The Hindu Business Line : Look up for inspiration

RETAIL banking is growing rapidly in India. The triggers for innovation and growth have been rising income levels, entry of new private banks, demographic change, low interest rates and widespread adoption of new technologies such as ATMs, the Internet and mobile banking. Given a bright growth picture, banks need to use information technology more intelligently to manage their retail businesses. Geographic Information Systems (GIS) technology can be of help here.

GIS are computer systems used to store and process geographic data. GIS scores over other data management systems in its ability to present spatial relationships in a digital map form that is easy to visualise and understand. As we shall see, there is a spatial dimension to many aspects of retail banking. Data is the central resource of a GIS system. GIS systems process two kinds of data — spatial and attribute. Spatial data gives the geographic location of a point of interest (e.g. railway station, school, bank branch, ATM etc). Attribute data contains other characteristics of that point of interest. GIS vendors in the country have invested considerable resources in creating and updating spatial data. Available data sets include district and village boundaries at state level and roads, PIN code/ward boundaries and important landmarks for cities. Creating accurate data sets of this nature involves analysing satellite images to identify outlines of roads and natural features such as lakes, rivers, etc. A ground survey is then conducted to capture street names and exact locations of points of interest, of which there will be several thousands in a big city.

Applications of GIS

Consider some of the potential applications of GIS in retail banking.

Site selection: A GIS system will have a database of points of interest in a town/city — for example all ATMs, bank branches, schools, restaurants, shopping centres, etc. A bank's own database will not have this information. It will have only customer addresses. So if a bank plans to open a new branch in an under-served area, it can use the GIS system to see if any of its competitors already have branches in that area and decide accordingly.

GIS applications have a tool known as a geo-coder that can convert a location reference such as a postal address to its corresponding position on a map. GIS can display where customers are located in relation to a branch. It can provide answers to questions such as — "How many customers live or work within one km of Branch X?" It can facilitate site selection for new branches and delineation of trade areas — where branches draw their customers from.

The banking sector is seeing a lot of merger and acquisition (M&A) activity.Sometimes, the deals involve public sector banks with large branch networks. Mergers will require many branches to be closed if the economic benefits of the transaction are to be realised. GIS can help identify which branches can be closed while minimising inconvenience to customers being shifted to other nearby branches.

Demand estimation and performance measurement: GIS supports thematic mapping. For example, it would be possible to generate a map where PIN code areas of branches having deposits exceeding Rs 10 crore are shaded in red, those with deposits between Rs 5-10 crore in blue and below Rs 5 crore in green. This map could help a bank quickly identify which branches or areas have good potential for its other savings products such as mutual funds or insurance.

The performance of a branch, based on parameters such as number of accounts or fee income generated, cannot be judged in isolation. A branch may appear to be performing poorly but this may be only because it is ia location with a high concentration of other banks' branches. A GIS-based analysis will be useful here. The benefits could include ensuring that the branch manager does not get a low appraisal, and preventing the bank from taking expensive corrective actions (e.g. refurbishing the branch), which are unlikely to yield the desired results. Spatial interaction models can also make predictions about how the branch would perform if one or more of the competitors were not present.

Credit appraisal: Urban areas are usually segregated along socio-economic lines.

Borrowers in areas where negative socio-economic influences prevail often display a higher propensity to default. GIS is helpful in identifying such spatial patterns in loan delinquency. The methods now in use — querying on the basis of PIN code or locality name — are inadequate because our cities lack address-numbering standards. You could have two addresses on the same street bearing different PIN codes. A GIS with a geo-coder will be able to show you that the two are neighbouring. This will not be clear if one used a database query based on PIN code.

There are instances of roads being renamed. Some customers use the old names while others use the new. Good GIS systems are able to resolve these kinds of problems because the necessary intelligence is built into their geo-coders.

And of course, the big advantage of using GIS still remains its ability to provide a visual image which is much more effective than a tabular report.

Banks have reported interesting results from GIS-based analysis. It has been observed that customers often bank more at locations closer to their place of work rather than residence. Customers residing far away from their branches are more likely to delay or default on repayments of personal loans.

Home loans: Geographic information is central to the real estate business. The geographical location of housing units is one of the most important determinants of market value. For most families, buying a residential site or apartment is among the most important decisions to make. Identifying a suitable property is tedious and time-consuming. An important reason is the lack of information on what is available for sale. The housing market in Indian cities and towns being fragmented, there is no single source of information. Comparisons between properties, on price and features, are difficult to make. Here is where GIS comes in. GIS applications can help prospective buyers find homes by specifying their requirements on spatial characteristics such as proximity to school/city centre, etc, and property characteristics such as built-up area, number of bedrooms, flooring, etc. Banks have to manage credit risks associated with making real estate loans. The higher the loan to value ratio for a property, the greater the risk to the bank. A significant decline in property value could result in negative equity for the borrower — where the value of his asset falls below that of his liability. Borrowers with negative home equity will likely have a higher propensity to default. The assessment of property value is, therefore, critical in housing finance.

The location of housing relative to offices, schools, hospitals, shopping and entertainment centres influences its market value. Attributes of the neighbourhood — quality of roads, water and power supply, public transport, degree of congestion and other socio-economic factors such as crime rates — also influence its value. Banks must develop databases of property transaction prices. Appraisers can then use transaction prices of nearby properties and make adjustments for the location and neighbourhood attributes to estimate a fair value.

Risk management practices in the US mortgage industry, aided by GIS, have become increasingly sophisticated. Banks are investing heavily in computer hardware, core-banking applications, ATMs and call centres. Though these investments are necessary, the payoff is uncertain and likely to be back-ended. Smaller investments in analytical tools such as GIS will bring significant and tangible benefits much faster.

The author is Director, DelFin Analytics. He can be reached at: delfin@vsnl.net

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
On a collision course

Sticking to the patent lane

Debut time

Up for grabs

Look up for inspiration

Buddies all

Trouble with modem

Tickers in XP

XviD codes installation problem

Letting light and life in

Quiz

Key to information locked up in databases