ABOUT: Despite the best efforts by policy makers and state-owned banks, the last mile problem has been an insurmountable hurdle in the way of financial inclusion for the poor. Many solutions have been tried but most have reported partial success. Bindu Ananth, Chair - IFMR Trust & IFMR Holdings, is possibly the best person to write on this given the number of years she has spent in studying the problems at the ground level and figuring out solutions that work. In this column, she busts some common fallacies about financial inclusion.
My colleagues Deepti George and Anand Sahasranaman looked at the cost structure of rural bank branches. They found that for every loan of Rs 10,000 through a public sector bank rural branch, the cost is Rs 4,150 (41.5 per cent). For a private sector bank rural branch, it is about Rs 3,210 (32.1 per cent). Going across to mutual funds, I learnt from a talk by Mr. Nandan Nilekani recently that the cost of on-boarding a customer is Rs 1,500. Now, imagine a customer whose investible surplus is Rs 10,000 a year. All this represents extremely expensive plumbing that tilts the scale in favour of wealthier customers who have larger account balances and investible surpluses.
There is very good news on both these fronts. There have been fundamental breakthroughs on the customer acquisition front. Aadhaar, through its almost universal biometric database, will do away with the need for bankers and mutual funds to do expensive and time-consuming documentation of the customer's proof of identity and proof of address. All the regulators have confirmed that Aadhaar = KYC. Through the shared e-KYC database and the Reserve Bank of India's (RBI's) planned central KYC repository, what used to be a private endeavour of each financial service provider will now become a shared, public utility. This is path-breaking.
In a parallel and equally important development, the RBI has granted in-principle licences to 11 payment banks. If this pans out as expected, in one year or so, India could go from having 125,000 bank branches to over five million lakh access points where customers can transact - at the very least open accounts and deposit & cash, including their welfare payments from the government. With reference to the cost discussion earlier, several payment bank licensees are telecom companies and their cost structures are fundamentally different from those of traditional banks; this will be a crucial enabler of proliferation. Across the board, technology is enabling lower variable transaction costs, which is essential if the financial system is to serve a billion people.
While the last mile for payments can be taken care of by a general purpose merchant along with some technological add-ons, the last mile for credit, insurance and investments will need to have, in addition, a skilled cadre of individuals who can advise the customer on the nature of the product to be bought, given her needs. This is a fundamental difference between payments and other financial services, where a "high-touch" last mile is required to ensure suitability of these products/services for the customer. It is hard to conceive of a farmer walking up to a mobile top-up merchant and discussing the merits of a weekly versus a bullet amortising schedule for her loan payments! The promising development here is the emergence of a number of specialised, regional non-bank finance entities as well as the new small finance banks that started their journey as microfinance institutions, with some of them having non-profit roots. I am involved with a business model called Kshetriya Gramin Financial Services (KGFS), where we deploy locally-hired, highly-trained individuals as "wealth managers" in remote rural markets who are enabled to offer a wide variety of financial products but within a tightly-defined framework of what is suitable for the customer. These new players will have to bring to the table an ability to understand the customer, manage large field forces, and an unstinting commitment to customer protection. While these institutions will also have to grapple with human resource challenges as they scale up, the fact that they are focussed on specific customer segments will help build a consistent identity and customer service philosophy. Another emerging trend that is pertinent here is the separation between manufacturing and distribution. Earlier, the bank or the insurance company was expected to both own the product as well as the distribution through captive channels such as bank branches. Increasingly, newer players will emerge which want to focus exclusively on distribution and customer service. Then there will be others who will specialise in product offering and balance sheet management. This will create room for innovation.