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What Raghuram Rajan Expects from Banking Tech and Why?

India, Dec. 10 -- When RBI governer Raghuram Rajan warned against hasty implementation of NDA's flagship financial inclusion plan, Pradhan Mantri Jan Dhan Yojana and urged banks not to run after numbers alone, it was seen by many as an act of direct confrontation with the government. Not only was the plan positioned and promoted as Prime Minister Narendra Modi's personal vision (No, it was not Swachh Bharat, but PMJDY which was his Modi's first major announcement made as part of his maiden Independence Day speech on 15th of August 2014), the government was pushing the banks (especially public sector banks) to open as many accounts as possible. Even today, in the scheme's website, the Guinness World Record certificate is proudly mentioned in the home page! In other words, it was not just the scheme but the speed too which was mandated by the government.

What is it that was worrying Rajan?

You get some answers when you see the usage trend. Many of those Jan Dhan accounts remained inactive. Earlier this year, a World Bank report based on the World Bank-Gallup Global Findex Survey, while acknowledging India's growth of bank accounts, expressed concern over the high dormancy rate.

"The sharp increase in penetration of accounts notwithstanding, the worrying aspect for India is that the country has among the highest rates of dormant accounts in the world," the report said.

While the government has managed to bring it down from 74% a year ago to about 34% now, much of that has happened because of the direct benefit transfer (DBT) of LPG. That is: one scheme of the government feeding another scheme. Also, 34% is also quite high by global standard. The global average is 15%.

The cost of maintaining such accounts is huge on the banks. For public sector banks, which are pressurized by the governments to open such accounts in large numbers that are dormant but have to be maintained, it directly impacts competitiveness. And these banks are all commercial banks and most of them are listed with public shareholders.

While financial inclusion is a laudable goal, it has to be a sustainable proposition. For that banks have to bring down the cost of banking transactions and overall banking business significantly. That was probably one of the factors that made Rajan speak out against hasty rollout.

Technology to the Rescue; Or is it?

That Raghuram Rajan, respected as one of the most balanced regulator globally, is worried about the cost structure of banking not coming down became evident when he spoke explicitly about that in a recent speech that he delivered to banking technology fraternity

"The cost structure in the banking system despite use of all the information technology is still significantly high," he said speaking at a conference organized in the Institute of Development and Research in Banking Technology (IDRBT) in October.

"We can see the effect of the IT revolution everywhere in the banking system, except on the expenses side," he said. "Why aren't the expenses coming down?" he asked. And the frustration was evident.

While enhancing the reach of banking is desirable, without the right cost structure, it would be untenable.

"It is only by reducing the cost of transactions (that) we can reach all," Rajan

It is not that Rajan was finding fault with technology or people running it. He did acknowledge how technology has improved banking in many ways. It's the application of technology to effectively reduce cost structure that he was not happy with.

And he had a point. Despite making the life of the user much smoother, what technology has not been able to do is to bring changes in the way banking is organized. All that banks have done is to do the things the old way, but a little more efficiently and with more convenience to the customer but have not rediscovered the model itself to leverage the new technology era.

That is what Rajan is after.

"IT and IT usage has not penetrated into the banks as fully and as properly as we would like. Banks are still not fully integrated in terms of IT usage so that on a daily basis, it can spin out what the details of the loans are. If you do not know the picture on a daily basis, there are activities that can pile up over time, which can be extremely risky for the bank," he said.

Take social media for example. Most leading banks have presence on social media and use Facebook to connect with the customer or Twitter to respond to customer complaints. They surely have improved customer service to some extent but it has not affected the business in any significant manner.

It is significant that Rajan did not talk of social media as a marketing or customer relationship tool; he urged the banks to leverage the data available through social media to understand customers and their needs

"There is tremendous information available, ranging from social media habits to the kind of products customers use and so on, which can be used to not just better serve the customer but also for efficient banking," he said.

In a way, the banking industry in India has got the low hanging fruits but they have run their course. It is time to take the next leap-of reengineering banking processes; redistributing channels, using customer data analytics, leveraging social media and other online activities data and analytics to understand the customers better, link product creation/positioning to the insight and so on.

Some banks are already trying it. It is time for larger banking community to go for the same.

And what can be a better situation than your top regulator urging you to do that?

Published by HT Syndication with permission from The CTO Forum.

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Publication:The CTO Forum
Geographic Code:9INDI
Date:Dec 10, 2015
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