Reaching Down And Out

Reams of writing will vouch that the current financial crisis in the US is not only due to complex financial engineering and a poor regulatory framework, but primarily because of the quality of customers the banking system had picked. Does it make sense to dole out cash to identity-less slum dwellers and villagers?

Indian Bank, Union Bank of India and Canara Bank have added their branches to the congested landscape in Asia's largest slum in the last 16 months – all looking to get a slice of Dharavi's Rs 4,400 crore leather business. Besides, of the 134 million financially excluded households in India, 76 per cent are rural and is a large uncontested market.

The multi-layered Indian banking system -- comprising 82 scheduled commercial banks (SCBs), 92 regional rural banks (RRBs), 4 local area banks (LABs), 1,813 urban co-operative banks (UCBs) and 107,497 rural co-operative credit institutions went through an introspective phase in the 1990s, when prudential norms were tightened; banks became risk averse and concentrated on strengthening their balance sheets. Today, that gives them the ability to convert what was largely perceived as social responsibility into a viable growth plan: providing access to finance to all, irrespective of geography, income or education. ADD

Whither Financial Inclusion?
India ranked 50 in the global financial inclusion index release this July by Delhi-based research forum Indian Council for Research on International Economic Relations (ICRIER), even below less developed African countries such as Kenya and Morocco.

Now in the process of developing an India specific index, Mandira Sharma, fellow at ICRIER says, "The two funds for financial inclusion of Rs500 crore (one for development of inclusion mechanisms and the other to meet the costs for technology adoption) set aside by the Union budget should provide the right catalytic effect." So far, notes the RBI's Trends and Progress Report 2007, 28 districts in eight states (AP, Gujarat, Haryana, HP, Karnataka, Kerala, Punjab and West Bengal) and the Union Territory of Puducherry have achieved 100 per cent inclusion.

The banking system had Rs 45,000 crores in deposits with RRBs in 2007, and has outstanding loans Rs.22,227 crore as on 31 March 2008 with the Self Help Group (SHG)-Bank Linkage programme which seeks to bring in low-income households into the financial access net. But that still leaves 60 per cent of the population out of the loop. So the RBI stepped up its efforts in its Annual Policy Statement, 2005-06, where it said "the banks had been bestowed with several privileges, especially of seeking public deposits on a highly leveraged basis, and therefore, should be obliged to provide banking services to all segments of the population on an equitable basis".

Let Us Count the Ways
Under this new guideline banks initiated and are conducting several pilot projects, to test the functionality of new schemes such as no-frills (zero balance) accounts, models like that of business correspondents (BCs), and information communication technologies. "The definition of pilot is nebulous, SBI pegs a 2- million account project as a pilot while Indian Bank targets 1 million accounts and Oriental Bank of Commerce aims for 500,000 accounts," says Manish Khera, CEO of FINO, a multi-bank promoted technology company. "Banks will never forgo so many customers after acquiring them."

The costs banks have to bear while providing such services, though, aren't ignorable. For instance, in the case of Canara Bank, the cost of opening a no-frill account was Rs 48, and each transaction Rs 1012. So, the break even average deposit level required was Rs.1,911 (for 12 transactions a year). The average balance, at Canara Bank was estimated at Rs 528 – less than half of break even.

"Viability will be driven by volume," says Shyamal Acharya, Chief General Manager of Rural Banking at State Bank of India who plan to break even by 31 March 2009 with 40 lakh accounts. "That depends on product development and marketing. The focus has to be on the BCBF model which not only provides the last leg for delivery but is a great marketer." SBI has tied up with business facilitator (BF) ITC's e-chaupal initiative to identify and provide crop loans in rural India.

The Proof of the Pudding..
"The difference between the earlier efforts of financial inclusion, like setting up RRBs, and the current apprioaches is primarily the customisation of products and adoption of technology," says Deepak Thakur of Frost & Sullivan. BCs, such as Seva of Mumbai-based Atom Technologies are set up by technology companies to go into villages, far from bank branches and provide a window for banking services (currently just no-frill savings account and recurring deposit schemes but soon to include insurance). They use handheld devices that connect to the banks servers using a telecom network. The correspondents know the villagers and trust becomes the collateral.

"It didn't make sense to spend a day traveling to a bank and losing a days wage," says 48 year old Vidhyadhar Rao, the owner of half a hectare of farm land 40 kilometers from Pune. Now he accesses his account for social service payments through a device, operated by the BC, that recognizes him by his fingerprint and tells him about his transaction details in Hindi.The BCs provide hardware, software and networking technologies and maintenance, the associated banks a fee depending on volumes. Axis Bank, ICICI, UBI, amongst others have participated in such initiatives all over the country.

HDFC started the first Common Service Centre in Jharkhand where apart from the services of a 'human ATM' people can access a variety of services ranging from public information services, e-governance services, educational services to agri related ones. "The business becomes viable when you stop looking at it as just bank accounts," says Sonjoy Mohanty CEO of A Little World, Mumbai-based BC to over 24 banks."

..is in the Eating
Such participation has led to the creation of nearly 16 million such accounts. But banks admit that just 15 per cent of these accounts are actively used. Many state governments, however, have tried to induce activity by disbursing social security benefits under NREGA electronically. But it's not easy: a survey conducted by Max New York Life and NCAER indicated that as much as 41.7 per cent of the rural population preferred to keep their savings at home.

That situations persists for a variety of reasons. According to the World Bank's Global Development Finance 2008, limited literacy in terms of basic mathematical skills and the feeling that banks are not interested to look into their interests has led to self-exclusion for many of the low income groups. On its part, the RBI's Project Financial Literacy disseminates information through pamphlets and brochures and a 13-language information website targetted at 'backward' groups.

But to really exploit the potential of these markets banks will not only have to promote their products and services through various media but also through local communities. The most effective marketing campaigns -- according to the Boston Consulting Group's 2007 report, The Next Billion Banking Customers – will have to include equal parts of education and sales pitch. To include their next customers, bankers will have to access them, and be accessible.