An assessment of the financial inclusion opportunity in India

1. FINANCIAL SERVICES
Financial inclusion plans
of banks in India
An opportunity for
innovative product development
kpmg.com/in

2. 1
Financial inclusion
plans of banks in India
An opportunity for innovative product development
India’s record on financial inclusion continues to be a
cause for concern
Despite various policy and regulatory initiatives since the Why should this be a critical issue for all of us? The
1950s, the record on financial inclusion in India continues to fundamental reason, as several theorists have concluded, is
come in below the expectations of policy makers and other that lack of access to finance is a critical factor responsible for
stakeholders. According to the Reserve Bank of India (“RBI”), persistent income inequality as well as slower growth. At the
only around 50 percent of the population has a bank account; very least, they concede that there is a two-way relationship
even fewer use bank accounts in any manner that could be between economic development and financial inclusion.
considered inclusive. Only 11 percent of people have any kind Hence, greater financial inclusion is an essential ingredient
of life insurance cover and only 0.6 percent of people have any for wider economic growth. By extension, we get better
kind of non-life insurance cover. business potential for banks, consumer product companies,
telecommunications service providers and several other
Even after 2005-06, when the term ‘financial inclusion’ was
enterprises.
explicitly introduced in the policy lexicon (RBI’s Annual Policy
Statement), progress has been mixed. For instance, in June
this year, the RBI asked all banks (public and private sector)
to go back to their boards and rework their financial inclusion
plans. All banks were required to present three-year financial
inclusion plans as part of the government’s goal to have
banking facilities available by March 31, 2012 in all villages
with a population of more than 2,000. However, when the
plans themselves are found to be wanting, the implications
are disquieting.
© 2010 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms
affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

3. 2
To improve the record on financial inclusion, it is critical to
focus on basic transactions
Before any discussion on how to enhance financial inclusion,
it is important to know exactly what it constitutes. As defined
by Usha Thorat, Deputy Governor RBI, financial inclusion
means “the provision of affordable financial services, viz.
access to payments and remittance facilities, savings, loans
and insurance services by the formal financial system to
those who tend to be excluded. 1 As such, the primary need
”
of the ‘excluded’ is the ability to conduct financial transactions
using the formal banking and financial services system. The
dominant focus, however, tends to be on providing micro
credit. Impediments to conducting basic transactions for
livelihood/living and consequent avoidable risks such as loss/
theft of savings and poor cash management are a root cause
for the financial troubles of the unbanked and the excessive
power of moneylenders. Financial inclusion needs to obviate
this root cause.
1 RBI Report on Currency and Finance, 2006-08, Box VII.2 “Financial Inclusion in India – Key Elements”
© 2010 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms
affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

4. 3
Impediments to conducting basic financial transactions it was found that for 12 transactions in a year, the
continue to be high break-even average deposit level required was INR 1,911 and
for 72 transactions, it was INR 11,465. By contrast, the actual
The needle on bank account penetration has not been moving average balance was estimated at INR 5284. This is probably
significantly. This problem is particularly severe in rural areas, the reason why no frills accounts, as they are designed today,
where the issue is not only lack of awareness (as among may tend to get under-serviced by banks.
the urban unbanked) but also widespread lack of access to
However, this issue of operational costs is not an
banking facilities. The number of accounts per 100 adults in
insurmountable one. It is widely recognized that the key is to
rural India was only just under 40 in 20072.
reduce the level of human/branch intervention. The banking
Even if we assume that up to 20 percent3 of adults have nil correspondent model has been proving to be useful in this
savings and, hence, no use for a bank account, there was still regard and the RBI agrees (it recently allowed banks to
a gap of about 40 accounts per 100 adults in rural India. While appoint for-profit companies like FMCGs and telcos as banking
the push for large numbers of no-frills accounts is helping correspondents). Also, there is that much-talked-about
the cause of such penetration, the actual extent of financial game-changer, i.e. mobile banking. With mobile phone
exclusion is much higher when we consider activity levels. penetration at nearly 660 million today and various
Several accounts are dormant or have very little activity, technologies available to leverage mobile telephony for
especially in rural areas. banking transactions, the only requirement is regulatory
initiative5. Such initiative is gradually being seen. For instance,
in June this year, the Telecom Regulatory Authority of India
Unviable operational costs are no longer the main (TRAI) and the RBI reached an understanding on regulation
challenge of mobile banking6. It was broadly agreed that TRAI will deal
with all interconnection issues while RBI will look into banking
aspects like the maximum amount of transactions per day,
The costs associated with financial inclusion have received
know-your-customer guidelines and the verification criteria.
significant attention as the central issue over the past
several years. Many a time, these costs were assessed The stage is thus set for extending formal financial services
using the framework of branch banking. For instance, the at dramatically lower operational costs. As such, the main
key components of operating a no-frills account (other than cause for slow progress of financial inclusion today is not cost
the interest payable on the account) are generally cited as related but a more fundamental one.
staff costs and overhead costs (and overhead costs may be
estimated as a percentage of staff costs). As the number of
transactions in an account increases, associated costs go up
and the deposit amount required for the bank to recoup its
costs rises. For instance, in the case of Canara Bank,
2 Basic Statistical Returns (BSRs) of Scheduled Commercial Banks
3 Max New York Life, NCAER Study (2008) found that 20 percent of households do not have any savings
4 RBI Report on Currency and Finance, 2006-08 (Section VII)
5 The Indian Telecom Services Performance Indicators Report, April – June, 2010, TRAI
6 Financial Express, ‘TRAI, RBI agree on roles in rollout of m-banking’, June 21, 2010
Savings accounts with scheduled commercial banks
80
Number of accounts per 100 adults
70
60
50
40
30
20
10
0
1981 1991 2001 2006 2007
Rural Urban
Source: Summarized in the RBI Report on Currency and Finance, 2006-08
45%
40%
35% © 2010 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms
affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

5. 4
The main challenge is developing products tailored to the Preference for keeping savings at home
needs of the unbanked and thereby attaining viability
45%
Conventional banking products are not well suited to the 40%
needs of the unbanked. As a result, financial inclusion 35%
initiatives based purely on such products are likely to fail. 30%
The first step, therefore, for a bank/other financial institution 25%
looking to service the unbanked is to understand their unique 20%
needs and not treat them as just another banking customer.
15%
For instance, the rural unbanked prefer to move money in
10%
small amounts quickly and securely with minimal transaction
5%
costs7. Given the vagaries of their occupations (agriculture,
small businesses), they also require a greater level of flexibility 0%
in matters such as loan repayments, investments and Rural Urban
insurance. Source: 2008 Survey by Max New York Life and National Council for Applied
Economic Research (NCAER)
There are several indicators that such unique requirements
are not being recognized. For instance, findings from a survey
in 2008 showed that the preference for keeping savings at
home (and not with institutions such as banks/post offices)
was significantly higher in rural areas as compared to urban
areas (42 percent versus 23 percent). Not surprisingly, this “We need to have a sustained structure
problem is more acute among lower income groups. As
income levels go up, the proportion of people borrowing from
for financial inclusion. The technology is
non-institutional sources tends to decrease8. available. What we require is a business
As such, there is a critical need for unique requirements of model and a delivery model. When we
the rural unbanked to be recognized and financial inclusion are talking of reaching to the people we
business models to be built on that basis. As Dr K C must understand what types of problems
Chakrabarty, Deputy Governor of the RBI, stated, “We need
to have a sustained structure for financial inclusion. The are faced by customers and what the
technology is available. What we require is a business model solutions are.”
and a delivery model. When we are talking of reaching to
the people we must understand what types of problems are Dr. K. C. Chakrabarty,
faced by customers and what the solutions are. ” Deputy Governor of the RBI
Business Standard, ‘Financial inclusion: RBI asks banks to review plans’,
June 18, 2010,
7 ‘Financial Inclusion and Digital Payments’ September 2008, a white paper by Indicus Analytics, an Indian economics research firm, for the Internet and
Mobile Association of India (IAMAI)
8 RBI Report on Currency and Finance, 2006-08 (Section VII, Table 7 Distribution of indebted households to institutional and non-institutional credit agencies)
.10
© 2010 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms
affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

6. 5
This challenge is best met by forming an ‘ecosystem’ This approach – similar to product development labs in
the technology and pharmaceutical industries - may seem
An unbanked household in rural India today, comes in too radical for the conservative sensibilities of banks (and
contact (or can come in contact) with a number of different potentially bank-sponsored ecosystems). However, the
businesses, not-for-profit and governmental organizations. process can be controlled and the reward could be more
Each such organization has a particular competency in than commensurate with risk (see end note). Each member
serving the needs of the rural consumer. These different of a bank-sponsored financial inclusion ecosystem can be
competencies can be powerfully combined to develop a encouraged to submit ideas and run small/early pilots to
capability that is far greater than the sum of its individual demonstrate the merit of such ideas, i.e. set up ‘financial
parts. For instance, a banking correspondent, an FMCG inclusion labs’. The more promising ideas can be taken to the
stockist, a mobile phone company, an NGO branch, etc. can next level, i.e. larger pilots and subsequent state wide/
each provide useful perspectives on rural customer needs nation-wide roll-outs.
and how they can be met. These organizations can then work
The key features that such ‘financial inclusion labs’ would
together to develop the products, design/implement different
need to have are:
parts of the value chain and also share capital investments,
as agreeable. If needed, they can partner with other • Various types of organizations should be a part of such labs
organizations such as technology companies and government for greater diversity of product ideas and better validation
departments. When each member in this multi-organizational
• At any given point in time, multiple ideas will need to be
partnership understands the role and appreciates the value
in test mode given the tight timeline prescribed by the
of every other entity in it, a self-sustaining ecosystem takes
government to the banks
shape. For this to happen, however, it may be essential for
one organization to take the lead and act as overall champion/ • In the interest of adequate product uptake, feedback
sponsor. Given the impending need for banks to refine/ from the customer should be rigorously obtained and
implement their financial inclusion plans, we firmly believe incorporated into the product development effort
that banks are well placed to take the lead in forming and
• Risk-taking (within limits acceptable to all members of the
sustaining such ecosystems.
ecosystem) should be encouraged so that the reward (i.e.
successful products) becomes more probable.
Banks can consider having ‘financial inclusion labs’ as The key for such financial inclusion labs would be to maintain
part of such ecosystems to facilitate innovation an unbiased view and strive to be unconstrained by any
particular organizational context. The goal is to facilitate a
As indicated earlier, banks will need to involve every part of freer flow of ideas that reach beyond individual organizational
their ecosystem right at the product development stage. boundaries.
Innovation is likely to be critical for the success of such
ecosystems. It will, therefore, be important to encourage
tryouts of promising ideas in early stages of the product
development process.
Financial Inclusion Ecosystem - an illustration
Telco FMCG
IT firm BANK BC
NGO UIDAI
RURAL UNBANKED HOUSEHOLD
Source: Industry discussions, KPMG analysis
Note: NGO – Non governmental organization, FMCG – Fast moving consumer goods company, BC – Banking correspondent, UIDAI –
Unique Identification Authority of India, IT firm – Information technology firm.
© 2010 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms
affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

7. 6
End-note: The size of the prize
While the overall size of the prize relevant to the business
of financial inclusion is hard to estimate, there are some
attractive indicators. One such indicator is remittances into
Bihar9. Bihar’s large proportion of migrant workers is well
known. However, post office records showed money orders
of only INR 450 crore in 2006 compared with a GDP of nearly
INR 80,000 crore10. Most workers prefer to remit money to
their families via friends, relatives, unorganized agents, etc. or
carry money themselves. As such, money remitted through
formal channels (mostly represented by money orders and
to some extent, bank drafts), is likely to be a fraction of the
aggregate amount of remittances into Bihar. Aggregate
remittances could be at least 20 times the amount remitted
through formal channels. In other words, there is a
near-term, if not immediate, potential to increase the
remittances turnover of the formal system in Bihar by a factor
of at least 20, considering that informal channels tend to be a
lot costlier, time-consuming and riskier. That kind of metric is
sure to excite the CEO of any bank.
9 KPMG Analysis, ‘Financial Inclusion and Digital Payments’ September 2008, a white paper by Indicus Analytics for the IAMAI
10 Ministry of Statistics and Program Implementation (www.mospi.nic.in)
© 2010 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms
affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

8. Contact us
Abizer Diwanji
Executive Director and
head - Financial Services
T: + 91 (22) 3090 2380
E: adiwanji@kpmg.com
Neeraj Jain
Director - Strategic and Commercial
Intelligence
T: + 91 (124) 334 5094
E: neerajjain@kpmg.com
Vijay Mani
Associate Director - Strategic and
Commercial Intelligence
T: + 91 (22) 3090 2142
E: vijaym@kpmg.com
kpmg.com/in
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