Targeting the unbanked in India will be lucrative

Targeting the unbanked in India will be lucrative

Last week, ABN Amro Bank announced its microfinance division has succeeded in providing basic financial support to some 500,000 underprivileged households in India. The Dutch bank’s microfinance portfolio is now Rs200 crore and, according to Romesh Sobti, ABN Amro’s country executive in India, it will double the coverage to a million households by 2009. It’s a profitable business that achieved break-even in the first year itself.

Bank of Baroda, too, made its intention clear last week by adopting Dungarpur district in Rajasthan. The public sector bank aims at increasing farmers’ income in one of the most backward districts in India by encouraging them to grow high-value crops and develop dairy products. Dungarpur, consisting of 800 villages, has a population of more than 1.1 million—predominantly tribals. The bank plans to set up more than 400 farmers’ clubs for expert advice on agricultural and financial issues and form 300 new self-help groups, organize health camps and train more than 4,000 rural youth for employment generation.

With consumers in urban India over-leveraging themselves and business opportunities getting saturated, commercial banks are going back to rural pockets for financial inclusion. Last year, the Chennai-based Indian Bank adopted Puducherry for extending banking services. State Bank of India Ltd, the country’s largest commercial bank, is now drawing up plans to reach out to 100,000 villages.

Banks in India want to deliver banking services to low-income groups at an affordable cost and make money out of this. There is indeed enormous scope as only 59% of adult population in India has bank accounts. If one takes a look at the number of bank accounts vis-à-vis the entire population, the percentage comes down sharply to 31%. This is also not an entirely correct estimate as a large chunk of population in urban India has more than one bank account. So, the actual coverage is much less. In rural areas the coverage among adult population is 39% against 60% in urban India. How does this compare with a developed country? A recent survey commissioned by the British Bankers’ Association says 92-94% of the population in the UK has either current or savings accounts.

The world’s second fastest growing economy presents a very uneven picture when it comes to banking. The unbanked population is the highest in the North-East. For instance, in Manipur, only 17 of every 100 adults have a bank account. In Nagaland, the number is 21. Meghalaya has the maximum number of bank accounts there—44 per 100 adults. Eastern India is no better off with just 33 out of every 100 adults in Bihar holding bank accounts and, 34 in Orissa.

Some states in north and west India have on the other hand, problem of plenty. For instance, every 100 adults in Chandigarh have 221 bank accounts. The comparative figure for Goa is 187, New Delhi 166 and Punjab 105.

These figures, however, talk about deposit accounts kept with banks. When it comes to accessing bank loans, the scene is worse. The credit market is very small with the number of loan accounts constituting only 14% of adult population in India. In rural areas, the coverage is 9.5%. Regional differences are glaring with the credit coverage at 25% for the southern region and as low as 7%, 8% and 9%, respectively, in north-eastern, eastern and central India.

Out of 203 million Indian households, three-fourths, or 147 million, are in rural areas and 89 million are farmer households. In this segment, 51.4% have no access to formal or informal sources of credit, while 73% have no access to formal sources of credit. Similar data is not available for non-farm and urban households.

The share of non-institutional sources for finance reduced from 70.8% in 1971 to 42.9% in 2002, but strangely, after 1991 when India opened up its economy, the non-institutional sources’ share has increased. The share of moneylenders in the debt of rural households increased from 17.5% in 1991 to 29.6% in 2002. This has happened despite the growing reach of bank branches. There were 8,321 branches of commercial banks and regional rural banks in 1969. Now, there are close to 69,000 branches. With this, the size of average population covered by each bank has been cut drastically—from 64,000 per bank branch to 16,000.

While banks tend to avoid small-ticket deposit and loans for fear of rising transaction cost, availability makes informal credit sources popular despite their higher cost. The first serious attempt to spread the message of banking was seen last year when banks were allowed to utilize the services of non-governmental organizations and microfinance institutions as intermediaries in offering banking services through the use of business correspondent model. This essentially allows branchless banking. Meanwhile, between March 2006 and 2007, banks opened six million no-frill accounts with low or zero minimum balances.

The Financial Inclusion Task Force in the UK has been focusing on access to banking for all—affordable credit as well as free face-to-face financial advice. Apart from creating a post office card account for those who are unable or unwilling to access a basic bank account, the UK has also introduced community finance learning initiatives to promote basic financial literacy. In the US, the Community Reinvestment Act, a civil rights law, does not allow banks any discrimination against low-income group clients. The challenges in India are very different. Are the banks up to it? More on that next Monday.

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