The topic of financial inclusion is at the centre stage of policy agenda. Both the Reserve Bank of India (RBI) and the ministry of finance have taken it up as a priority, setting aside other things such as consolidation in the industry. The bet seems to be on the business correspondent (BC) model, which envisages non-bank outlets (such as kirana stores) supporting banking transactions for customers who do not have access to a bank branch. While the direction is right, we need to think and act more boldly to make any significant impact on the problem in a short time.
It is instructive to study other industries where we have struggled and succeeded with the issue of exclusion. It was not very long ago (around 15 years) when teledensity in India was 4% and increasing it to around 20% was a national priority. Between 1995 and 2009, teledensity increased from 4% to 50%. This success is a matter of national pride. Much of it is to be credited to new low-cost wireless technology and the private sector enterprise that was unleashed on a commercial opportunity. The earlier prevailing wireline business model pursued by the department of telecommunications (now by Bharat Sanchar Nigam Ltd) was not going to be able to deliver this revolution in this time frame.
Illustration: Jayachandran / Mint
It is not that we did not try earlier. Public phone booths were introduced to extend the reach of the old technology to the masses. But the breakthrough needed to transform the industry came with new technology and new operators who brought huge investment (around Rs2 trillion in telecom infrastructure over the last 15 years), new product development (low-cost, dust-resistant, long-battery phones, for example), and creative marketing focused on the mass market.
The current conception of the BC model for financial inclusion reminds one of the phone booths in the telecom story. The model as it is conceived extends the reach of the traditional bank branch to people through some last-mile technology solutions. The banks do not invest in the technology. They seek partners, often by competitive bidding. There are a handful of small companies that develop technology for this last-mile connection. These face a host of problems: They bid against each other for being a bank’s BC and most end up financially unviable. Their total equity base is around Rs200 crore. No large technology company is in the fray. No serious investment to develop a breakthrough technology or business model is in the pipeline.
The challenge of financial inclusion is bigger than the telecom challenge. It will need significant investment, experimentation and innovation to create a commercially viable business model. And RBI is justified in its caution, given that public savings are involved.
There is, thankfully, a growing recognition within RBI and the finance ministry that a commercially viable business model is required and that the financial inclusion objective cannot be met as a social obligation by banks. There is even a section that seems to believe that new banking licences be given out to increase competition and hence automatically create inclusion. There is a fallacy in this thinking. If you are a new bank today, financial inclusion will not be among the first things you will go after. There are just too many more attractive business sub-segments under the broad umbrella of banking.
Why not create an innovative win-win model? Let the same corporate houses and non-banking financial companies that will queue up to get the banking licences be given BC licences instead. That way, we offer a well-defined business opportunity that is targeted at the problem. The customer’s money will stay with the bank at the back end and so safety of money will be ensured. The bank can continue to be responsible for know your customer and anti-money laundering norms and other vigilance to cover the risks to the financial system and payment network.
These BCs will be corporate entities with large enough balance sheets to plan sufficiently large technology investments. Large scale is required to get unit costs down to a level where the mass market finds it attractive to participate (remember the thinking from the telecom industry about phone calls at the price of a post card?). They will invest time and effort to study the customers’ needs and develop commercially viable propositions that will be more attractive than the currently offered “no frills” services. The definition of BC will need to be fine-tuned to make the commercial opportunity real for any potential licensee.
A BC needs to have the right to price the customer appropriately, offer suitable products and services without any undue interference, market itself, geographically expand freely and have the flexibility to tie up with many banks at the back end.
The inspiring revolution in teledensity in a short span of time shows that revolution is possible with a careful blend of a new business model, the latest technology, commercial enterprise and wise regulation. We need the best of all of these to solve the financial inclusion challenge.
Saurabh Tripathi is partner and director, The Boston Consulting Group. The views expressed here are personal. Comments are welcome at firstname.lastname@example.org