Speaking at Mint’s financial inclusion conclave on 17 June, Thorat gave an account of the development of financial inclusion through the last four decades in the country and explained why they hadn’t delivered satisfactory results. The keynote speaker talked about the challenges facing the formal financial sector in its efforts to open a bank account for everyone and for holders to transact using these accounts while also availing services such as savings, credit and insurance.
In her speech, the former RBI deputy governor pointed out that another important aspect of furthering financial inclusion would be to bring in more competition in the space. “The attention of the huge banks is not focused because there is so much else they have to do," Thorat said. RBI’s effort to bring in small finance banks and payments banks also focuses on competition in this space.
Thorat also touched upon the phenomenal growth of e-commerce and how the banking industry had failed to take advantage of the large payments network and infrastructure flowing from it. A huge challenge for the formal financial sector while improving financial inclusion is the unorganized sector, given the fact that customers coming from this sector do not necessarily have the documents needed by banks for risk management and credit appraisal, she said.
Following Thorat’s keynote address, a panel discussion took place among seven prominent financial services experts, who spoke about the architecture of financial inclusion in India.
The panel comprised B. Sriram, managing director and group executive-national banking at State Bank of India; H.R. Dave, deputy managing director, National Bank for Agriculture and Rural Development (Nabard); Bindu Ananth, chair, IFMR Trust; Jerry Ross, chairman, GlobeOne; Rajesh Makkar, executive vice-president, Fullerton India; Rajeev Arora, chief technology officer, Fino PayTech and Rajeev Ahuja, head of strategy, retail business, financial inclusion and transaction banking at RBL Bank. Edited excerpts from the discussion:
What have you learned from the Jan Dhan experience? What are your people on the ground telling you about the nature of accounts opened under the scheme?
Shriram: Financial inclusion in India has found its own niche as it has found its way into the Jan Dhan scheme. The major difference between the financial inclusion we have had over the past 30-40 years and what we have today is that of speed. There are a lot of people waiting to get on to financial inclusion, there is a lot of demand-supply happening there and that is where the speed aspect comes in. We had gone through this phase of branch expansion, trying to get business correspondents on board, trying to get the business models functioning slowly but surely. But today, when I talk about the Jan Dhan scheme, every day we are opening about 70,000-75,000 accounts in our bank alone—so across the industry, that would be some 3.5-4 lakh accounts each day. Two other important statistics that came our way was that of the 3.5 crore accounts that we opened; and almost 75% people had mobile numbers and those numbers were captured in our system. So there is a database available with us to leverage any future business that we can think of.
The second important point is that about 55% of the accounts opened belonged to women depositors. The big question for me today is how to make it a business plan. While the speed is fair, financial inclusion is a waiting game you have to play over the next 5-10 years. You are not in the financial inclusion game for quarter-on-quarter returns. So the person with more data and resilience to absorb some cost is the person who will win in the end.
Arora: Under the Jan Dhan scheme, I would take this opportunity to compliment the public sector banks for having done a wonderful job. When I go to the hinterlands and ask customers if they have a bank account, they say they do. They also have a RuPay card. What is missing is the access and I am sure that will come sooner rather than later. I think the Jan Dhan scheme is taking a holistic approach to people’s banking needs, which is not just limited to opening of accounts, but provisioning of all services—be it savings, insurance, credit or any other service. One of the things that has come across is that this has to be a solid business proposition. The government today is being looked at as a major facilitator for financial inclusion, they direct and then banks implement. What if we look at the government as a big customer for financial inclusion? The government today sends about ₹ 3 lakh crore (trillion) worth of subsidies to customers who are considered as bottom of the pyramid. Any efficiency gain—I am estimating some 30% would be about ₹ 1 lakh crore—just the interest savings on that would be enough to pay for 200,000 merchant points year-on-year. So if the government starts paying for the services that they utilize then this becomes a commercial activity. This would create infrastructure that does not exist, on which other services can grow.
Most accounts that have been opened under the Jan Dhan scheme are by public sector banks. Private sector banks have not been as aggressive as them. Is it because private sector banks do not see it as a business proposition yet?
Ahuja: When we started our journey around 2009-10, we started with a very clear idea that the financial inclusion drive has to be a long-term commercially defensible business. Over time it has to start making sense, otherwise there will be no joy in creating businesses. Our fundamental belief at the beginning of our journey was that the world of finance is actually supply led.
I think this will become a very fast-moving consumer segment and in a lot of ways good supply of credit would lead to more and more demand creation down the road. So that is our philosophy and we have actually set this up as a separate group from the day one. With its own technology, process, people infrastructure, and a lot of partnership mindset.
Opening bank accounts is limited by its network. Look at the other networks that we are not using. The urban co-operative banks, the rural regional banks and the rural co-operative banks—the network of these banks are just lying there. Is it that those networks are so outdated that they are just defunct and cannot be used?
Dave: When we look at co-operatives, we always think that they are the traditional manually-operated branches. But today, rural co-operatives are all on core banking system (CBS). In fact, Nabard brought to India for the first time a cloud-based technology for co-operatives. Therefore, most banking networks of co-operatives are now on CBS platform and are ready for a larger role in financial inclusion. That’s the first point.
Second point is that traditionally co-operatives were the first ones who provided financial inclusion. This was followed by a second wave of financial inclusion, led again by the co-operatives, which was bringing self-help groups (SHGs) under the gambit of the baking system. Now when we look at the regulatory aspect of allowing or disallowing the co-operatives to play a larger role in financial inclusion, it is more to do with the ticket size of individual transactions which needs to be kept in view. Otherwise, if we compare with the broader parameters of commercial banks, co-operatives might not fit into it.
When your organization started the linkage of various groups with banks, was the focus there? What has changed from then till now? Is it that the credit culture is now expected to grow quickly?
Dave: To say that rural customers are not disciplined customers is wrong. The kind of investment the country has made to bring that credit culture, it is already very big. Today, half of rural India is linked to bank accounts through SHG programmes. Therefore, the culture and value system of being a valued customer of the bank is already ingrained. There is no need to have an extra focus since the discipline is already there.
As an important anecdote: we brought in business correspondents (BC), but now people say BCs are not viable. We need to look at what the options are for that. Seasoned SHGs, when they were appointed as BCs, brought in phenomenal volume of business, since they were not outside the system. They were a part of the entire structure and the relationship with the bank was already there. So we already have a huge disciplined set of rural customers.
Could you compare what is happening in India to other geographies? A lot has been written about the sub-Saharan African experience and mobile payments and bank accounts have revolutionized financial inclusion there.
Ross: Mobile banking is just a piece of it. The power of the smartphone and what it is doing is an important foundation but it’s not enough to solve the issue. The bottom line is that alternative financial services have been servicing the bottom of the pyramid because banks have not been able to make money out of it. And unless banks do not fully engage and involve themselves completely at that level, the solution really cannot happen.
It takes more than a digital platform: it takes an entirely new model and creation of a new enterprise network which connects banks with other players in a more efficient fashion.
The focus has been on banks as an instrument for financial inclusion, but then other vehicles of inclusion such as microfinance are also functioning to improve inclusion.
Ananth: I think one of the issues with financial inclusion has always been the lack of diversity in the way it is carried out. For a long time, we bet on the house thinking that a handful of universal banks would get everything done right from opening of accounts to loans to everything. I think one positive trend that has emerged is that there is acknowledgment that we need different actors, different models and cost structures when talking about financial inclusion. For a standard bank to administer a loan of ₹ 20,000-25,000, the cost is upwards of 20%. Even within the banking system you need different types of banks and payments bank is an interesting thought on that front.
We have always thought of banks to fulfil a set of services, but you could have a bank that specialized only on the liabilities side. It is in some sense a reimagination of what a bank is in the digital age. For a number of reasons, this model would not have been feasible about 10-20 years ago. But today, considering the big disruption the digital models have had, it is something that one can think of. I think this model could be a shift in the way we think of financial inclusion because these are players with fundamentally different cost structures than traditional banks. Having said that, I think even non-bank players will continue to have a significant role in improving financial inclusion.
Makkar: We could be opening a lot of bank accounts, but how many of them would be going to a bank branch which is typically about 30-50km away from where these customers are. When we at Fullerton developed our model, we decided to replace the moneylender. What is the moneylender doing? They are reaching out to the customers. So we developed our model in a way that we reached out to customers, forming SHGs, providing a livelihood for the women of the families there, allowing to get loans for their requirements.
The moneylender also gives convenience to customers in repayment schemes. They allow customers to either repay daily, fortnightly or monthly. We designed our model in a way that there were schemes where customers could repay weekly. With the moneylender, another benefit is that the customers do not need to sign many papers. We do follow know your customer (KYC) norms, but we have moved to tablets. To reduce our costs, we have gone digital for most of our paperwork and receipts. Another big challenge in terms of cost is that the entire system works on cash. What we are proposing is that if we can convince these customers to use more electronic payments, that would reduce a lot of costs for the NBFCs and the microfinance companies working in this space.
So Mr Ross, even globally do you think banks need to change the mindset considering the revolution in e-commerce and mobile commerce that is underway?
Ross: It’s about someone thinking of not just service but experience. It should be enjoyable and can be done on the fly. That is the solution. Fortunately, there are very sharp people who are doing it. In the next five years banking will change from what it has in the last 100 years. And banks that do not get the thought process of changing themselves with the customers, they will not survive.
Obviously this is not a profit making segment right now. Do you see it moving in that direction? What will be the future of banking?
Shriram: When we first completed the Jan Dhan scheme, about 94% accounts were zero balance, then through an SMS campaign, we saw that we could get these customers to come back and get some transactions going in their accounts. Today the zero balance level is at about 66% and by the end of the year we expect this number to drop down to 35%. In the last 30 years of pursuing financial inclusion we had managed to get only ₹ 1,700 crore worth of deposits. In one single year this number has more than doubled for us. This is why it is important to have a business plan and business strategy to grow this business. Next step for us is to focus on lending plans. I think the payment history that is captured in these accounts gives us an excellent opportunity to grow our lending business in this segment. In our association with e-commerce websites, we have had the opportunity to reach out to a lot of smaller borrowers for loans. I was surprised to hear that at Snapdeal, every third supplier of products is a small business. If we were to take a typical check of credit history and all that for these people, it would take ages for loan sanctions. But when the e-commerce company tells me about their history of purchases from these suppliers, it helps me take confidence and lend to these vendors, helping them scale up their business. This is the lending of the future that we are discussing.
Ahuja: I think the approach is that as a bank we will not be able to acquire clients on our own. Clients are used to going to certain places to buy either a toothpaste, washing powder, grocery etc. and the idea is to enable and empower each point where a client comes. We have to make all those points a banking point. So when we think financial inclusion, we think what we need to change to bring the client to me.
Fortunately, financial services can be digitized, and today we have assisted-digitization and when the model gets more evolved, customers will do that fulfillment of their needs themselves and come back to us to top it up in a months’ or two months’ time. So it’s a journey. So while several years ago, financial inclusion was bank outward, it is now customer backward and if we get it right, models will evolve over time.
Ananth: I do agree that we cannot get too excited about opening bank accounts. Clearly it is an important starting point. But we have to think much ahead of that. It is highly possible that in the future the provider of loans may not be the same as the one who opened the account. We will see a lot of these differentiations happening. The question is, how do you enable that? Internationally we are seeing companies who are dedicatedly managing customer information, over and above the credit bureaus. This is what we should be focusing on now.
Makkar: We talk about savings accounts, but we do not talk about the asset side or businesses like insurance. One of the things that we at Fullerton have done is that in rural india where we book about one lakh loan accounts every month, we are giving out insurance to these customers. This insurance is going out at about ₹ 250-300 to each customer, which in normal course of time, no insurance company would do. Another thing we are doing is connecting manufacturers of solar lights or bicycles to reach rural India.
Arora: We talked about disintermediation earlier where the provider of the product is different from the one who opened the account. As a business correspondent we had a first hand experience doing that, be it savings, loans, government benefit transfers or insurance. We realized that the current banking architecture has a structure that demands that these customers come to the banks. However, in the new scheme of things, the banks are going to the customers. This has helped in the portfolio behavior and the deeper engagement of customers. What has happened is that the traditional costs have now gone away and have made place for a leaner architecture to come in its place where a low value customer can avail banking services in the convenience of his home.