India: A Fresh Approach to Financial Inclusion

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Oct 2014
India, October, 08 2014 - Financial inclusion has been an important developmental agenda for India. Though financial inclusion is ‘necessary’, it is definitely not a ‘sufficient’ condition for economic growth. It’s like what water does to stimulate germination; but for healthy growth of a seedling, fertile soil, air and sunlight are also important. Lack of even one of these factors will lead to stunted growth.

Financial inclusion is not just about access to financial products — both savings and borrowings. It also about safe, easy and low-cost access to a cash-flow management system, and that includes a payment system that allows you to move money around safely and at a low cost.

Financial inclusion has been an important developmental agenda for India. Though financial inclusion is ‘necessary’, it is definitely not a ‘sufficient’ condition for economic growth. It’s like what water does to stimulate germination; but for healthy growth of a seedling, fertile soil, air and sunlight are also important. Lack of even one of these factors will lead to stunted growth.

A watershed period

The current decade is the watershed period for financial inclusion in India as it marks a paradigm shift in the approaches of banks and financial institutions, thanks to the regulatory push and the demand pull. Currently, India’s banking network comprises of 1.15 lakh branches and an ATM network of 1.6 lakh.

Of these, 44,000 branches (38.2 per cent) and 23,000 ATMs (14.58 per cent) are in rural areas and the remaining in semi-urban and metropolitan areas. The number of banking outlets in villages, which was 67,694 during 2009-10, crossed 3.8 lakh in March 2014. Nearly 12,748 rural branches were opened during 2010-14, against a reduction of about 1,300 rural branches in the last two decades.

Despite the formidable physical outreach and rural footprint of banks, 44 per cent Indians lack access to a savings account.

Obviously, there have been some major challenges in achieving financial inclusion in rural areas in this large country. Underdeveloped infrastructure makes it hard for banks to operate in many rural areas. The opportunity cost for a rural customer braving a long trek to the branch over bad roads remains a major deterrent to operating a bank account.

Illiteracy and language differences act as barriers, as does banks’ failure to offer products relevant to rural customers. For banks, a host of problems, such as small transaction size and higher credit risks make it even more difficult to serve the rural market.

Despite such challenges, rural banking is far ahead of where it was in the first decade of this century. The RBI has encouraged expansion in rural areas through its Financial Inclusion Plan and by granting urban branch licenses on the basis of the number of rural branches opened.

Specific solutions

The success of financial inclusion depends largely on developing products/solutions that directly address those specific needs.

The financially excluded consumers have certain unique characteristics such as low financial literacy, low and cyclical income, minimal collateral, lack of credit history, absence of formal and verifiable identity, illiteracy. These need to be taken care of while designing products and services for them.

Hence, the products and services to be offered should not be stripped-down versions of products and services originally created for the more affluent consumer segments and should instead holistically address the expectations of the financially excluded consumers.

Also, given the heterogeneity of the financially excluded segment, there cannot be a single approach or model which can be prescribed globally. Instead, models/solutions which are contextual to the local consumer requirements are required.

Each stakeholder of the financial inclusion ecosystem including financial institutions, regulatory agencies, technology service providers, NGOs etc will need to play their part and collaborate with each other.

The service providers in the financial inclusion space must acknowledge the fact that only a commercially viable and scalable business model can provide sustainable solutions.

For long term sustainability and effective scaling up of financial inclusion services, the underlying business model should offer a ‘win-win-win’ proposition to the customer, intermediaries (business correspondent/business correspondent agent) and the bank. In meeting the needs of financially excluded, the conventional banking approach faces challenges such as huge infrastructure set-up cost, high operating cost and lack of risk mitigation measures.

As evident, even mere ‘stripping down’ of conventional products doesn’t work as banking needs of target segment are distinctively different. The problem is compounded by lack of appropriate and enabling technology solutions for reaching out to the target segment.

Given this, there is a greater need for following a different approach -- a need for frugal innovation. Indians are natural leaders in frugal innovations given that for generations we have internalised the jugaad system of developing make-shift but workable solutions using limited resources, while targeting the financially excluded.

Trust and scale

Research across the globe proves that for a digital inclusion initiative to be successful, there are two major critical factors; building trust and breaking the sub-scale trap. The latter has again two subcomponents — increasing network participants and increasing network ‘touch-points’.

Thankfully in India, the trust of common public in banking institutions is so high that there is a very good ‘aspiration value’ to holding a mainstream savings bank account, which is evident from the long queue for account opening even in rural areas.

Financial inclusion is more than a policy imperative; it represents huge opportunity for banks. Although it can conceptually cover an arena of services like access to formal banking, credit, insurance, repatriation and financial advisory, perceptionally it has been limited to bank account opening. Various schemes such as Swabhiman, financial literacy drive, no-frills account, priority-sector lending, and Kisan Credit Card have been initiated by the Governmentand the RBI.

The Pradhan Mantri Jan Dhan Yojana (PMJDY) was launched on August 28 , and India now has over four crore new bank accounts, which is almost 80 per cent of the five crore target of the Swabhiman scheme.

Going by this speed, the target of 7.5 crore accounts by January 26, 2015, seems highly plausible. Also, by granting access to the 1.6-lakh strong ATMs and over 60,000 points of sale as against a single business correspondent agent touch point in the earlier Swabhiman scheme, PMJDY has addressed the issue of network touch-points to a large extent. But most of these are in urban and semi-urban areas, physically and psychologically away for the ‘new to banking’ customers.

Making the financially excluded persons financially capable and providing them with customised feasible products would be the road ahead for financial inclusion.

Further, leveraging technology and enabling the poorly informed unsophisticated investors understand and become savvy and take sensible decisions will take some time, but is not a task unachievable.



 

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