The ‘missing market’ as a business opportunity

The ‘missing market’ as a business opportunity

Till recently, lending to the poor and underprivileged had been an obligation under the law for commercial banks. Now, they are looking at this segment as an opportunity.

A recent study of banking services in Bihar by Diviya Wahi, a manager with ICICI Bank Ltd, India’s largest bank by market value and second largest in terms of assets, shows that a bank branch in Bihar covers 23,000 people against the national average of 15,000. Bihar has 45,103 villages, covered by 3,989 branches of various banks. This translates into one bank branch for every 13 villages. The distance between two bank branches is 18-20km.

Wahi is in favour of setting up local financial institutions (LFIs) that can tie up with banks. This model helps banks to lower their cost as they do not need to invest in rural branches. She also suggests that more than 9,000 village panchayats or local administrations in Bihar can play a major role by offering their offices as nodal points for connecting LFIs with the clients. Former army officers can float such LFIs and Financial Information Network and Operations Ltd (Fino), a company based out of Mumbai, can provide the technology network. The Fino team has developed a platform that can accommodate 50 million customers. The company offers a biometric fingerprint-enabled smart card that allows foolproof customer identification. This is a completely offline solution that requires only a smart card reading device and a fingerprint sensor at any point of transaction.

Nachiket Mor, deputy managing director of ICICI Bank, is passionate about bringing in the “missing market" into his bank’s fold. Mor believes in developing a network of community-based financial institutions to provide financial services to the poor. He also favours creation of venture capital funds that can identify and provide equity finance and mentor new entrepreneurs in rural India.

To cover the entire country, a network of 200 such entities, each serving a million households, would be needed. ICICI Bank has developed the partnership model that leverages the local presence of these entities with the ability of the bank to diversify risks. It has created more than 100 microfinance partners and extended more than $500 million (Rs1,965 crore) worth of loan to 3 million clients till last year. Operating through these partners, ICICI Bank hopes to cover 25 million clients and build an asset book of $10 billion by fiscal 2010.

How are the other private banks addressing the missing market? Axis Bank Ltd is adopting a cluster approach. It has identified 23 districts across India to implement this model. These include Amritsar, Ludhiana, Moga and Sangrur in Punjab; Udham Singh Nagar in Uttarakhand; Guntur and Krishna in Andhra Pradesh; and Bellary and Gokak in Karnataka, which have been identified as new business centres, based on parameters such as gross cropped area, fertilizer consumption and rural infrastructure. The bank is opening few branches to form a cluster to fully tap the business potential of these centres. For small and marginal farmers, Axis Bank has introduced loans against the pledge of gold ornaments. Its chairman P.J. Nayak says it is ensuring better price realization for the farmers for their produce by being present at all levels of the value chain—from farmers to agri-processing units. It has already formed 28 agri-clusters and proposes to push the number to 40 by the end of the year.

HDFC Bank Ltd, in contrast, is following a four-tier pyramid structure. At the bottom, it offers microfinance of amounts between Rs5,000 and Rs12,000 to landless farmers through self-help groups. At the second tier, it offers pre-crop loans and post-harvest warehouse receipt finance to farmers. Armed with the latter, farmers can approach the commodity exchanges to discover the price of their produce. The next tier of the pyramid is the small and medium processors. Finally, HDFC Bank is reaching out to the large processors and input suppliers such as fertilizer firms, sugar firms and dairies to meet their working capital needs.

The bank is following a hub and spoke model to cover this space. It has identified some of its rural branches as hub branches and is attaching three spoke branches to them at a radius of 30-40km to offer its rural retail products. Typically, each spoke cover 30-40 villages, bringing in about 100 villages in one cluster. Sales staff of the bank visit the customers on motorcycles.

Besides, HDFC Bank has installed point of sales machines at more than 1,000 cooperative banks where its rural customers can walk in to deposit or withdraw cash on a real time basis. It is also offering loans to small grocery and drycleaning shops against collateral of property. According to Aditya Puri, HDFC Bank’s managing director, this is one of the bank’s fast growing businesses. And all these have been done with minimum investment. The bank plans to grow its Rs500 crore microfinance book to Rs2,000 crore in next 24-30 months covering six million families.

Even that may not be enough as close to 100 million households in India do not have access to finance. Prominent microfinance practitioner Vijay Mahajan pegs the annual demand for microfinance at $30 billion, about 10% of the global aggregate microfinance demand of $300 billion.

Tamal Bandyopadhyay keeps a close eye on all things banking from his perch as the Mumbai Bureau Chief of Mint. Please email comments to