'Connectivity remains a challenge'

BANKERS SPEAK: Manish Khera

Financial Information Network & Operations, set-up by ICICI Bank last year, now also has on board three public sector players Indian Bank, Union Bank of India and Corporation Bank as they look to concretize their thrust on financial inclusion using Fino's smart card and hand-held reading devices for enabling transactions in unbanked areas. Manish Khera, chief executive officer, Fino, tells Shriya Bubna that the smart card technology platform of Fino can help banks cut operational costs by one-third and MFIs, but connectivity remains an issue.

When Fino started operations, its objective was to function as the backoffice to all microfinance institutions (MFIs). What has been your success in linking the nearly 200 MFIs?

At present, 8 MFIs are live on the Fino platform namely, KAS Foundation, Grasso, Janalakshmi, MYA, Krushi, Awareness, MMFL and MAS. Among the bigger MFIs, we have started a pilot with Share and are working on sorting out the gap with Spandana.

We have uploaded 75,000 customer accounts on the Fino smart card, of which, 60,000 are savings accounts and 15,000 are loan accounts. We have asked the MFIs to start with loading incremental accounts and not migrate the entire data to us. In many cases, the quality of data is very bad.

The second bigger issue is of connectivity. So we are loading the accounts in phases and plan to have 4 million accounts by 2008. In the next one year we should transfer the entire database of the 8 MFIs.

The savings accounts are simple and we have not started loading recurring deposits and fixed deposits. The loans are mainly self-help group (SHG) and joint liability group (JLG) loans.

While, we are ready to load individual loans also, the problem is the network. We crossed 1 lakh cards on July 13, of which 50,000 cards are already on the field and 100 point-of-transaction-terminals.

What about banks?

We have tied up with Indian Bank for its financial inclusion in Dharavi and Kolur. There is a pilot with Union Bank of India for 5,000 smart cards in Uttar Pradesh with a target of 1 million. Corporation Bank is running a pilot in 5 branches initially and will be adding another 20 branches.

They are also looking at loading individual loan products. HDFC Bank wants to bring its 2,500 groups on the network. Soon, Punjab National Bank also should also start using the Fino platform. For loading the remittance product on the card, ICICI Bank is trying to tie-up their network points from Dharavi to Bihar.

Banks still have to work out whether the business of micro-lending is more of the nature of social cause or there is a profit to be had.

What are the main issues constricting the use of technology in micro-lending?

There need to be more customers in the fold. The system has to stabilise. The whole network is creaking. The connectivity is bad.

The Fino system works on an offline basis, all we need is a simple phone-line to push transactions onto the back-end. We need only 20 minutes of connectivity, once a day, even that is a problem.

To what extent has Fino helped the MFIs and banks in lowering their operational costs?

The average cost of a transaction at a branch would be around Rs 40-45, at an automated teller machine (ATM) it would be Rs 15-12. For using the Fino system the technology cost, including the card, device would be Rs 2 per transaction.

The charge paid to the business correspondent is over and above this at Rs 1 to Rs 5. Even at Rs 5, banks think it is a viable transaction. So effectively, costs have come down to one-third of their level.

If we estimate 75 transactions a year, per account, the cost would be around Rs 150, including charges for the business correspondent this would be around Rs 225 to Rs 375 per account per year.

If a bank charges about Rs 500 upfront fees on a loan product as processing charge, this makes it a profitable proposition. On a savings account however, it could be a loss making proposition.

ICICI Bank has recently resumed lending through partner MFIs, after the Reserve Bank of India had raised some concern about the model. Since the loan is on the bank's books, the RBI wanted banks to have an up-to-date record of all transactions.

Following this some of the large MFIs were looking to use Fino's platform for updating data on a real-time basis on the bank's network at a cost of Rs 25 per account per year.

The bank is pushing its MFI partners to move to the Fino platform as it is more like a regulatory requirement. That is what we are also telling the MFIs.

Since Fino has a ready database on MFI customers, has this credit bureau component been tapped?

No not yet. MFIs use the group dynamics for credit evaluation. Public sector banks have their own system in place. Now the question is can Fino be used for credit modeling.

The first step, in this direction is the unique identification that we provide, this is more foolproof than bio-metric identification in tracking the customer's credit history. (Fino cards have a unique chip number and a unique geographical locator printed ont he face of the card which uniquely identifies the individual belonging to a village).

Currently CIBIL only offers a negative list of borrowers which acts as a checklist. On credit scoring and modeling, we would definitely look at that. We would look at aligning ourselves with somebody for that.

There was a proposal with ICICI Bank and Nabard to set up a credit information bureau. We were to run a pilot in two districts in Andhra Pradesh and assign a unique identification to each customer. We would be looking at only the overall exposure of that customer and not evaluating credit worthiness. However, the proposal is stuck somewhere in Nabard's hierarchy.

What about from the regulatory point of view, do you feel that something needs to be done?

Some of the discussions that are happening are disturbing. A technical committee on inclusive banking is looking at issues like how many fingers of the customer need to be captured in an image to be used as identification.

The failure rate on using single finger images is only a single decimal, in capturing two fingers...it is at two decimals, so what is the point of capturing the image of six fingers. Instead issues like different vendors having different standards, which does not allow inter-operability of machines, should be resolved, such that the same biometric card works on all the machines.