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The opportunity costs have been high (for banks and their clients) on large sums
of money tied up as ‘tied branch settlements’. For example, a national check
clearing takes two weeks instead of two days! The opportunity cost for individual
banks is also high because of largely manual inter-bank payment settlements.
Transaction balances maintained by banks and their clients tend to be higher
than if the settlement mechanisms between banks and branches were more efficient and
automated.
The possibility of fraud (and delayed discovery of fraud) is another by-product of
manual, paper-based systems for processing transactions. A major area of concern
in some bank branches, this danger is now extended to the nascent and fast growing
stock markets. With timely information, the multi-crore securities scam could have
been forestalled.
Banks have been reluctant to accept and conform to capital adequacy ratios that
are based on risk weighing of assets because there is no precise information on
their asset compositions.
Portfolio management capabilities are weak because of delays in processing
and obtaining information about distribution and quality of assets
among branches. This problem is particularly acute for small agricultural
and industrial loans where single banks as well as the entire banking
system often end up over lending to one sector in one region. The long
reaction times for such lending problems add to portfolio deterioration.
Portfolio diversification strategies are also difficult to put in place because
the information base is inadequate. The inadequacy of portfolio
information also makes it difficult for banks to resist populist lending programs.
Banks cannot precisely differentiate the costs for various financial
products, instruments and services. They are constrained in their ability to
price services according to demand. The result: banks underprice their
fee-based services because they do not know enough to negotiate with
their clients, and there is no price differentiation among banks for their
financial services.
Banks cannot obtain a timely, comprehensive picture of the banking relationships
for specific firms, slowing the response to clients.
Banks cannot identify and analyze centers of high activity, resulting
in poor allocation of manpower and inflexibility in switching resources.Without such
