 "Can banks see profit in financial inclusion?")
The Reserve Bank of India (RBI) has granted in-principle approval to 11 entities to set up payments banks. The plan is to push for greater financial inclusion through these banks. The Jan Dhan scheme is also being scaled up. But is financial inclusion a profitable venture for banks?
“Financial inclusion isn’t yet viable for banks,” says C V R Rajendran, former chairman and managing director of Andhra Bank. There is no sufficient balance and 45.76 per cent of the Jan Dhan accounts have zero balance. Jan Dhan Yojana, primarily driven by public sector banks, led to the opening of 137.2 million accounts, as of August 12 this year. B Sambamurthy, director of Bandhan, and one of the three people directly associated with the launch of financial inclusion (along with former RBI governor Y V Reddy and Indian Bank Chairman K C Chakrabarty) says, “There are wonderful pilot cases to make financial inclusion viable but these have only been glamourised, not scaled enough.”
Transaction costs prevent banks from making this scheme profitable. To open an account with a RuPay card, banks have to spend about Rs 100. For insurance benefits, the accounts have to be operated once in 45 days. If these transactions are at a bank branch, it costs Rs 45 a transaction. To be eligible for insurance, if a customer visits a branch at least eight times a year, it costs the bank about Rs 400 a customer. Rajendran says if these accounts are to become viable, they must have an average of Rs 6,000 and a shift to cheaper delivery channels is needed. When a customer uses an ATM, the cost per transaction falls to Rs 9 and, in case of internet or mobile transactions, less than a rupee.
Banks could also do well if they de-centralise and act local. “Big ideas are good for institutional structures, but not great for products. We need localisation of products,” says M S Sriram, professor, Indian Institute of Management, Bengaluru.
Attracting the unbanked with insurance, RuPay cards and overdraft facility hasn’t helped banks. Sambamurthy says while the RuPay card has been ramped up quickly, acceptance infrastructure is abysmal. Banks are slow in building acceptance infrastructure — both card- and mobile-driven — as it drives the break-even level high and increases the gestation period. Also, banks are wary of the overdraft limit of Rs 5,000, as they fear this would turn into an entitlement, owing to which they might record a large number of non-performing asset (NPA) accounts.
Sriram says should “restructure products to ensure processing expenses are reduced. This can be achieved by making the process repetitive, standardised and aggregated. Banks need to re-engineer processes that need customer touch-points, as well as those that are at the back office”.
Financial inclusion can bring enough money to propel the already-burdened public sector banks. Rajendran says about Rs 16 lakh crore is lying as cash in circulation. Presuming at least 30-40 per cent is with the unbanked, it is big money if it enters the banking system.
Sambamurthy, for instance, cites the example of para-banking/chit funds, which are good at design and delivery of products, adding a few of these alone have mobilised about Rs 100,000 crore of deposits. “Banks can replicate these models and this will improve their Casa (current account and savings account) and viability,” he suggests.
He says cash management is a major cost component and there is an urgent need to push a less-cash economy. “The country can save about Rs 10,000 crore by way of direct benefits transfer, lost taxes and cost of printing. This could be invested in building huge acceptance infrastructure, at least by 50 times, as anything less is sub-optimal,” he adds.
Banks also need to cut expenses and focus on innovation. Cross-selling should be from the customer’s perspective; it shouldn’t be aimed at shoring up profit-and-loss accounts of banks. “Otherwise, it could degenerate into mis-selling.”
He cites the example of Scandinavian countries where even beggars/mendicants carry swipe machines. “It looks crazy and unreasonable. But we need to be crazy to achieve viable financial inclusion.”
“Financial inclusion isn’t yet viable for banks,” says C V R Rajendran, former chairman and managing director of Andhra Bank. There is no sufficient balance and 45.76 per cent of the Jan Dhan accounts have zero balance. Jan Dhan Yojana, primarily driven by public sector banks, led to the opening of 137.2 million accounts, as of August 12 this year. B Sambamurthy, director of Bandhan, and one of the three people directly associated with the launch of financial inclusion (along with former RBI governor Y V Reddy and Indian Bank Chairman K C Chakrabarty) says, “There are wonderful pilot cases to make financial inclusion viable but these have only been glamourised, not scaled enough.”
Transaction costs prevent banks from making this scheme profitable. To open an account with a RuPay card, banks have to spend about Rs 100. For insurance benefits, the accounts have to be operated once in 45 days. If these transactions are at a bank branch, it costs Rs 45 a transaction. To be eligible for insurance, if a customer visits a branch at least eight times a year, it costs the bank about Rs 400 a customer. Rajendran says if these accounts are to become viable, they must have an average of Rs 6,000 and a shift to cheaper delivery channels is needed. When a customer uses an ATM, the cost per transaction falls to Rs 9 and, in case of internet or mobile transactions, less than a rupee.
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A lot also depends on how well banks design and deliver products and services. “Product and service design represent the first mile, while the distribution network represents the last mile, which has seen some progress. But that isn’t enough,” says Sambamurthy.
Banks could also do well if they de-centralise and act local. “Big ideas are good for institutional structures, but not great for products. We need localisation of products,” says M S Sriram, professor, Indian Institute of Management, Bengaluru.
Attracting the unbanked with insurance, RuPay cards and overdraft facility hasn’t helped banks. Sambamurthy says while the RuPay card has been ramped up quickly, acceptance infrastructure is abysmal. Banks are slow in building acceptance infrastructure — both card- and mobile-driven — as it drives the break-even level high and increases the gestation period. Also, banks are wary of the overdraft limit of Rs 5,000, as they fear this would turn into an entitlement, owing to which they might record a large number of non-performing asset (NPA) accounts.
Sriram says should “restructure products to ensure processing expenses are reduced. This can be achieved by making the process repetitive, standardised and aggregated. Banks need to re-engineer processes that need customer touch-points, as well as those that are at the back office”.
Financial inclusion can bring enough money to propel the already-burdened public sector banks. Rajendran says about Rs 16 lakh crore is lying as cash in circulation. Presuming at least 30-40 per cent is with the unbanked, it is big money if it enters the banking system.
Sambamurthy, for instance, cites the example of para-banking/chit funds, which are good at design and delivery of products, adding a few of these alone have mobilised about Rs 100,000 crore of deposits. “Banks can replicate these models and this will improve their Casa (current account and savings account) and viability,” he suggests.
He says cash management is a major cost component and there is an urgent need to push a less-cash economy. “The country can save about Rs 10,000 crore by way of direct benefits transfer, lost taxes and cost of printing. This could be invested in building huge acceptance infrastructure, at least by 50 times, as anything less is sub-optimal,” he adds.
Banks also need to cut expenses and focus on innovation. Cross-selling should be from the customer’s perspective; it shouldn’t be aimed at shoring up profit-and-loss accounts of banks. “Otherwise, it could degenerate into mis-selling.”
He cites the example of Scandinavian countries where even beggars/mendicants carry swipe machines. “It looks crazy and unreasonable. But we need to be crazy to achieve viable financial inclusion.”