Can financial services be made bite-sized to deepen credit penetration?

Small can be more beautiful: Large-scale sachetisation of financial services may be just around the corner

Micro-credit is a hit. Total assets of banks, small finance banks and micro-finance institutions (MFIs) in this business now stands at Rs 2.5 trillion or thereabouts; it is projected to grow more than three-fold to around Rs 6 trillion by 2027, covering nearly 140 million low-income clients. Can financial services be made bite-sized to deepen credit penetration? The approach borrows from “sachetisation” in the fast-moving consumer goods business — shampoo being the first product to be sold this way.

Arohan Financial Services’ “Bazaar” offers credit through the joint lending group (JLG) mechanism to small-ticket borrowers. “The amounts can range between Rs 20,000 and Rs 75,000. Each member in a JLG steps in for a member in case of a repayment problem, and we take comfort from that,” says Manoj Nambiar, the firm’s managing director (MD). The product has been around for a decade, but technology allows for borrowers to service interest on a daily basis.

Can you template the approach? “Each industry has to look at sachetisation in its own way. But conceptually, take PMJRY (Pradhan Mantri Jan Dhan Yojana) launched seven years ago. It’s sachetisation even if you don’t think of it being so,” says Akash Sinha, co-founder and chief executive officer (CEO) of Cashfree Payments.

Axis Bank has teamed up with PayNearby to open savings and current accounts for last-mile retailers and customers. “You needn’t maintain a minimum balance. You just offer cash to the kirana shopkeeper and it will be credited to your account via the micro-ATM route,” says Anand Kumar Bajaj, the founder, MD and CEO of PayNearby. And yes, it’s a play on PMJRY, where accounts don’t call for a minimum balance to be maintained.

For Axis Bank, this arrangement fits in with its Deep Geo initiative, targeted at over 8 million customers in semi-urban and rural regions across 2,065 branches during the pandemic. Its big bet: “Bharat Banking”.  “The ability to deliver financial services in significantly smaller ticket sizes goes up dramatically, when done digitally, points out Munish Sharda, group executive and head for Bharat Banking at Axis Bank. He’s categorical: “The inclusion agenda is sachetisation.”

Wider context

Axis Bank’s Deep Geo strategy needs to be located in a wider context as well. There are 464 million accounts which have opened under PMJDY with an outstanding balance of Rs1.73 trillion in these accounts. As of June 2022, there are 159,000 branches operated by banks (commercial), with total deposits of more than Rs 70 trillion — or close to approximately 15 branches per 100,000 in head-count. This is further complemented by a network of 217,000 ATMs — of which 47 per cent are in rural and semi-urban areas.

And there are close to 3.2 million business correspondents engaged by banks. Per data from the World Bank’s Global Findex Database, as of 2021, 78 per cent of Indian adults (population with 15 years, or more of age) had a bank account, compared with 53 per cent in 2014. And, banking access is on offer to almost every village within a 5-km radius in 25 states and seven union territories covering 99.94 per cent of identified villages.

And sachetisation can go beyond banking.

PMJJBY (Pradhan Mantri Jeevan Jyoti Bima Yojana) is an example of customers buying a life cover of Rs 200,000. But, as Tarun Chugh, MD and CEO at Bajaj Allianz Life, notes: “Sachet insurance offers limited life cover, which may not be enough for the family to fulfil their needs in case the breadwinner dies. And this may be a deterrent.”

He believes that it may work as a first step in securing the family’s financial future, “and from there on the customer can work with life insurers to widen their life cover.”

Viral Acharya, former deputy governor, Reserve Bank of India, held forth on its promise in 2018 — borrowers and entrepreneurs can build their reputation and credit quality by repaying such initial information-building loans. Gradually, they can borrow more and at longer maturities, potentially making capital investments to enhance productivity. “Such ‘sachetisation’ of credit can rapidly expand access to credit for those micro and small enterprises, hitherto not included in the formal credit market,” he said.

He had also qualified that “…it would remain important not to undermine their (small borrowers) inherently strong credit culture by making it easier for borrowers not to repay”, as this would compromise the essence of how micro-entrepreneurs build a reputable credit history to differentiate themselves from others and over time grow in size and economic value creation.

Financial inclusion  

Sachetisation not only helps turbo-charge financial inclusion, but two years ago, Acharya (while speaking at a media event) went a step further. “There are some banks whose business model is so broken in my assessment that there won’t be any immediate suitors who are interested in buying their equity in a significant manner or at decent prices,” said Acharya.

He went on to add: “What is the option? I’d say they should focus on sachetisation or democratisation of credit.” It may be harsh, you might say, but nobody has yet said that sachetisation is a bad idea.

So, what’s holding it up?

“You must have the ability to structure a product based on the seasonal aspects of a business and the borrower’s needs. It calls for a skill-set of a different kind. I think fintechs can do it better than legacy institutions,” says Jiji Mammen, executive director and CEO, Sa-Dhan — a self-regulatory body for MFIs. Simply put, can you offer a loan or insurance to a grower of seasonal fruits or vegetables, or wedding and pilgrimage-centre caterers?

It will call for public credit registries (PCRs) which have to work alongside private credit bureaus (PCBs). The former, as not-for-profit enterprises, will be able to ensure better data coverage than PCBs. At some point, it can give rise to the availability of “near real-time data.”

In fact, the Report of the High Level Task Force on Public Credit Registry for India (2018), chaired by Y M Deosthalee, had envisaged it. The Report had recommended that a PCR be set up, backed by an appropriate Act, to improve the information efficiency of the credit market and strengthen the country’s credit culture.

It is unlikely that the RBI’s legacy-regulated entities will be big players in sachetisation any time soon. This is because transaction sizes may not make commercial sense beyond a minimum threshold of, say, Rs 10,000. Financial inclusion will hold the key to stability of jobs in the informal sector -- it is hard to imagine the organised sector throwing up jobs, much as we strive for it. 

For sachetisation to fire, the way out is partnerships between legacy players and new-age financial technology firms that in the immediate future may well have to rethink their game owing to the RBI’s latest norms on digital lending. The situation is fluid, but the bigger picture is that the building blocks which will power the next wave of sachetisation — PCRs, account aggregators, and finely-tuned digital lenders — are coming together. Slowly, but surely.