Thursday, April 06, 2006

Grassroots Banking and our banks

In a piece with some extensive analysis, R Vaidyanathan (prof at IIMB) writes in The Hindu Businessline about how our banks have effectively ignored the unorganized sector despite proclamations to the contrary.

The spirit of grassroots entrepreneurship, which is the basis of the country's growth, must not be snuffed out by software solutions that ignore human judgment, and half-baked policies formulated by the metropolitan elite who know more of Wall Street than our own Ranganathan Streets, Brigade Roads.

Sometime back, I had mused about how even as mobile phone service providers are going for micro recharges our banks have steadfastly refused to entertain zero balance or no frills accounts (this though, has changed, banks now do offer zero balance and no frills account).

Nagamma has been a flower vendor for more than 20 years in my neighbourhood in Bangalore. She has joined several informal `chits' at various times to save some money and generate loans. But many a time the persons running the `chit' have fled with the collections.

As a finance professor, I thought, I should do some practical finance and advised her to open an account with a commercial bank for saving her hard earned money and perhaps use that to get a loan some time later. The branch manager, a pleasant woman, has known the flower vendor for many years. But alas not the Core Banking Solutions (CBS) with its central server located in Davos or Basel. It will just not recognise Nagamma. The branch manager quite helplessly pointed out that the system decided about accepting new customers under the `Know Your Customer' (KYC) model.

The funny is thing is that if a bank lent a few thousands to a (few hundred) flower vendor(s) it will still lose far less than if it lent a few crores to a single errant broker or a builder who has all the documentation thats needed in the system.

So it is not enough that the manager knows the customer. The `system' should also recognise her using the Multi-Factor Discriminant Model of Non-linear Credit Rating. Nagamma was asked photos, proof of address, PAN number, proof of date of birth, references and also given exotic choices of using debit card and net based banking. It is sad that banks have moved away from the community-based recognition of new customers and particularly the small entrepreneurial class.

Read the full piece for more.

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