Financial Inclusion: Financial Products for Bottom of the Pyramid

ABOUT: Since the economic reforms started in the 1990s, the depth and sophistication of financial products have been improving every year.
By Chandra Shekhar Ghosh   Delhi     Print Edition: January 17, 2016
Financial Products for Bottom of the Pyramid
(Photo: Ajay Thakuri)

Chandra Shekhar Ghosh, Founder, MD & CEO, Bandhan Bank (Photo: Subir Haldar)


ABOUT: Since the economic reforms started in the 1990s, the depth and sophistication of financial products have been improving every year. But much of the focus of these products has been on rich and middle income consumers. It is recognised by everyone that without proper financial products for the have-nots, no real progress on financial inclusion can take place. Chandra Shekhar Ghosh, Founder, MD & CEO, Bandhan Bank, with his deep knowledge of microfinance in India, makes suggestions ....


At the outset, let me be candid about one thing - the term 'financial inclusion' is being used in India in a very narrow sense. The barometer of financial inclusion here is how many deposit accounts a bank is opening. Though bank deposits are critical, financial inclusion is more than that - we need to make available loans, insurance and other financial products as well. Have we been able to do that? No, but we have been trying.

It will be a success and we will be able to make access to formal banking services a fundamental right in India if we, the bankers, approach the subject in a slightly different way. Traditionally, the banking system has been reaching out to the masses in the hinterland due to push by the government and the regulator. We need to see business at the bottom of the pyramid.

"The JAM trinity - Jan Dhan Yojana, Aadhar and mobile banking - will give impetus to the work banks have been doing to achieve 100% fi nancial inclusion.

According to the 2011 Census, 70 per cent of India's population lives in villages. If one looks at the distribution of bank branches in India, published by the Reserve Bank of India (RBI) every quarter, one finds that little more than one-third branches - 37.73 per cent or 48,732 - are in rural areas (September 2015 RBI data). So, there is a wide mismatch. There is a geographical disparity too. Ratings agency Crisil's financial inclusion index (Inclusix) reports a score of 62.2 for the southern region and 28.6 for the eastern region. The RBI data support Crisil's findings. It shows that the eastern region has 16.25 per cent of all reporting offices and credit deposit, or CD, ratio of 44.47. The comparative figures for the southern region are 27.95 per cent and 88.22, respectively.

Urban Exclusion

We must also remember that there is exclusion in urban pockets too, even in Mumbai and Delhi. There are reasons for the reluctance of the banking sector to reach out to the masses, particularly in rural India. The low transaction size and volume make cost an inhibiting factor. Technology can bring down costs but one needs to spend on the right kind of technology as even after putting in place the right platform, it may not always be smooth sailing for banks as connectivity is a major issue in remote rural pockets. Naturally, it takes long to make the business profitable. So, we need deep pockets and enormous patience, besides skills and the right products.

The hindrances are poor internet connectivity, frequent power cuts and unwillingness of employees to service the rural masses. Many branches in rural areas are forced to keep power generators to ensure that they continue to do business even in the absence of electricity. This adds to the cost. Such costs are not incurred in urban and semi-urban areas. The size of transactions, too, is relatively bigger in such areas.

Typically, young, bright bank officers do not want rural postings. Therefore, the quality of staff who ultimately land in rural areas is in many cases inferior to those serving the urban clientele. Even if a few get posted in rural areas or in outskirts of cities, they choose to commute from their home and hardly get time to interact with the local people. Limited opportunities for education of children and poor health care facilities in such pockets add to their woes.

The problems are many and deep-rooted and there is no magic wand to change the scenario overnight. It will take continuous push by the government and the banking regulator to create the right ecosystem for true financial inclusion. And, this is happening. The Prime Minister Jan Dhan Yojana is a great initiative. The banks are responding to the overtures of the government and the regulator. They are not only walking briskly to cover the proverbial last mile but also seeing business opportunity in financial inclusion.

(Photo: A. Prabhakar Rao)
A recent survey by Standard & Poor's Ratings Services found that 76 per cent Indian adults do not adequately understand key financial concepts. It may sound a bit harsh but the reality is that financial literacy in India is nobody's baby. I feel people living in rural India are still apprehensive about using the services of financial institutions. The not-so-friendly attitude of the staff, lengthy paper work and lack of understanding of the processes and products scare them away. They do not mind borrowing from local money lenders even at high interest rates due to less or no paperwork. Probably, we need an institution exclusively to drive the financial literacy mission. The institute can select educated youth from rural areas, train them and place them in rural bank branches.

Customised Products

Banks cannot hawk the same set of products to urban as well as rural customers. Their products have to suit the lifestyle of the rural folk. For instance, the traditional fixed deposits are offered in multiples of months. This can be tweaked. The maturity of deposits can be around festivals or the harvest season or New Year when people like to have money for celebration or travel.

Banks cannot hawk the same products to urban as well as rural customers. Their products have to suit the lifestyle of the rural folk.

In case of recurring deposits, a fixed amount is deposited every month and one usually loses interest income if the deposit is withdrawn before the term. This cannot work for people whose income is dependent upon farm-based work and other small businesses as their cash flow is uneven. A recurring deposit product with flexible instalments and options for withdrawal when one needs the money will help a lot.

People who earn small amounts every day keep aside a part of their daily profit. A daily deposit product will be immensely beneficial for such people.

A lot of hue and cry is being raised about the development of the MSME sector. We don't foresee a small business growing into a large mainstream business house. We are happy if we get our money back, letting the small business continue to be the same. Lack of funding is the first barrier to scaling up, but absence of motivation and hand-holding are also the reasons why small businesses remain small. A dedicated group of staff could be deployed in rural and semi-urban bank branches who can visit local areas and identify businesses that can be scaled up with funding, technical support and motivation. They can provide continuous counselling to the owners throughout the credit cycle.

I have experienced that the repayment record of people whom bank approaches with credit is much better than those who come and ask for credit. We need to remember that the banks cannot lend cheap to this segment, inhibiting credit growth to this segment. Let the rate of lending be decided by market forces and let banks focus on the quality of service.

I have also seen that cheap credit is not the first priority of these entrepreneurs. There are other factors such as timely availability of credit, matching of credit with cash flow, timely support in case of a crisis, hassle-free paper work and friendly attitude of the banker as well.

We take extreme care in serving high net worth individuals. Financial inclusion will get wings the day we start offering the same kind of service to a marginal farmer living in a mud hut. A poor daily wage earner with limited means of income needs such services much more than a millionaire.

We take extreme care in serving high net worth individuals. Financial inclusion will get wings the day we start offering the same kind of service to a marginal farmer living in a mud hut.

Do the banks have the skill and attitude to replicate the urban service practices in the rural settings? Perhaps not. A training centre is needed to sensitise the employees on how to provide the best possible services to poor and middle-class households.

Rural housing is a priority of this government. Having a pucca house is a dream for many in rural settings. By possessing a pucca house, families could do away with the recurring cost of maintaining mud houses. In the new priority sector loan norms, the Reserve Bank of India has included housing loans up to `28 lakh in metropolitan centres and `20 lakh in other areas in this segment. Many of us tend to focus on the higher side of such limits to build our loan book, but if we look for those who want `10-15 lakh or even less than that to build a house in rural India, it will change the landscape of financial inclusion, literally. The future of the banking sector rests in the country's 6,38,000 villages.

The JAM trinity - Jan Dhan Yojana, Aadhar and mobile banking - will give impetus to the work banks have been doing to achieve 100 per cent financial inclusion. A new era in Indian banking is not far from us.

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