Manuel Bueno

Financial Access for the BoP: Expanding Inclusion in India

accessWhich banking models could be used to enable access to the BoP? A recent BCG publication, entitled “A Roadmap for Expanding Financial Inclusion in India,” tries to answer just that question for the Indian market.

India has the second highest number of financially excluded households in the world with 135 million (China is first with a whooping 263 million). Rural households represent a big share of those financially excluded. BCG estimates that between 2007 and 2010, 17 million households will enter the financial markets thanks to income growth and 30 million more thanks to innovative banking business models. BCG further estimates that these 30 million people will represent Rs 10,000 crore (about $2.5 billion) for banks and Rs 20,000 crore ($5 billion) for insurance companies, or $83 and $166 per household.Business models will therefore need to be redesigned taking into account BoP market characteristics. BCG advocates deconstructing the value chain in order to determine which activities to outsource and which to keep in house to become leaner and reduce costs.

They argue that the value chain should be deconstructed into six fundamental pieces that can highlight ways to serve this market: product development, customer acquisition, risk management, funding, administration and collection (although they just elaborate on the first two): In terms of product development, household needs can be divided into transactions, borrowing, saving and insurance. Although BoP demand is not homogeneous, there are several common characteristics for the products they are looking for, such as:

* Flexibility (because they tend to lack steady income)
* Simplicity and speed
* Small product sizes

BoP customers, as in other BoP markets will not settle for cheap, stripped-down versions of mainstreams products. New products have to be designed for them, taking into account the above mentioned characteristics.

With regards to increasing the customer base, most banks will need to find new distribution channels. Most branches often lose money on small products with high transaction costs, so in general most rural branches operate at a loss. To improve profitability branches could start offering additional non-financial services.

Alternatively, branchless banking which includes distribution networks selling the products door to door or empowerment groups and cooperatives should be considered. Inter-industry partnerships could add to the capillarity of the provider without increasing costs by offering point-of-sale (POS) locations in post offices, supermarkets or lottery shops.

Additionally BCG’s study devotes a couple of pages to the Mobile Phone Banking prospects in India, a market that will certainly grow in a matter of time (for some more insight about the future of the Mobile Phone Banking market in India, refer to CGAP’s Notes on Branchless Banking in India) and to the government’s role in this arena.

There were two things I missed in this study. Firstly, I wish they had given more detail of the survey they conducted in India. There is no information at all about when, how, where and the social composition of the sample. Considering the heterogeneity of the country, talking about “Indians” is akin to talking about “Europeans”. Secondly, I am surprised the study fixates on enabling access to households, but not to SMEs.

In all, this doesn?t detract from the general quality of the study which is good and very easy to read (especially if you tried to tackle the World Bank report first!).