‘Full financial inclusion a pipe dream’
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Six of India’s senior bankers and heads of microfinance institutions (MFIs) gathered at Mint’s first annual South India Banking Conclave to discuss the issue of making financial inclusion sustainable and how to address the challenge of combining profitability with inclusion. The consensus that emerged out of the discussion is that both banks and MFIs are moving in the right direction and it has to be combined with financial literacy but it will take time to cover the entire country.
Chandra Shekhar Ghosh, chairman and managing director of Bandhan Financial Services Pvt. Ltd; P.N. Vasudevan, managing director of Equitas Microfinance India Pvt. Ltd; V.S. Radhakrishnan, managing director and chief executive officer of Janalakshmi Financial Services Pvt. Ltd; Ashwini Mehra, deputy managing director of State Bank of India; T.K. Srivastava, executive director of Syndicate Bank and Raja Gopalakrishnan, group managing director (Asia Pacific) and chief operating officer (international) of Fidelity Information Services (FIS) joined the discussion that was moderated by Tamal Bandyopadhyay, deputy managing editor of Mint. Edited excerpts:
Bandyopadhyay: There has been pressure from the government as well as the Reserve Bank of India (RBI) on banks and other financial intermediaries to go to the hinterland and expand banking services. Banks are moving reluctantly as they don’t see money there. Millions of accounts have been opened but the number alone does not tell the truth. We will start with Chandra Shekhar Ghosh of Bandhan who has got in-principle approval from the RBI to set up a bank. You have shown that banking with the poor can be done profitably.
Ghosh: The cost of reaching to the poor is indeed high and financial inclusion should not be a charitable activity—it has to be financially viable. About 60% population does not have a bank account and only 10% can access credit from banking services. How can small and medium enterprises get access to credit? For that, you need microfinance institutions (MFIs). Small and medium enterprises are good financial managers—whatever money they get, they use it in the right way; and their repayment rate is very good—for us it is 99.5%. Because our NPAs (non-performing assets) are low and we reach people where there is no competition, the cost is minimal.
For any financial activity, there are two major factors. One, human resources—60% of our employees have not gone to colleges. If I want to hunt a rat, I don’t need to hire a tiger as it is not cost-effective; a cat is enough to catch the rat. I don’t need MBAs to give out tiny loans of Rs.5,000-10,000. We recruit people, develop their skills to reach the poor in unbanked areas and that helps us minimize the cost of operation. But we can’t cut the cost of funds until and unless we are allowed to take deposits from the public. Then only we can reduce our interest.
Bandyopadhyay: Srivastava, Syndicate Bank has a history of dealing with poor people through pygmy accounts…
Srivastava: We started the pygmy accounts in 1928 when there was no concept of financial inclusion. The modus operandi was that we appointed pygmy agents and they used to go to the small business establishments, like a chaiwallah, a vegetable vendor, etc. and they used to collect 1 anna (6 paisa). Within a period of about 10 years, it started generating good revenue for the bank and good profits. This success story clearly demonstrates that the small-people are bankable and financial inclusion is definitely a profitable activity. Financial inclusion is all about strategy—you have to see where you fit it into that strategy and how you make it profitable as fast as possible. We have 10 lakh pygmy accounts—about Rs.3,000 crore. And out of that, almost Rs.1,000 crore is loans. We are making profit out of it. We are collecting even Rs.5 from customers in different corners of the country. So you have to develop a strategy and increase financial awareness and literacy.
Vasudevan: We are an MFI and so we’re not in the savings and liability side of the business. As far as lending is concerned, we actually cover a wide spectrum of services for the low-income and excluded segments—of course, microfinance is the flagship programme and beside that we’re offering micro-SME, typically in the Rs.50,000-5,00,000 category. And then, we have micro-housing finance, which is Rs.1-5 lakh and affordable housing finance, which is Rs.5-25 lakh. We are also into used commercial vehicle finance—typically the average lending size is Rs.2-3 lakh. We do cover a large segment of customers who are typically not serviced by the banks.
When we focus on the financially excluded segments, we find that we don’t have any problem in terms of demand and repayments, and there is a huge opportunity in the excluded segment as far as lending is concerned. We have estimated that the entire demand from the unorganized and excluded segments from the country, excluding agriculture, is about Rs.40 trillion, nearly two-thirds of the assets of the entire banking sector. That being so, there is a need for 50-100 large specialized banks to address that segment. And the model has to be different, it cannot be a five-star hotel. You cannot come to Leela Palace and ask for a cup of Rs.5 chai. The structure has to be different and that structure is what some of the MFIs and NBFCs (non-banking finance companies) that operate in the excluded segments have created.
Bandyopadhyay: Raja, one of the reasons why people do not find it sustainable is because of the high transaction costs. Can you throw some light on how do you overcome this?
Gopalakrishnan: If you step back, the fundamental issue is that there is huge imbalance between the demand side and the supply side. Either we don’t have enough demand or we’re not able to harness the demand. And on the supply side, it just boils down to the fact that the cost of supplying is completely not right-sized. The whole issue is how do you create a technology infrastructure, systems, processes, supply chain and the entire piece in such a way that you can actually right-size that to the demand that exists in the market place? The other issue is also in terms of aggregation. If you look at the entire spectrum of financial inclusion—loans, savings, micro-insurance as well as transactions—all the big banks keep talking about is share of wallet; that you can increase the amount of wallet share that you have from a customer. But that’s not the way it’s being looked at from a financial inclusion perspective. The pygmy account is just one example. So, if you look at it, you have to right-size the entire supply chain in terms of technology, processes—that is the only way because ultimately you cannot mass produce the kind of services that we want at the higher cost models.
Radhakrishnan: I think there is a realization and acceptance that inclusion is a huge opportunity. If you turn the clock and say, ‘Let’s start lending and then do cross-sell of other products’ which is what Janalakshmi has attempted to do, then it is profitable. If you take a microfinance company today and its core business, you can make a good return on assets, a lot of bankers would agree. If you add on to it the cross-sell of savings, pension products, insurance products, etc., you’re making more. Then you drive efficiency through technology because you need the technology to look at a customer in a holistic manner. And you’ve also got to be able to ensure that as the customer grows, you’re able to grow and service his needs.
What we say is that the need of the customers, depending on where they are in their life cycle or economic cycle, keeps increasing. Now if microfinance institutions do not re-orient themselves, what happens is that you’re building all the credit history and then handing them over on a platter to a bank. The problem is that there is a belief that only banks can do inclusion. The reality is that inclusion has to be addressed through multiple players. And that’s what the Nachiket Mor committee (on financial inclusion) said—you need a mobile company providing inclusion, a banker providing funds and a microfinance institution to do the last-mile connectivity. That’s the model that is going to work. That’s what the telecom sector has done…banks can be like telecom towers, they can be the wholesale provider of funds…
Mehra: As far as banks are concerned, I will slightly disagree with Srivastava, in the sense that the banks’ own experience in the matter has not been an unmitigated success. How it actually started was that we relied on some of the technology providers to help us do the financial inclusion and increase the coverage of villages. These agencies had the technology but they did not have the ground-level presence. So we had these customer-service points which were identified with some difficulty and merely to achieve our target of covering these villages and having the number of accounts, we ended up opening a whole number of accounts but without many transactions happening.
To make financial inclusion sustainable, you have to make sure that the customer service points are well looked after and well-serviced. To that extent, the bank has taken a certain number of initiatives to increase the number of transactions. To make it sustainable, we’ve offered services and brought in our own technology, called kiosk banking, which has proved to be quite successful. And we’ve also offered facilities of cash being available at the customer service point by means of a cash-at-POS (point of sales) facility. We’ve also permitted them to take deposits into the loan accounts so that there are more transactions.
Bandyopadhyay: All of you are saying that the poor people are more credit-worthy and the NPA level in this segment is extremely low and technology is available. Then, what’s the problem?
Ghosh: The problem is that the major portion of un-banked people is living in rural India. Very few people are interested in going to rural India to serve poor people. There is a big gap there. It will take some time to build on the capacity and serve rural India. Financially it is viable, there is no doubt. We recruited 95% of the people from rural areas and from poor families. They are happy living in the villages and that is an advantage that we have.
Radhakrishnan: I think inclusion for MFIs is the core business. It’s not an incidental business which is regulated and required to be done. Therefore, the kind of people we recruit, the kind of processes we put in place, etc. are very different. We’ve also attempted to ensure that we build up platforms so that customers can grow with us and continue to get loans of up to Rs.25 lakh. I think inclusion is not being looked at holistically—it’s being looked at as a problem that bankers need to solve. We have to look at it much more strategically…I do hope that UID (unique identity project) continues to exist because that will be a great platform to leverage.
Bandyopadhyay: The impression that I get by talking to bankers is that it’s not a profitable business…
Gopalakrishnan: If you look at it, there are three components: the demand side, the supply side and the environment and ecosystem. If you go back to the last 10 years and look at the strides we’ve made in the environment and ecosystem, that’s going to continue to happen. The country is going to get more networked, but the reality is that there are only pockets and pieces that are working. The big picture is not working. However, it’s not all negative. There are strides being made and each one of these has to come together. If you look at complete financial inclusion, that is a pipe dream because India has to be a developed country for us to have complete financial inclusion.
Srivastava: Look at the financial inclusion that banks have done—almost 20 crore accounts have been opened and still we only have 25% active accounts. If you get into why it has happened, it’s a drive which has been led by the government, RBI, and the banks for including the non-included customers in a way that the account should be opened. So, the primary objective for the banks was to open as many bank accounts as possible and the targets were given and we achieved that.
At that time the banks did not think about how they were going to make it profitable; the ultimate aim was to open accounts. And the transactions have not happened the way they should’ve happened. The demand side has not been tapped. If you look at the financial expenditure and resources of the rural areas, they go to moneylenders. They borrow at a high rate. Why do they go to money lenders? Even at 9 o’clock in the night, you can knock at their doors and get the money. If banks can do this, it can become sustainable. The aim of financial inclusion for the last 10 years was not to make it profitable but to include them in the form of opening of accounts.
Mehra: One very important aspect is financial literacy. That does not target only the account holders, but also our customer service points who need to be told that there are a number of products that can be sold through this channel; there are a number of other initiatives that they can take to try and make their own activity more and more viable. I feel the banks are doing this but we need to do more and more interaction with the customer service points to make them realize what their role is so that they can play it more effectively and also encourage the rural population to transact more and more.
Vasudevan: As far as the lending part is concerned, both NBFCs (non-banking financial companies) and MFIs have proved that it’s a very profitable business. Of course, they lend at 20%-plus interest rate, but if you look at the ROEs (returns on equity) of any of the NBFCs and MFIs, except maybe a few extreme cases, the ROEs are never more than 20%, which is what most banks aspire to get. So, we need a different kind of institution—marriage between a Leela Palace and a road-side tea shop. And we need a regulator whose task is only financial inclusion in the country.
Bandyopadhyay: How do you see the progress in the next two years?
Gopalakrishnan: If you’re talking about a two-year timeframe, I don’t think there will be any dramatic progress in terms of financial inclusion. There will be progress definitely in terms of new models that might have a hint of what the future could hold in terms of profitability and sustainability—I think you’ll start seeing some green shoots on that.
Srivastava: Lots of transactions will start happening and that will ultimately lead to profitability.
Mehra: Two years down the line we should definitely see a much better story.
Radhakrishnan: There won’t obviously be 100% inclusion, but there will be multiple players.
Vasudevan: If we’re able to come up with a very good blueprint, a good plan in terms of how this financial inclusion can truly be taken forward on a large-scale basis, that will be very satisfying.
Ghosh: Financial inclusion is currently top-driven; we need it to be bottom-driven. So, from the top if anyone wants to come to the bottom, they can easily do that, but from the bottom to go to the top is very hard and will take some time to reach.