Indian banks need to partner microfinance companies and other non-banking institutions to expand the reach of financial services in unbanked and under-banked areas.
Industry players said banks must form partnerships with micro-lenders and business correspondents as their current cost structures often prevent them from offering services to the poor masses not only in rural centres but also in urban towns and metropolitan cities.
“In Bangalore, in the shadow of the formal banking system, right at the heart of the city, if I can walk you down a stretch of 500 metres by 100 metres, there will be hundreds of micro enterprises, which never get access to the formal banking system,” Ramesh Ramanathan, chairman of Janalakshmi Financial Services, a Bangalore-based urban microfinance institution, said.
The purpose of financial inclusion is not served by merely opening bank accounts, and urban poor and rural masses should also have access to other financial products like insurance and mutual funds.
“Why should they have perched access to only one product...There is no question that we as the last mile players need to connect with banks. But they also needs to connect with us, not just for opening bank accounts but also for (offering) other services,” Ramanathan said.
Bankers stressed the need to develop a hybrid model where banks' services will be supported by business correspondents and micro-lenders. “There is a huge mass of people without the basic banking facilities. Banks alone cannot meet these needs,” Hemant Contractor, managing director of the international banking group of State Bank of India (SBI) said.
According to Rana Kapoor, founder, managing director and chief executive officer of YES Bank, traditionally banks have depended on brick and mortar branch models to provide banking services to its customers. Hence, it is difficult for banks to replace micro-lenders, especially in remote locations, as it was not cost effective.
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“We have to build very low-cost structures. Leaders need to concentrate on improving efficiency...We need to focus on systems, processes, technology and cutting cost to reach the last mile,” he said.
Industry players, however, said for-profit organisations were needed to pursue the development agenda despite the recent crisis in the microfinance sector in Andhra Pradesh, where micro-lenders were accused of charging high rates and using coercive methods to recover funds from poor borrowers.
“Much of the damage in the microfinance sector is self-inflicted by some of us. (But) you cannot get scale without a for-profit organisation. I cannot put the social baggage of my personal agenda on to investors. I have to give them a fair return,” Ramanathan said.
Kapoor said microfinance institutions will need support from banks; otherwise, they will not be able to survive on their own.
Contractor said banks have to be innovative not only in manufacturing financial products but also in their service offerings, and this was critical for growth to be inclusive.
Bankers said it is a misconception that innovation led to a crisis in the global financial system.
“What happened in 2008 was the lack of transparency and faulty regulations around those products, which allowed an over-concentration of risk. And it was more the lack of transparency than the innovation itself," Rich Ricci, co-chief executive of Barclays Capital, United Kingdom, said.
Kapoor said there was a need to strengthen the regulatory inspection on innovative financial products.
“We have to appreciate innovation itself is not negative. What is undermined and is somewhere below the radar is grading the role of inspectors. You can have great regulations, great compliance and all that big-picture stuff but you also need knowledgeable skill sets and inspectors who understand the nuances of banks' architecture,” he said.