Mumbai: Collaboration and not competition could help achieve financial inclusion in India. Collaboration among banks and between banks and technology firms and mobile service providers is imperative as the task is huge. As India’s rural economy grows, financial inclusion will no longer remain an obligation for banks—it will fast become a business opportunity, provided banks are able to reach out to the masses in a cost-effective way and offer a package deal of deposits, loans, insurance and mutual fund products.
This was the consensus among seven leading bankers of India and the UK who attended Mint’s Annual Banking Conclave in Mumbai on Wednesday to discuss Inclusion Through Competition. Some said rural business could become the driver of growth in Indian banks in the next few years.
The panellists were State Bank India’s managing director R. Sridharan, ICICI Bank Ltd’s chief executive officer and managing director Chanda Kochhar, Standard Chartered Plc’s regional chief executive officer (India and South Asia) Neeraj Swaroop, Hong and Shanghai Banking Corp. Ltd’s (HSBC) India head Naina Lal Kidwai, Indian Banks’ Association (IBA) chairman M.V. Nair, Barclays Bank Plc chairman Marcus Agius and British Bankers’ Association chief executive officer Angela Knight. Mint’s deputy managing editor Tamal Bandyopadhyay moderated the discussion.
The next growth driver
Currently banks view the so-called priority sector lending to agriculture and the small-scale sector as an obligation, but the growth in rural India could change all this. “In the course of time this stipulation might become meaningless because many of the businesses we do in rural areas under this segment are going to become more and more profitable,” Sridharan of State Bank said.
The country’s largest lender has opened 1,200 rural branches in the past five years. It has also employed “barefoot bankers” to cover 87,000 villages but “there is still some distance to go” to achieve financial inclusion as India has about 600,000 villages.
Kochhar’s ICICI Bank is chasing financial inclusion not because of a social obligation but because of the future potential of the rural market.
“It’s a big misconception that ICICI Bank is only an urban phenomenon… Out of 2,000 branches, 40% are in semi-urban and rural areas...which is more than the regulatory requirement,” she said.
“We believe the entire rural India is in a way going to be the next driver of growth for the Indian economy and therefore it is economically imperative for us to participate with this segment of the population and take banking to this segment,” Kochhar added.
ICICI Bank expects the Indian economy to grow at 9% or 10% in the next few years and banking will grow at 20%, mostly because of rural growth.
Marcus of Barclays said the growth rate will make a difference. “I am enormously impressed by the fantastic growth rate that India is having... When I look at the size of the country and the size of the population, and then look at the growth rate, I am amazed at the financial sector in India,” he said.
Foreign bankers participating at the panel discussion challenged the notion that financial inclusion is not a part of their business model. They said limited foreign bank branches in rural areas was not because they didn’t want to go there but because regulatory approvals were hard to come by.
Kidwai of HSBC said the banking sector as a whole will have to find a profitable delivery model if inclusion has to be successful.
“The challenge before us is: How can we deliver a low-cost model which makes business at the grass roots profitable? Mobile banking is seen as a panacea for delivery and distribution but the cost and point of delivery is still not fully with us in terms of the profitable model. So the challenge for us is how can we as a banking sector deliver a low-cost model which makes doing business at the grass roots profitable?” she said.
“We have opened only a few thousand branches in the last 10 years. If the total number of villages are 600,000 and we need 80,000 or 100,000 branches in the country…we are not going to get there at the pace we are going,” said Swaroop of Standard Chartered. “My hypothesis is that in the state that we are in, more than competition, we need sharing of infrastructure. Ideally, each of the 25-30 commercial banks can adopt a portion of the country, states or districts for financial inclusion and the policymakers need to look at the quid pro quo in terms of commercial viability. There has to be an incentive of sorts to make this happen faster than what the natural market forces will allow to happen.”
Right business model
Indian banks are still grappling with what is the right business model for financial inclusion that would make it profitable and attract more and more players to the hinterland.
Nair of IBA, who is also the chairman of Union Bank of India, said that unless both existing and new banks see it as a good business, inclusion is not going to make progress.
“The question we have to ask: Is it a CSR (corporate social responsibility) activity or a business activity? The key challenge in giving access to those who are excluded is the last-mile delivery and connectivity. Unless and until we achieve this, we cannot achieve inclusion,” he said.
Nair expects the rural market to increase rapidly in the next 15 years as more rural households join the middle-income group.
“By 2025, 175 million households in the rural markets will join the middle-income group and that’s a big business proposition for any bank in India. Secondly, by 2017 the consumption in the rural market will equal the urban market and that is a good enough motivation for any bank to go,” he said.
Kidwai suggested that each bank should adopt an area in the hinterland and develop their own model and then pass it on till a perfect business model emerges.
“Look at the microfinance business; they are profitable but we are not able to do it because the regulators won’t allow us at such usurious rates. We will never be profitable in what has been done so far. Besides, being a bank also carries a reputation risk,” she said.
Avoiding subprime crisis
According to Nair, the best way to avoid any credit crisis in the subprime sector is spread of financial education along with financial inclusion. “We need to graduate the subprime borrowers and that needs huge amount of investment and time to educate them,” he said.
Kidwai of HSBC agreed that education is indeed important but cautioned that one needs to use discretion while choosing customers. “Don’t forget that you have issued a credit card when everybody had 10 credit cards that they could not pay for. Microfinance is running a similar risk—everybody is chasing the same customer and rushing to the same region. Competition has to be used with care,” she said.
Kochhar said what matters is the lending practice. “Why did the crisis happen in the Western countries? Because they were lending against asset bubbles and not against the customers’ cash flow. Just because you are moving from a big customer to a small customer, it doesn’t mean that you are running the risk of a subprime crisis”.
Sridharan said “merely because the borrowing person is less advantaged, I don’t think it is going to lead to subprime crisis”.
According to Knight of the British Bankers’ Association, in the UK the financial inclusion project was about opening a bank account to which an individual can transfer money and from where they could take cash out and make payments; and the target was not only enhancement of credit. But in the US the target was on lending and the lending predominantly happened in the subprime mortgage area.
“How do you proceed with inclusion with a great degree of safety? If you increase the lending without proper knowledge, it is more likely the problem later would be for the individual as well as the provider of the loan,” she said.
Do we need more banks?
Kochhar of ICICI Bank said there is a lot of business for everybody—for the new players to come and for existing players to grow. “Should competition be there? Yes, competition is always good for the industry. In my view, consolidation, competition and inclusiveness need not be mutually exclusive at all. There is room for small and big players,” she said.
State Bank’s Sridharan, too, said the prudential guidelines will play a critical role when new players will be allowed to set up banks. “The banking business requires large leverage. There is also deposit insurance that ensures some amount of protection (to depositors) and this concept of ensuring that large banks won’t fail also is a factor that needs to be considered to see what kind of prescription you make for ownership (of banks),” he said. According to him, some kind of diverse ownership is ideal for the banking sector.
Inclusion & competition
Standard Chartered’s Swaroop said he saw both inclusion and competition significantly more than it is now.
“We will see more bank branches, more smart cards and mobile phones,” Kidwai said. “A whole lot of system of delivery is probably the answer. More distribution points? Yes. More bank branches? More mobile ATMs? Yes. So the answer lies in finding more creative avenues than brick and mortar branches.”
IBA’s Nair said that by 2012, his association will reach out to 50,000 villages with more than 2,000 population, which translates into around 65,000 villages. “After 2012, we will reach out to all villages in India,” he added.
State Bank’s Sridharan said that the number of customers and branches will go up substantially. “Today in a small country like France, Credit Agricole SA has more than 12,000 branches,” he said. “If you keep that in mind, there is enough room for large number of branches for all of us.”