New plans for inclusive banking

Innovative strategies can bring formal banking to 30 million, says BCG report.

Commercial banks can bring in an additional 30 million poor households into the formal banking fold in the next three years by using innovative business strategies such as collaboration with telecom companies to payment services, according to a Boston Consultancy Group report.

The report titled, The Next Billion Customers: A Road Map for Expanding Financial Inclusion in India, said understanding the financial needs and barriers that had kept the poor outside the formal sector was a must. Financial institutions should size and structure their products to suit people outside the banking fold.

With barely 34 per cent of the population engaged in formal banking, India had the second highest number of households (about 135 million) excluded from banking services.

These people were on the cusp of high growth and consumption, but their demand was not being met by suitable services, the report added.

The Indian economy is in a high-growth phase and the momentum of income growth rather than any aggressive efforts to court customers will bring formal banking to 17 million households by 2010 in the normal course. These banks will be able to service 86 million families, according to the report.

However, the use of flexible payment schedules for people at the bottom of the pyramid and shared back-up services could bring in extra 30 million households into the banking fold.

This would mean that banks would be able to serve 116 million households by 2010 instead of 69 million in 2006, said Arun Subramanian, the co-author of the report.

The addition of 30 million households in the next three years has huge implications for financial services. It could expand the revenue pool by around Rs 10,000 crore for banks and Rs 20,000 crore for insurance services.

Janmejaya Sinha, the managing director of BCG India, said more than three billion around the world were financially excluded. They had limited access to, or rarely used, formal financial services.

"More than the low income, it is the volatility in their incomes (most of them are not salaried and have monthly variations in income) that keeps them outside the perimeter of financial services. This makes it hard for banks to assess their credit-worthiness", Subramanian said.

As a step to increase access to banking services, financial institutions must develop distribution models that are aligned with the needs of billions and present trustworthy alternatives to informal channels, the report added.