invoice status, faster transmission of invoices for payers’ approval, and quicker dispute management systems enable better customer service. Payers get regular updates on invoice status, payment timings which enable them to estimate cash outflow with higher certainty, thereby helping them achieve better and more efficient working capital management. Eliminating costly paper invoices and reducing time and manpower required to manage them offers significant cost reduction opportunities as well. The situation in Asia Electronic invoicing in Asia is at a very nascent stage. This is due to a number of reasons including lack of regulatory framework, lack of established standards, tax impediments, lack of government initiatives, and lack of proper understanding of the overall system among the participants in the trading chain. Volumes of electronic invoices exchanged in Asia come from the business-to-consumer segment, and few technically qualify as “electronic invoice.” B2B invoices electronically exchanged are just beginning to emerge. In Asian countries, attention and investments are far more focused on the “paperless trade”. There is regular and ongoing processing of standards and regulations related to the adoption of international standards of communication. It is, however, a widespread practice at the governmental level to develop standards that adapt to the needs and uses of each individual country. The regulatory frameworks are at different stages for different Asian countries and legal aspects are regularly developed. Rather, it is taxes and fiscal constraints (for example, in China and India) to make recourse to electronic invoicing impractical. In a report titled ‘Progress of Electronic Invoicing in Asia’ Celent has studied in details the country specific developments regarding the adoption of electronic invoicing in Asia. The use of alternative transmission channels is still low in maturity in Asia. The tendency is to maintain a centrally managed, government-owned channel. Central governments and local administrations are very active in promoting the digitization of commercial documents. However, this does not necessarily mean specific recourse to the use of electronic invoices. The development and adoption of electronic billing are far more consistent in the presence of government programs devoted to the creation of procurement service centers.

Figure- Scattered levels of e-invoicing adoption in Asia (source: Celent)

The relatively low knowledge of aspects and rewards tied to the electronic processing of invoices in economically advanced countries (e.g., Japan) indicates an urgent need for greater investments in education and training. Another reason is the not yet complete integration of the procure-to-pay and order-to-cash corporate processes. Asian companies have a substantial lack of confidence in relying on banks as their technology partners. An increase in marketing, conference events, and education activities on the theme of electronic invoicing by operators who want to penetrate this market is expected in the future. While today companies are still running programs to persuade suppliers to embark on electronic invoicing, a more mandatory form of relationship building is expected.

Lok Adalat: The road to efficient dues recovery

Dues recovery for loans, credit cards and cheque bounces by banks in India has always been a dicey issue. Filing civil cases in India’s over burdened courts leads to prolonged litigation and inordinate delay. Hence banks employ collection agencies who sometimes use coercion or other quasi-legal methods which have been frowned upon by Indian courts. In such a scenario, Lok Adalats have presented a viable alternative for dues recovery. Lok Adalat (People’s Court) is an Alternative Dispute Resolution (ADR) mechanism in India for compoundable offences which are organized by the government and presided over by a judge or a person of respect with legal knowledge. A bank which has a large number of outstanding cases in the normal courts, can request the Legal Service Authority of a state to organize a Lok Adalat especially for the unresolved cases, the cost of which is generally borne by the bank. The advantages of Lok Adalat are: • It resolves disputes through negotiation and compromise in an informal atmosphere. If a compromise cannot be reached it is sent back to the normal court • Technical legal procedures are not strictly followed and hence the process is much quicker than normal courts. A Lok Adalat in January in Chennai this year disposed of 226 cases and recovered a whopping Rs.11.2crore (approx USD 2.4mn) on a single day. • No requirement of court fees or a lawyer and hence cheaper • Any decision by a Lok Adalat is fully enforceable by law and cannot be appealed against Indian banks have increasingly turned to Lok Adalats for dues recovery. The trend, which was started by public-sector banks like the State Bank of India, Bank of Baroda and Central Bank of India, has been adopted by private banks like ICICI as well. Public response has been extremely positive towards this mechanism as it is easier to resolve these issues via Lok Adalats rather than letting them linger on in normal courts and facing collection agents. The easier and quicker redressal of cases, more favourable terms of settlement (than would be possible in a normal court) coupled with the legal validity and enforceability of Lok Adalat decisions have made people adopt Lok Adalats. Lok Adalats have been hugely successful not only in metropolitan cities like Delhi and Chennai but also in smaller cities. With the increasing success of Lok Adalats, Lok Adalats have expanded in terms of size and technology use. ICICI organized a “digital” Lok Adalat in Delhi for 100,000 cases. It was organized across 5 district court compounds which were connected to a centralized server through which the case facts could be accessed and the resolution be electronically sent to the concerned judges. It is not that Lok Adalats have an unblemished track record – they have been somewhat of a failure in Mumbai – but Lok Adalats have offered a viable alternative to banks for dues recovery and it is likely to be adopted by more banks in future.

Necessity is the Mother of Implementation

Banks in India were a late entrant to the core banking wave, but have mostly caught up to the rest of the world. The advent of private banks, due to liberalization, increased the competition and forced many Public Sector Unit (PSU) banks to upgrade their legacy systems to support and service customers effectively. State Bank of Patiala was one of the first PSUs to function fully on a computerized infrastructure in 2005. Since 2005, a lot of PSUs such as State Bank of India and associates, Andhra Bank, Corporation Bank, Indian Bank, Oriental Bank of Commerce, Punjab National Bank, Syndicate Bank, Vijaya Bank and Union Bank of India have completed 100% core banking implementation. However, as of October 2009, there are still a number of PSUs like Allahabad Bank, Central Bank of India, Canara Bank, Dena Bank, UCO Bank, United Bank of India etc. who have not implemented core banking completely. There has been no deadline set by the Reserve Bank of India. However, the incentive to implement full computerization and core banking system has surprisingly come through an external necessity, namely the unique identification number (UID) scheme that is to be launched in 2010 across the country by the Government of India. With the scheme, the Government of India is planning to issue over 600 million UIDs over 5 years and the PSU banks have been nominated as sub-registrars for issuing the UIDs. And only core banking compliant banks are eligible for UID, which will help banks to leverage this to attract unbanked populations in the rural regions. The financial inclusion will be a major area of focus for all the banks in the years to come and the necessity to be a part of the UID scheme has forced the laggard banks to implement their core banking systems by mid 2010, when the Government of India launches the pilot phase of issuing UIDs. With the informal deadline soon approaching, will the banks be able to meet it? The banks will nevertheless be pushing hard to ensure that they become a part of the process, lest they want to miss a good opportunity to grow.

Mobile Banking: Service of the Future

RBI gave green signal to Nokia to offer Mobile Money Transfer in partnership with YES Bank. Nokia will now offer mobile money services to its customers from its 200,000 outlets across the country. Customers will now be able to make payments, pay utility bills and transfer money to other accounts. Obopay is the technology partner for YES Bank to enable back-office support for mobile banking. This could be the beginning of Mobile banking revolution in a country like India which has over 600 million mobile connections. Nokia is also in touch with other banks for similar tie-ups. Banks and service providers can learn from M-PESA (Kenya), Smart Money (Philippines) to replicate similar models to suite both rural and urban market scenario. India has a huge potential for this payment channel and could certainly have an impact on the m-commerce in the days to come. The trend will further encourage banks to offer competitive products and services exclusively for mobile banking customers. This new channel can be effectively used to achieve twin objectives of financial inclusion in the rural and new technology adoption in the urban India. However, it is important for banks to give special attention to KYC and AML norms and go slower than aggressive in offering this kind of services.