Banks Yet to Reach Bottom of Wealth Pyramid
Tuesday, May 6, 2008
By Preeti R Iyer & Aniruddha Ghosh
For all the noise that it has generated, usage of technology to achieve financial inclusion is still far from what is being desired.
Lenders such as Citi and GE Money have withdrawn from advancing small-ticket personal loans. Other banks are also going slow on such products, given the absence of contract enforcement and difficulty in following know-your-customer procedures.
Further, senior industry officials feel that much of the focus towards rural banking and financial inclusion has been generated by repeated statements made by the Union finance minister P Chidambaram and RBI governor YV Reddy.
In short, financial inclusion is seen in the same manner as priority sector lending – an obligation rather than an untapped opportunity. For banks, the bottom of the pyramid is clearly not an attraction. It continues to be unchartered territory involving experimentation and huge operational costs. Compare this with the telecom companies which are making money selling airtime to labourers in recharge packages for as low as Rs 10.
According to the Boston Consulting Group, there are 204 million households in India, of which 18 million top-tier households are well-served by banks. There are also 90 million households, which represent the next billion customers for banks. However, business opportunities in this space are yet to be tapped effectively. Beyond this, there are another 95 million households which are completely outside the radar of financial institutions at the moment.
Said BCG senior partner and managing director Janmejaya Sinha: “Financial inclusion is more spoken about, than actually practised. Lending a strong push to infrastructure and speeding financial literacy will certainly help, but, banks need to recognise that there is immense opportunity in this sector.” He added further that banks need to be experimental in order to explore unknown areas. This, in turn, would call for an all-round collaboration between banks and industries such as retail, pharmaceutical companies, telecom operators etc.
The issue to be examined is whether banks have fully leveraged the technology available. To begin with, banks need to acknowledge the fact that each vertical offered to rural customers will call for a different technological medium. Smart cards, or biometric cards are similar to debit cards, but they use fingerprinting for identification instead of personal identification codes. This technology is actually safer than what is currently being used for debit and ATM cards, according to Financial Information Network & Operations’ (FINO’s) chief executive officer Manish Khera.
However, merchant establishments, willing to accept cards, are hard to come by in rural and semi-urban areas, as compared to the large metros and cities. Thus, both acceptance and awareness of cards pose an issue. Even as debit and smart cards would be of help, senior officials feel that using mobile phones as a vehicle for financial inclusion in rural areas would serve a better purpose. Cellular phone companies have already surmounted the distribution challenge of selling to the poor in rural areas. Said Vodafone Essar director, marketing and new business Harit Nagpal, “In rural India, most people buy items of daily consumption on a daily basis and hence such products have always been available in small pack sizes.”
As far as covering costs is concerned, Mr Nagpal said that a customer recharges his phone for Rs 10 at multiple occasions through the month, thus spending equal to customers who recharge with a higher value once a month.
mChek is a mobile payments solution provider that has piloted a mobile-remittance solution with ICICI Bank, SBI and Airtel.
According to mChek’s CEO Sanjay Swamy, “Sooner or later, we will definitely see the mobile phone as an enabler for financial inclusion. It’s still early days, but the heavy penetration of mobile phones in rural India presents an opportunity that can not be ignored.” He added that a smart card is nothing more than a SIM card, and all the information stored on it can be replicated on a SIM card as well. Further the connectivity enables real time processing as well as functions like remittances.
A business correspondent or a business facilitator is generally appointed for a district by the bank, and is either part of the bank or the microfinance institution it has partnered with. Under the BC model, the correspondent is given a hand-held device, enabled to read smart cards with a screen to display information – including an ?e-passbook’ of all the transactions on that particular card. So in case the holder wants to withdraw Rs 200, the correspondent enters it on the card and gives him the money that he is carrying on behalf of the bank.
The Reserve Bank of India (RBI) recently launched the “bank-in-a-box” model in Andhra Pradesh, in collaboration with Union Bank of India and Corporation Bank. This project involves a local business correspondent, who opens and maintains accounts for the rural population. The experience here has been that the number of deposit accounts have outnumbered the loan accounts, thus making it easier for banks who may not have to worry much about replenishing funds with the correspondent.