Financial inclusion plans of banks in india an opportunity for prod dev


Published on

An assessment of the financial inclusion opportunity in India

Published in: Business, Economy & Finance
  • Be the first to comment

No Downloads
Total views
On SlideShare
From Embeds
Number of Embeds
Embeds 0
No embeds

No notes for slide

Financial inclusion plans of banks in india an opportunity for prod dev

  1. 1. FINANCIAL SERVICESFinancial inclusion plans of banks in India An opportunity for innovative product development
  2. 2. 1Financial inclusionplans of banks in IndiaAn opportunity for innovative product developmentIndia’s record on financial inclusion continues to be acause for concernDespite various policy and regulatory initiatives since the Why should this be a critical issue for all of us? The1950s, the record on financial inclusion in India continues to fundamental reason, as several theorists have concluded, iscome in below the expectations of policy makers and other that lack of access to finance is a critical factor responsible forstakeholders. According to the Reserve Bank of India (“RBI”), persistent income inequality as well as slower growth. At theonly around 50 percent of the population has a bank account; very least, they concede that there is a two-way relationshipeven 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 ingredientof life insurance cover and only 0.6 percent of people have any for wider economic growth. By extension, we get betterkind of non-life insurance cover. business potential for banks, consumer product companies, telecommunications service providers and several otherEven after 2005-06, when the term ‘financial inclusion’ was enterprises.explicitly introduced in the policy lexicon (RBI’s Annual PolicyStatement), progress has been mixed. For instance, in Junethis year, the RBI asked all banks (public and private sector)to go back to their boards and rework their financial inclusionplans. All banks were required to present three-year financialinclusion plans as part of the government’s goal to havebanking facilities available by March 31, 2012 in all villageswith a population of more than 2,000. However, when theplans themselves are found to be wanting, the implicationsare 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. 3. 2To improve the record on financial inclusion, it is critical tofocus on basic transactionsBefore any discussion on how to enhance financial inclusion,it is important to know exactly what it constitutes. As definedby Usha Thorat, Deputy Governor RBI, financial inclusionmeans “the provision of affordable financial services, viz.access to payments and remittance facilities, savings, loansand insurance services by the formal financial system tothose who tend to be excluded. 1 As such, the primary need ”of the ‘excluded’ is the ability to conduct financial transactionsusing the formal banking and financial services system. Thedominant focus, however, tends to be on providing microcredit. Impediments to conducting basic transactions forlivelihood/living and consequent avoidable risks such as loss/theft of savings and poor cash management are a root causefor the financial troubles of the unbanked and the excessivepower of moneylenders. Financial inclusion needs to obviatethis 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. 4. 3Impediments to conducting basic financial transactions it was found that for 12 transactions in a year, thecontinue 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 actualThe needle on bank account penetration has not been moving average balance was estimated at INR 5284. This is probablysignificantly. 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 anbanking facilities. The number of accounts per 100 adults in insurmountable one. It is widely recognized that the key is torural India was only just under 40 in 20072. reduce the level of human/branch intervention. The bankingEven if we assume that up to 20 percent3 of adults have nil correspondent model has been proving to be useful in thissavings and, hence, no use for a bank account, there was still regard and the RBI agrees (it recently allowed banks toa gap of about 40 accounts per 100 adults in rural India. While appoint for-profit companies like FMCGs and telcos as bankingthe push for large numbers of no-frills accounts is helping correspondents). Also, there is that much-talked-aboutthe cause of such penetration, the actual extent of financial game-changer, i.e. mobile banking. With mobile phoneexclusion is much higher when we consider activity levels. penetration at nearly 660 million today and variousSeveral accounts are dormant or have very little activity, technologies available to leverage mobile telephony forespecially 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 IndiaUnviable operational costs are no longer the main (TRAI) and the RBI reached an understanding on regulationchallenge 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 pastseveral years. Many a time, these costs were assessed The stage is thus set for extending formal financial servicesusing the framework of branch banking. For instance, the at dramatically lower operational costs. As such, the mainkey components of operating a no-frills account (other than cause for slow progress of financial inclusion today is not costthe interest payable on the account) are generally cited as related but a more fundamental one.staff costs and overhead costs (and overhead costs may beestimated as a percentage of staff costs). As the number oftransactions in an account increases, associated costs go upand the deposit amount required for the bank to recoup itscosts rises. For instance, in the case of Canara Bank,2 Basic Statistical Returns (BSRs) of Scheduled Commercial Banks3 Max New York Life, NCAER Study (2008) found that 20 percent of households do not have any savings4 RBI Report on Currency and Finance, 2006-08 (Section VII)5 The Indian Telecom Services Performance Indicators Report, April – June, 2010, TRAI6 Financial Express, ‘TRAI, RBI agree on roles in rollout of m-banking’, June 21, 2010Savings accounts with scheduled commercial banks 80Number 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. 5. 4The main challenge is developing products tailored to the Preference for keeping savings at homeneeds 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 Urbaninsurance. Source: 2008 Survey by Max New York Life and National Council for Applied Economic Research (NCAER)There are several indicators that such unique requirementsare not being recognized. For instance, findings from a surveyin 2008 showed that the preference for keeping savings athome (and not with institutions such as banks/post offices)was significantly higher in rural areas as compared to urbanareas (42 percent versus 23 percent). Not surprisingly, this “We need to have a sustained structureproblem is more acute among lower income groups. Asincome levels go up, the proportion of people borrowing from for financial inclusion. The technology isnon-institutional sources tends to decrease8. available. What we require is a businessAs such, there is a critical need for unique requirements of model and a delivery model. When wethe rural unbanked to be recognized and financial inclusion are talking of reaching to the people webusiness models to be built on that basis. As Dr K C must understand what types of problemsChakrabarty, Deputy Governor of the RBI, stated, “We needto have a sustained structure for financial inclusion. The are faced by customers and what thetechnology is available. What we require is a business model solutions are.”and a delivery model. When we are talking of reaching tothe 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 andMobile 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. 6. 5This challenge is best met by forming an ‘ecosystem’ This approach – similar to product development labs in the technology and pharmaceutical industries - may seemAn unbanked household in rural India today, comes in too radical for the conservative sensibilities of banks (andcontact (or can come in contact) with a number of different potentially bank-sponsored ecosystems). However, thebusinesses, not-for-profit and governmental organizations. process can be controlled and the reward could be moreEach such organization has a particular competency in than commensurate with risk (see end note). Each memberserving the needs of the rural consumer. These different of a bank-sponsored financial inclusion ecosystem can becompetencies can be powerfully combined to develop a encouraged to submit ideas and run small/early pilots tocapability that is far greater than the sum of its individual demonstrate the merit of such ideas, i.e. set up ‘financialparts. For instance, a banking correspondent, an FMCG inclusion labs’. The more promising ideas can be taken to thestockist, 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’ wouldtogether 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 labsorganizations such as technology companies and government for greater diversity of product ideas and better validationdepartments. When each member in this multi-organizational • At any given point in time, multiple ideas will need to bepartnership understands the role and appreciates the value in test mode given the tight timeline prescribed by theof every other entity in it, a self-sustaining ecosystem takes government to the banksshape. For this to happen, however, it may be essential forone organization to take the lead and act as overall champion/ • In the interest of adequate product uptake, feedbacksponsor. Given the impending need for banks to refine/ from the customer should be rigorously obtained andimplement their financial inclusion plans, we firmly believe incorporated into the product development effortthat banks are well placed to take the lead in forming and • Risk-taking (within limits acceptable to all members of thesustaining 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 maintainpart of such ecosystems to facilitate innovation an unbiased view and strive to be unconstrained by any particular organizational context. The goal is to facilitate aAs indicated earlier, banks will need to involve every part of freer flow of ideas that reach beyond individual organizationaltheir ecosystem right at the product development stage. boundaries.Innovation is likely to be critical for the success of suchecosystems. It will, therefore, be important to encouragetryouts of promising ideas in early stages of the productdevelopment process.Financial Inclusion Ecosystem - an illustration Telco FMCGIT firm BANK BC NGO UIDAI RURAL UNBANKED HOUSEHOLDSource: Industry discussions, KPMG analysisNote: 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. 7. 6End-note: The size of the prizeWhile the overall size of the prize relevant to the businessof financial inclusion is hard to estimate, there are someattractive indicators. One such indicator is remittances intoBihar9. Bihar’s large proportion of migrant workers is wellknown. However, post office records showed money ordersof only INR 450 crore in 2006 compared with a GDP of nearlyINR 80,000 crore10. Most workers prefer to remit money totheir families via friends, relatives, unorganized agents, etc. orcarry money themselves. As such, money remitted throughformal channels (mostly represented by money orders andto some extent, bank drafts), is likely to be a fraction of theaggregate amount of remittances into Bihar. Aggregateremittances could be at least 20 times the amount remittedthrough formal channels. In other words, there is anear-term, if not immediate, potential to increase theremittances turnover of the formal system in Bihar by a factorof at least 20, considering that informal channels tend to be alot costlier, time-consuming and riskier. That kind of metric issure 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 IAMAI10 Ministry of Statistics and Program Implementation ( © 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. 8. Contact usAbizer DiwanjiExecutive Director andhead - Financial ServicesT: + 91 (22) 3090 2380E: adiwanji@kpmg.comNeeraj JainDirector - Strategic and CommercialIntelligenceT: + 91 (124) 334 5094E: neerajjain@kpmg.comVijay ManiAssociate Director - Strategic andCommercial IntelligenceT: + 91 (22) 3090 2142E: information contained herein is of a general nature and is not intended to address the circumstances of any particular individualor entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such informationis accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such informationwithout appropriate professional advice after a thorough examination of the particular situation.© 2010 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMGInternational Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG and the KPMG logo are registeredtrademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity. The KPMG name, logo and “cutting throughcomplexity” are registered trademarks or trademarks of KPMG International. Printed in India.