More than a political obligation, extending financial services to the vast unbanked population could be a large opportunity for the sector.
Consider this: India is expected to grow 8.6 per cent in 2010-11 and 9 per cent in 2011-12. This makes the country the second-fastest growing large economy after China. And, more than half the population does not have bank accounts. These are two aspects that throw up two contrasting sides of one country — India.
Finance Minister Pranab Mukherjee had last year directed banks to provide appropriate banking facilities to all habitations that have population in excess of 2,000 by March 2012. Banks have, through State-level Banker Committees (SLBCs), formulated their road maps for financial Inclusion and identified approximately 73,000 habitations with population of more that 2,000.
These habitations have been allocated to commercial banks, regional rural banks and cooperatives banks to provide banking facilities in a time-bound manner.
Is this huge untapped potential a business opportunity for banks? Or do banks have to go for financial inclusion only because political masters want it?
| GRIM FACTS |
| * Only 40 per cent of population has bank accounts |
| * If MFIs, other channels are included, 47 per cent population has access to institutional credit |
| * Only 38 per cent of the 87,051 branches of scheduled commercial banks are in rural areas |
| * There are only 32,919 rural bank branches for about 600,000 villages in India |
Nobody has summarised this challenge in a manner as apt as RBI Governor D Subbarao, who recently said banks considered financial inclusion as obligation and there was a need to make them realise that it was also a business opportunity.
In fact, financial inclusion remained an obligation for banks in the past due to focus on traditional banking and absence of new technology.
A recent report by the Confederation of Indian Industry (CII) and Boston consulting Group (BCG) says banks have, historically, struggled to build an efficient and low-cost distribution network to serve the marginal customers.
The high distribution costs translate into a cost-income ratio of 10-12 (compared to the desired ratio of 0.5) in a traditional branch-based banking model.
In fact, if the traditional banking model is used to include all the currently excluded households, it will result in an annual obligation to the tune of Rs 20,000 crore.
Not surprisingly, financial inclusion has, for long, been seen as an obligation by financial service providers. Since this obligation is unviable to fulfil, formal banking continues to overlook the needs of the marginal customer.
As a result, these customers continue to rely on informal sources like money lenders, friends and family for most of their needs.
Not any more, perhaps. With the advent of cutting-edge mobile and information technologies, financial inclusion may no longer a dream.
Changes like the introduction of Business Correspondents (BCs) and disbursal of government payments through the banking system have begun to improve the economics of the ecosystem for financial inclusion.
However, despite all these positives, financial inclusion continues to remain an obligation for the formal sector. The key issue to be worked on now is ascertaining what could turn this obligation into an opportunity for the sector.
Chief Economic Advisor Kaushik Basu says financial inclusion is indeed an opportunity, but, of course, not an automatic one.
“If it was an automatic opportunity, private banks would have probably done that. So you need a regulatory system for it to become an opportunity,” he says.
The CII-BCG report says recent developments like the creation of a national unique identification infrastructure — through Aadhaar, the multi-purpose programme of the Unique Identification Authority of India (UIDAI) — could provide impetus to financial inclusion.
But this requires challenging the existing paradigms. Mere incremental tweaking of existing business models may not work. It would need a deep understanding of customer needs and innovative collaborative cross-industry business initiatives to reduce the cost of service delivery.
According to the report, there are two possible routes forward.
First, financial service providers take a set of actions around reducing cost (manpower, distribution, technology, etc) and increasing revenue potential of their initiatives (targeted products, new business models, etc).
To achieve this paradigm, financial service providers would need to levy adequate charges on the customer and focus on delivery of products and services that are profitable.
This would increase the penetration of formal financial services from 47 per cent to nearly 65 per cent, with an additional profit potential of Rs 1,500 crore for financial services providers by the fifth year.
The charges paid by the newly-included customers in this model would be higher than that charged by banks in their traditional banking models from the richer existing customers. But these would be significantly lower than the cost they to incur while availing of services from the informal sector, if they can access the services at all.
This approach could be supplemented by a second possible route, where policy makers create an enabling ecosystem through a set of regulatory and policy changes. Here, benefits through regulatory and policy changes are passed on to the end consumers.
For example, interest rates on loans can be brought down to 18-20 per cent a year, while remittance costs could come down to 2 per cent, if this approach is adopted.
This paradigm requires a combination of some initiatives, together with some targeted subventions by the government and the regulator. These may include targeted incentives to promote financial inclusion viability and allowing non-banking financial companies to be business correspondents.
This would lead to an increase in the penetration of formal financial services from the current level of 47 per cent to approximately 80 per cent. This paradigm should create an additional profit potential of Rs 3,500 crore for the financial service providers by the fifth year, according to the report.
In an environment vitiated by strong arm tactics of some microfinancial institutions, financial inclusion could be a business opportunity.
Basu says financial inclusion is a business opportunity, “if you have a proper system in place, within which borrowing and repayment take place. After all, you do want a system where repayment takes place regularly”.
However, he adds a word of caution, too. “You cannot go and harass a person to pay back a loan. If it is obligatory for the person to pay back a loan and it is being done under a legal system, that is what we mean by financial inclusion,” he adds.
