Is Technology the panacea of weak co-operative Banks?

Indian Banking industry has the appreciative feature of being more mature than that of other industries especially in comparison to the neighbors. It is also true that countries like Malaysia have proved it otherwise by leapfrogging in the last decade. India has the motley mix of Banks such as Scheduled (nationalized), Private, and Co-operative Banks. Due to the vast terrain and uneven development and for some historical factors, co-operative Banks have made inroads into areas where other Banks have not looked at. In the very interior of the country, the co-operative Bank is the only one saving the population from the ancient system of burying pots of gold as savings or burdened under the unjust arithmetic calculation of the moneylender.

Urban co-operative Banks have given a mixed image to the layman. It is often joked that for every politician, there is a co-operative Bank. Easily granted loans and turning a blind eye at the time of recovery of such loans is often a disguised vote solicitation technique. There was even a hue and cry when RBI banned co-operative Banks from giving advances to their own Directors perhaps from the ignoramus who never grasped the true principle of co-operation casting a shadow of suspicion even on the correctly modeled and run co-operative Banks. Reserve Bank of India has already initiated steps to recognize them as Banks as against just a co-operative society which would otherwise club then with housing and marketing societies, thus increasing RBI’s control over them. The Prudential norms and Asset classification is diluted only nominally for the non-urban co-operative Banks. Merger of weaker Banks into the stronger ones is encouraged also from the Income Tax angle by taxing the co-operative Banks so that at the time of merger, the acquired loss can be set off which should be a major encouragement factor for the acquiring Bank just as this is one of the major considerations (other being market share) whenever a company acquires another. With just a year or so available for recovery, what are the various strategies adopted by Banks are on the ‘borderline’ of sound health?

System audit executed by the author in more than 30 co-operative Banks, evoked cause of concern and cry for change of software vendor. Ironically, the co-operative sector whose management has been known to be weaker than either the scheduled Banks or the private sector Banks, justifiable deserved strong software support but coupled with absence of defined quality for software (even till date), the introduction of application platforms such as Dbase and FoxPro permitted a skeletal force of developers, even one man operations to develop Banking applications which more often were just vanilla operation coverage with very low to nil security features. Such application packages were fertile grounds for fraudulent persons. In the next round of change, the vendor population dwindled to a mere handful. There are handful of software vendors in the Big Bank market and a different handful set in the co-operative Bank market. Whenever any vendor ‘crossed’ his market, the results were disastrous as events have proved themselves.

Core Banking is not only the fashionable platform of operation but also the necessity of the day to permit anywhere Banking and installation of Real Time Gross Settlement System (RTGS) which permits faster clearance of cheques by direct communication from the clearing cell of the RBI to the Bank’s RTGS server. With handful of vendors in the market, will the purchase of a standard core Banking package permit a borderline co-operative Bank bounce back to the pink of health? Before jumping to an answer which is controversial in itself, one has to appreciate the feature change from the old platform of Local Area Network (LAN) which may have come from much smaller a vendor though the size of the vendor may not be directly proportional to the efficacy of the software and its coverage. The noteworthy positive features of most of such applications are:
1. Most of the vendors themselves have graduated from the LAN during which time they have altered, added, enhanced and fine tuned the application to more than the vanilla feature of just posting and interest calculation.
2. Hardware costs and networking costs are continually reducing. Leased telephone line once a prerogative of the mightiest corporate, is commonplace in its role of networking. Continuous Branch connectivity which is the essential feature of core Banking is affordable to smallest of Banks.

Internal Audit teams have reported startling improvements in efficacy of branches when the Bank implemented core Banking solution. The observations of the System Auditors was more easy to comprehend since many security duties were now executed through the Data Centre which now could be manned by appropriate personnel which was not possible in the LAN environment which would have demanded high end hardware and software engineers in every branch. Not only would the cost be prohibitive but there would not be sufficient work to retain the interest of the concerned personnel. The observations of the internal auditors (or even the concurrent auditors) on the improvement in work flow could be the result of the following:

1. Corebanking is real time software demanding that the transactions and even back office entries be passed thought the system.
2. Given the learning history of earlier LAN based software and the system audits that diced it, the software vendors installed all improvements that were either demanded by their client Banks or reported by the system auditors.
3. Discretion is therefore given a back seat in the interest of internal control. Core Banking has very few areas which have a manual over –ride.
4. Plethora of reports with a minimum of 100 reports on an average in each of the core banking solutions, one must be right for you! This may be the principle for satisfaction of the discriminatory. However, time reveals that even a 100 report output still falls short of management and legal needs even of the day.

Thus, from the simple action of opening a savings account to reporting health of a borrower, the system takes control with nary a loophole to exploit much to the delight of the auditors and most Bank managements. Thus, ensuring Income Tax PIN number capture to ensure legal compliance to correct interest and installments in arrears are system driven, suddenly removing all the irregularities observed by the previous auditors continuously over the years. Correction of the old data of course needs to be awarded priority to equalize data quality. The main assumption is of course the quality of the application as available under the professional eye of the handful experienced vendors and the Bank management’s intention to improve. Improvement in housekeeping and reporting in itself admittedly does not constitute health of any Bank. But when a struggling Bank no longer has to take Herculean efforts in the departments of housekeeping and accurate reporting, the manpower is available for ‘recovery’ and marketing. Training is an essential input of this service industry which demands time. Core Banking application will make available this time. Marketing and proper scrutiny of applications will thus be possible in the given time frame. All this is expected to improve the Bank’s health. But will all this possible in the restricted time of one year? Very difficult is the consensus but it is assured that the ‘direction’ of the health of the Bank will turnaround for the better. The very ambitious managements may be able to even achieve a complete health turnaround in a small time frame too – all thanks to core Banking.