No-frills accounts are proving to be a growing business opportunity.
One-and-a-half kms from the glitzy office blocks housing a dozen-odd bank headquarters at Mumbai’s Bandra-Kurla Complex brews a silent revolution. From a dingy store full of gunny bags filled with old plastic for recycling, an ageing Ladulal Jain runs a State Bank of India (SBI) no-frills account mini-branch.
The place, in the middle of Dharavi’s grime, is almost a Mecca for migrant labourers and other local residents, most of whom have their village roots intact and hopeful dependants.
Started around four months ago, Jain is seen as almost a father-figure by many of the 2,000 account holders at SBI’s business correspondent outlet. As he prepares to close for the day past 5 pm, he has no choice but to politely turn away eager young men pleading with him to send money home in time for the festival weekend.
“Earlier, our men had to spend almost half a day to send money home,” said Anish Khan, a 36-year-old commercial vehicle operator. “It now takes me only a few minutes. And since it’s cheap, I use the facility 10 times a month to send money to my family and friends in need.”
Seeking a no-frills account at the same location is Mohammed Qamruzzama, a 39-year-old manufacturer of travel bags. His family in Parihar village of Bihar looks forward to the Rs 3,000 he sends them every month.
“The Post Office delivers money every 15-20 days. That sounds like a joke today,” he said. “Money these days moves in a matter of minutes.”
Anish Khan and Mohammed Qamruzzama are harbingers of a remarkable transformation that bankers say could extend credit to the needy, reduce poverty and migration to towns and increase employment opportunities locally.
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It makes business sense, too. Ladulal Jain’s outlet remits around Rs 1,00,000 a day. Account holders can send a maximum of Rs 10,000 on which they pay just Rs 25 as commission, he says. It earns 60 per cent of that and the bank keeps the rest. Jain expects to exhaust the limit of 2,500 accounts in a matter of weeks and may seek permission to open more accounts. His expense is a modest Rs 20,000 on mobile phones and a printer to confirm transactions, he says.
Many of his account holders are migrant workers, who are permitted to furnish a limited Know Your Customer disclosure, which may even be a village identity card to open an account for deposits, withdrawals and remittances. “It’s a revolutionary concept,” said a senior SBI official closely associated with the project.
Costs for banks are limited to spending on a few days training and paying the business correspondents, use of hand-held instruments and other related technological investments. In rural areas, where villagers don’t have access to a branch or mini-branch, operations are usually conducted by a business correspondent on a hand-held instrument.
SBI, which has enrolled 1,000 business correspondents in the past three months, plans to increase the number to 50,000 in two years. It aims to open up to 7.5 million no-frills accounts and extend its direct and indirect coverage to 100,000 villages. The bank expects to generate Rs 2,000 crore in business by the third year, and is working on various models with varying commission structures.
“We see it as a business opportunity,” said J K Sinha, chief general manager for rural business at SBI. “By deepening our reach, we can mobilise deposits. And by increasing our range of products at a sustained level, we should break even in one or two years. There is a lot of demand for savings and insurance products.” The bank, which issued 1.1 million insurance policies by March, aims to give out another 700,000 insurance policies in the year to March 2011.
Likewise, Bank of India has an ambitious plan to increase the number of no-frills accounts to 10 million from 3.7 million at present and cover 7,000 villages. It aims to lend Rs 11,500 crore in three years to March 2013. “In a village, every individual, however poor, has an identity, which he loses on migration to town,” said N C Khulbe, general manager at Bank of India. “A bank accounts gives him back his identity. Why can’t the 70 per cent of our population also be part of India’s growth story?”
| SMALL IS BEAUTIFUL | ||
| Bank branches | Rural | Urban |
| SBI & its associates | 5,560 | 4,835 |
| Nationalised banks | 13,381 | 8,669 |
| Foreign banks | 4 | 4 |
| Regional rural banks | 11,626 | 2,746 |
| Other scheduled commercial banks | 1,113 | 2,638 |
| All scheduled commercial banks | 31,684 | 18,692 |
Bank of India has opened rural self-training Institutes to help villagers sharpen their skills, and get the latest market prices, practices and seeds. Loans are recovered several months after the harvest or whenever a farmer can get a better price for his produce.
By doing so, it also helps increase a farmer’s capacity to absorb credit and enables the bank take its relationship beyond just a savings account, which on its own takes much longer to be profitable. “Some moneylenders charge villagers as high as 5 per cent interest a month,” says Khulbe. “It is a business opportunity for banks. The emphasis is on credit delivery. The creditworthiness of a small borrower is usually very high.”
His bank witnesses demand for as little as Rs 2,000 from farmers and others in rural areas. Besides loans, Bank of India sees opportunity in micro-insurance, remittances, as well as financial literacy and credit counselling. The bank has given a Rs 500 overdraft facility to holders of every account to meet any emergency. Three years is sufficient for a bank to begin making profits from these operations, Khulbe said.
Axis Bank plans to triple the number of accounts to 2.4 million by March 2013 and break even by then. The bank also plans to triple the number of villages under its coverage to 12,000 in the same period. “It makes business sense in the long run and it will be profitable once it gathers volumes,” said S K Mitra, president, agricultural and rural banking at Axis Bank in Mumbai.
Reserve Bank of India wants to ensure that within three years, all villages with a population of at least 2,000 should have access to banking. Before RBI’s initiative, some banks opened branches in villages and incurred losses, prompting the central bank to push the business correspondent model, which permits retired teachers, small shopkeepers, agents of government savings schemes or insurance, petrol pump owners, among others to work as a representative of a bank.
Of more than 600,000 villages, towns and cities, only 30,000 have bank branches, and less than half of all Indians have a bank account. The skew can be gauged from the absence of a bank branch as late as 2007 in Dharavi, located in the heart of India’s financial capital. Today SBI’s Dharavi ‘branch’ is teeming with customers and more banks see this as an opportunity. The slum now has nine ATMs, all actively used.