In India, Thinking Big by Thinking Small
Friday, September 30, 2005
With every debit card replaced by a thumbprint, every mutual fund peddled at a village store and every insurance policy sold in $2 bits, a new variety of bank is germinating in the bleak, unlikely soil of rural India.
One in nine human beings is an Indian villager, and 70 percent of Indian villagers have no bank account, inhabiting a financial parallel universe in which savings are a gold necklace and loans come from pistol-packing moneylenders.
As global megabanks penetrate India, as in other developing markets like China, these are not their customers. Banks like Citibank and HSBC skim the top and dip into the middle, serving as investment bankers to corporations, lenders to a mushrooming “consumer class” and money managers for a widening sliver of the fabulously rich.
In India, that leaves 700 million people for the taking. Now, a handful of domestic banks, led by ICICI Bank, India’s second-largest after State Bank of India, are tapping rural India with innovative new business models and technologies. And their moves suggest that while the cream hovers on top, more riches may lurk below – for those willing to alter their offerings for a radically new client.
Getting the poor to bank, and bank profitably, could push rural finance past a tipping point: from philanthropy with a hint of business logic to real commerce with a hint of compassion.
“You ought to have a commercial justification for doing a business,” K.V. Kamath, ICICI’s chief executive, said in an interview. “You ought to then be able to scale it up.”
Those, he said, are the “prerequisites to success” for transforming rural banking from “small, isolated examples of do-good” to something lucrative enough to take root and spread.
And should the model being field-tested in India prove possible to replicate, the techniques behind it could help empower the more than half of humanity living on a few dollars a day or less.
“As and whenan Indian company cracks this and solves the problem, it can bottle the solution and sell it to the world, because there will be a lot of places where it is applicable,” said Nicholas Winsor, head of personal financial services for India at HSBC Bank in Mumbai. “I’m sure there are going to be solutions that come out of this that are world-beating.”
But HSBC, like other foreign banks in India, is instead focused, he said, on the emerging “consuming class,” which itself encompasses 50 million households.
“At some point, you build up a business of such scale and critical mass that you can move cost effectively into other markets,” Winsor said. “But it’s a big step to move from Mumbai Fort” – an elite neighborhood in the financial capital – “into a village in rural India. A standard business model would struggle to do that and be profitable.”
The case of ICICI Bank reveals how local banks are picking up where multinational banks leave off. Initially, ICICI did rural banking because it had to. Under government rules, it was mandated to set aside a hefty proportion of its overall lending to so-called “priority sectors” in rural India.
But a few years ago, it began exploring whether this obligation could be turned into a profit-making center. Facing fierce competition in the cities and wielding “patient capital” – deposits seeking the highest, not necessarily the quickest, returns – ICICI decided to make serving the rural poor its long-range growth strategy.
To symbolize its dedication, ICICI recently made its rural banking a stand-alone division, removing it from its earlier home in the Social Initiatives Group.
The division, which oversees microfinance, agricultural business and rural lending, generated 1.4 billion rupees, or $32 million, in net-interest income last year, according to managers, about 5 percent of the bank’s total.
The division expects to end the next financial year with 130 billion rupees in assets, about 8 percent of the bank’s total assets in 2005 of 1.7 trillion rupees.
But it believes that there is still more out there: 3 trillion rupees’ worth of demand for credit from rural areas alone.
To access that market, the bank has to change attitudes of potential customers as well as revamp its own practices.
Indians have traditionally shied away from banks and paper investments in favor of more solid assets like gold. India is the world’s largest gold jewelry market by volume, accounting for around 520 tons in 2004, according to the World Gold Council.
Part of that demand is attributable to the high inflation and rupee devaluations that plagued India during decades of economic mismanagement.
Lack of access to banking services outside of the cities, though, also plays a role.
Banks have not ventured out to serve rural customers because they are expensive to reach and, once reached, are often too poor to afford bank products.
Second, rural customers, largely farmers, have often been too vulnerable to the whims of weather and misfortune to repay loans with reliability.
ICICI has tried to meet those challenges by deploying new technology and by redesigning how a bank should operate.
To serve clients too remote to have access to reliable phone service, the bank is deploying chip-embedded cards that can verify a depositor’s identity offline by storing the person’s thumbprint.
To serve clients living hand to mouth on a daily wage, the bank is shrinking products like insurance and mutual funds.
Nachiket Mor, who heads rural banking at ICICI, said it was trying to reconceive banking products as any other consumer item.
For example, shampoo sales only took off in rural India when companies realized that the poor would buy it if it was brought to their nearby village store, packaged in small, affordable sachets one could buy day by day, rather than shelling out for a whole bottle.
So ICICI now sells personal-accident insurance at its rural branches for $2 a year, with a payout of about $2,200 in case of death and half that in case of debilitating injury.
It is in the testing stages of a mutual fund that managers say will cost just $2 to join; Mor has told colleagues that he would like to offer day laborers and landless farmers the ability to pay that small sum up front – and then add to their investment in increments as small as 2 cents or, at most, 20 cents.
Cheap, customized, made-in-India software reduces back-office costs to levels that can justify such tiny transactions. Now, to cut costs even lower, the bank is betting on the evaporation of the branch itself.
The rural kiosk is a revolutionary new face of banking. Whether a makeshift stall, a room in a village bungalow, or a multipurpose store also offering movies and online medical advice, the kiosks are owned by entrepreneurs. ICICI trains them, connects them to the Internet and uses them as conduits to sell banking products, or simply to inform locals about them.
By leaving kiosk ownership to others, who can sell other products and services, ICICI avoids heavy overhead.
ICICI’s rural strategy has already won over some investors.
“At the beginning of the year, we recommended that if people had to invest their marginal dollar in Asia, we considered the most attractive market to be India, and ICICI was our top stock pick for the year,” said Alistair Scarff, the head of research for Asian banks at Merrill Lynch in Hong Kong. “In trying to bring rural channels and IT together in a rural environment, they are amongst the clear leaders.”
C. K. Prahalad, a business scholar at the University of Michigan, recently wrote a book, “The Fortune at the Bottom of the Pyramid,” that also praises ICICI as “a pioneer” for developing “radical technologies” and “creative approaches” to serve the world’s poorest consumers.
Once they have served this new segment of customers, though, banks face another challenge: The fate-battered lives that rural customers lead make loan repayment difficult.
ICICI is experimenting with a new role as money doctor, attacking the causes of rural poverty rather than merely mitigating the symptoms through risk management.
Mor added: “We can’t simply go there and say, ’I’m a financier; I don’t know anything else.’ If you don’t know anything else, the customer is going to give you the residual of whatever happened to his life. If he’s not able to sell his sugar cane, if he’s not able to sell his grain, if he’s not able to get good value for his milk, he suffers and – you know what? – you suffer.”
The solution was to reverse-engineer from farmers’ problems by offering them a basket of products to cushion them from misfortune.
To protect farmers against the bad monsoons that spoil their crops and make them default on loans, ICICI is now selling farmers rainfall insurance that delivers when the clouds do not. The premiums vary from 2.5 percent of the payout for 30 days of coverage, to 8 percent to 12 percent for coverage lasting three or four months.
To check the snowballing effect of borrowing from one usurious moneylender to repay another, ICICI now offers small farmers bridge loans, which allow them to sell last season’s harvest when prices are best, without missing out on buying next season’s seeds. The bank says it charges an interest rate of 9 percent to 11 percent a year, compared with 2 percent a month from moneylenders, who often take an additional cut once the asset is sold.
In some areas, the bank even steps in to substitute for the government, providing electronic facsimiles of land deeds and other government documents that remain difficult for individuals to acquire and often require farmers’ missing one or more days of tilling work to board a bus to a big city and wait in line. The service costs up to 15 rupees, or about 33 cents, for a printout, about one-seventh of the typical bus fare.
At the ICICI village kiosk here in Alandi, a five-hour drive inland from the financial capital, Mumbai, the bank’s arrival has produced a flurry of interest. Having read the advertising billboards, local laborers without bank accounts have come to request credit cards, something that remains well beyond their reach. But on this particular Saturday, a schoolteacher on a monthly salary of 13,500 rupees came in to ask for a home loan.
“It gives me peace and satisfaction that I will be living in my own home, that I will be in a proper state,” said Shirish Shelke, 36. “My social status, image and standard of living will grow,” he added, lifting his hands in a gesture that mimicked his coming ascent.
Arun Kumar Singh, 29, who works at a factory, recently bought the $2 personal-accident coverage, a step that was not taken lightly.
“I have taken the consensus of everyone in my family before buying it and everyone likes it,” he said.
Singh is a first-time insurance buyer, and his wish list is growing: a checking account, a savings account and an ATM card linked to his insurance package.