While there are 334 million bank accounts in India, only 60 million Indian households are really 'banked', as it were. And there are around 91 million households, with incomes of anywhere between Rs 40,000 and Rs 180,000 per annum, which can be tapped by the banking sector. The Boston Consultancy Group (BCG) surveyed around 9,000 individuals belonging to this group across India to identify what needs to be done to bring them into the banking fold. According to the BCG, if these 30 million additional households are addressed by organised financial service providers over the next three years, it would expand the revenue pool by around Rs 10,000 crore for banks and Rs 20,000 crore for insurance services. But banks need to think out of the box for this, according to BCG's managing director for India, Janmejaya Sinha. Excerpts from an interview with Shriya Bubna:
Why don't banks go after these segments your report identifies?
Banks go after segments where they can make a certain amount of money. If they could address the needs of all households, who would leave out 135-140 million households? I think the issue is why those households can't be accessed? There are issues in the quality of their demand, in the costs of reaching the service and in the restrictions around the pricing. What we are arguing is that the existing models will not help to capture this opportunity.
Right now the credit market is growing at 16-17 per cent per annum, and within this, different groups are growing at 30-35 per cent. It's difficult to find a market opportunity that's bigger. If you have a first-mover advantage here, it'll create a competitive advantage "" you'll be getting into a group which has no accounts and so no allegiances either to any particular bank or to a particular financial services provider.
What are the issues that need to be addressed?
In product development, you have to think of how to develop a product as the target borrowers want simplicity and flexibility. These borrowers take longer to sell to and you are going to make less money from them. So, when you are trying to sell to them as an individual bank, you might think it's a waste of time. If, however, you can collaborate with someone else, the sales will become viable. Think of a financial services firm and a cement company tying up "" give a loan to an individual to use in building a house! That way, a virtuous cycle builds up. Some of the landless labourers we interviewed in Orissa said they earned for only five months a year "" they buy utensils when they are earning and sell them when they aren't earning anything. So, if they buy these utensils at Rs 250 and sell them at Rs 200, this implies a twenty per cent cost "" over a seven-month period, that's a substantial earning possibility.
The other problem is that priority sector loans have to be given at the prime lending rate. At 13 per cent, you cannot lend to them, it is impossible. So, these borrowers then have to go for higher interest rate loans, sometimes even as high as 100 per cent.
How can banks tap this segment given the current regulatory framework?
Take small loans "" the biggest issue in small loans is to whom they should be made and how these will be repaid. Well, if you know that someone has had a post-paid card for a year, that's an indicator the person is in the habit of paying his bills.
Why aren't banks tapping the potential?
For one, they spend more time being worried than in seeing the full opportunity. The biggest issue is that the ticket size is too small. So, we need to think outside the box, of ways to make the ticket size bigger.
One way is to bundle things. You could either get customers to bundle "" say that you will not lend them Rs 10,000 individually but will give a Rs 50,000 loan to five people collectively. Or, as a bank, you could tie up with someone else. This market can give you Rs 10,000 crore, but right now it is zero since lending to it is seen as an obligation.
What can the government do to support this segment?
There are issues for both the government and the RBI to address. We do not have a single identity card for the entire country. Various kinds of cards exist, and none cover the entire country, whether it is an election card or a PAN card. Why don't we make a biometric chip-enabled election card which can then be used to make payments, and so on. Even the land records have not been digitised and put on one single database. How long will it take? A year, two years? Why can't a project like that be taken up?
The other issue is collection. The fact is you do not have a legal system where you actually can collect all your dues. We need to figure out what contract enforcement we can have to ensure that wilful defaulters are identified and weeded out. And all of this should be possible within the law.
What are the non-financial barriers to those individuals accessing banks for credit?
One of the people we spoke to said he cannot borrow from a bank, because no one reminds him when his interest payment is due "" so, as a result, the interest just piles up. With a moneylender, he is told that he has to pay this much every week. If, in a particular week, he cannot make the payment of, say, Rs 10, the money lender will tell him he needs to pay Rs 20 the next week. The chap does not know how much interest that is, but that flexibility is there.
If you go to a moneylender, do you know how much time he takes to give you a loan? Ten minutes. If you go to a bank, you have to fill up a form "" the poor individual doesn't know how to fill the form up, there is no one to help him do this. And all the while, he's losing his daily wages since the bank wants him to be present between 10 am and 3 pm "" the moneylender, however, is willing to see him at even 8 in the evening after the day's work has been done. This is what customisation is all about. The individual doesn't love the moneylender but he knows where he can be found, he knows his loans will be dealt with immediately, even when they're turned down. The same cannot be said of any other credit provider.
