Financial inclusion lies with MFIs
Public sector and rural banks have not achieved the goal of financial inclusion because of their high human resources costs. Only MFIs provide a low-cost platform to achieve it, says Saurabh Tripathi
WE BETTER not let politics destroy our fledgling MFI industry. While many players speak for the poor, this industry has demonstrated a sustainable business model dealing with the financially excluded. In this article, I argue that contrary to popular perception, financial inclusion is not a technology challenge but is, in fact, a low-cost HR challenge. And MFIs (and some NBFCs) have shown how to operate sustainably at a very low cost of HR. Technology is a crucial facilitator. High street banks — both in the public and private sectors — will not be able to solve the HR riddle unless they pick crucial business model lessons from these firms. They hold the key to addressing exclusion.
Financial exclusion is an HR problem. People costs account for over 65% of a bank’s operating costs. Technology accounts for less than 10%. The search for low-cost banking is a search for lowcost human resources. Those who believe that innovation in technology can replace human resources are as mistaken as those who had written off bank branches many years ago. Bank branches with their reassuring presence and human touch are back at the centre stage now and are considered crucial to win customer trust. If educated customers need the human touch, why shouldn’t the poor man with his precious savings?
MFIs are interesting because they operate profitably at such a low-cost of human capital that they can provide the human touch even for businesses with a low-ticket size. The average cost per head of MFIs is about . 1 lakh per annum compared with . 5.6 lakh for PSU banks, . 5.3 lakh for private sector banks, and . 3.8 lakh for regional rural banks (RRBs) as depicted in the graph. MFIs operate their branches, evaluate credit, make collections, manage technology and maintain accounts at an average cost of manpower equal to a peon’s salary in a public sector bank. The MFI business model is not yet the full answer (and recent issues have highlighted the areas to improve), but it definitely bears the seeds of low-cost banking required for inclusion.
Despite the many regulatory interventions, high street banks will find it difficult to do inclusive banking as profits are too low and the ‘hassle’ is too high. It has been known for quite some time that a conventional high street bank’s cost structure is too high to be able to serve a low-ticket business in rural areas. The regulator has pinned its hopes on outsourcing the costly last-mile customer touch point. The business correspondent (BC) model was envisaged to help commercial banks in the last mile to reach the financially excluded. However, the progress has been slow.
For a long time, the reigning paradigm was that the poor should not be exploited and no profits should be made at their expense. So, only non-profit entities were allowed to be business correspondents. Gradually, the regulator acknowledged that ‘for-profit’ entities are required in the last mile. ‘For Profit BC’ guidelines were introduced some time ago. We have, however, not yet seen any significant adoption of the BC model by ‘for profit’ entities. The reason is that the ‘for profit’ entities like corporate houses with rural distribution do not find this business financially lucrative.
THE regulator has to appreciate that the profits are very low and risks too high, to interest any organised entity to venture into this. In fact, the entities who would actually be interested as they have the customer contact and are used to the operational issues — the MFI and rural NBFC — have been barred from becoming BCs.
Public sector banks will not succeed in bringing inclusion due to the inherent constraints of their character. Despite their noble intent, the public sector is most ill-equipped to create inclusive banking. Most people do not appreciate that the public sector is the highest cost business model in the Indian banking system today in terms of average manpower cost. Despite very low compensation at senior levels, the HR cost per head in the public sector is the highest. Given the nature of industrial relations in public sector banks, this trend is unlikely to be arrested.
The RRBs are a sitting example of this phenomenon. RRBs were a bold public sector initiative to create banks for rural areas with local low-cost HR. The costs within RRB have crept up gradually and today they are considered inadequate for their mandate. Further, the work environment in the public sector is hardly encouraging for experimentation required to innovate and create new low-cost models. Innovation involves risks of failure and many public sector executives will admit in private that one of the good ways to thrive in public sector is by not taking any decisions and hence avoiding making mistakes.
Banks who are serious about inclusion will need to create separate subsidiaries or business units that will pick tips on HR from the MFIs. Banks shudder at the thought of having to manage two different set of employees with different service conditions and costs. They could, however, learn from the airline industry. Budget airlines have been very successful. Many full-service airlines that entered the budget airline space successfully created a separate subsidiary with a distinct brand, employees, fleet and infrastructure. I will not be surprised if these bank subsidiaries look like MFIs in terms of HR strategies.
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Financial Inclusion has whetted the speed of development of banking industry in India. In order to face the bouts of non banking financial institusion, financial inclusion is being treated as an important weapon.The Committee On Financial Inclusion,2008,chairman,Dr. C. RANGARAJAN defined it as
"the process of ensuing access to financial services and timely and adequate credit where needed by vulnerable groups such as weaker section and low income groups at an affordable cost."
Basically, it means that even lower strata of society with less disposable income should also have bank accounts, can get immediate credit as well as avail the benefits of financial advisory services.The people who have been covered for this are
- underprivileged people in rural areas like farmers
- underprivilaged people in urban areas like labourers,domestic help
- unemployed
- physically challenged
Reserve Bank Of India, has taken a lot of measures to ensure that proper banking facilities is provided to all. It has started many such programmes like
- Opening of RRB's (regional rural banks)
- Self help Groups
- Cooperative movement
- liberalised branch expansion
- overdraft facilities even in savings account
But it lacks in proving to be a huge success because of lack of any proper business model,technology and poor delivery modes.In 2007, total accounts per 100 person stood at a meagre of 54 accounts!
If given due importance this will help in reducing the dependence of people on non-banking financial institutions and indigenous bankers.
The first-ever Index of Financial Inclusion to find out the extent of reach of banking services among 100 countries, India has been ranked 50. Only 34% of Indian individuals have access to or receive banking services. In order to increase this number the Reserve Bank of India had the Government of India take innovative steps. One of the reasons for opening new branches of Regional Rural Banks was to make sure that the banking service is accessible to the poor. With the directive from RBI, our banks are now offering “No Frill” Accounts to low income groups. These accounts either have a low minimum or nil balance with some restriction in transactions. The individual bank has the authority to decide whether the account should have zero or minimum balance. With the combined effort of financial institutions, six million new ‘No Frill’ accounts were opened in the period between March 2006-2007. Banks are now considering FI as a business opportunity in an overall environment that facilitates growth.
The main reason for financial exclusion is the lack of a regular or substantial income. In most of the cases people with low income do not qualify for a loan. The proximity of the financial service is another fact. The loss is not only the transportation cost but also the loss of daily wages for a low income individual. Most of the excluded consumers are not aware of the bank’s products, which are beneficial for them. Getting money for their financial requirements from a local money lender is easier than getting a loan from the bank. Most of the banks need collateral for their loans. It is very difficult for a low income individual to find collateral for a bank loan. Moreover, banks give more importance to meeting their financial targets. So they focus on larger accounts. It is not profitable for banks to provide small loans and make a profit.
Financial inclusion mainly focuses on the poor who do not have formal financial institutional support and getting them out of the clutches of local money lenders. As a first step towards this, some of our banks have now come forward with general purpose credit cards and artisan credit cards which offer collateral-free small loans. The RBI has simplified the KYC (Know your customer) norms for opening a ‘No frill’ account. This will help the low income individual to open a ‘No Frill’ account without identity proof and address proof.
In such cases banks can take the individual’s introduction from an existing customer whose full KYC norm procedure has been completed. And the introducer must have a satisfactory transaction with the bank for at least 6 months. This simplified procedure is available to those who intend to keep a balance not exceeding Rs.50,000 in all accounts taken together. With this facility we can channel the untapped, considerable amount of money from the low income group to the formal economy. Banks are now permitted to utilize the service of NGOs, SHGs and other civil society organizations as intermediaries in providing financial and banking services through the use of business facilitator and business correspondent models.
Self Help Groups are playing a very important role in the process of financial inclusion. SHGs are usually groups of women who get together and pool money from their savings and lend money among them. Usually they are working with the support of an NGO. The SHG is given loans against the group members’ guarantee. Peer pressure within the group helps in improving recoveries. Through SHGs nearly 40 million households are linking with the banks. Micro finance is another tool which links low income groups to the banks.
Yet, banks are fighting to fulfill the Financial Inclusion dream. The main reason is that the products designed by the banks are not satisfying the low income families. The provision of uncomplicated, small, affordable products will help to bring the low income families into the formal financial sector. Banks have limitations to reach directly to the low income consumers. Correspondents can be considered to be an excellent channel which banks can use to distribute their product information. Educating the consumers about the financial benefits and products of banks which are beneficial to low income groups will be a great step to tap their potential.
Banks are now using new technologies like mobile phones to reach low income consumers. It is possible that the telephone providers themselves will start basic banking services like savings and payments. Indian telecom consumers have few links to financial institutions. So without much difficulty telecom providers can win the battle with banks. Banks should therefore be proactive about transferring this technology into an opportunity.
The Indian Government has a long history of working to expand financial inclusion. Nationalization of the major private sector banks in 1969 was a big step. In 1975 GOI established RRBs with the same aim. It encouraged branch expansion of bank branches especially in rural areas. The RBI guidelines to banks shows that 40% of their net bank credit should be lent to the priority sector. This mainly consists of agriculture, small scale industries, retail trade etc. More than 80% of our population depends directly or indirectly on agriculture. So 18% of net bank credit should go to agriculture lending. Recent simplification of KYC norms are another milestone.
Financial inclusion is a great step to alleviate poverty in India. But to achieve this, the government should provide a less perspective environment in which banks are free to pursue the innovations necessary to reach low income consumers and still make a profit. Financial service providers should learn more about the consumers and new business models to reach them.
In India Financial inclusion will be good business ground in which the majority of her people will decide the winners and losers.________Who can take part in financial inclusion?
The Indian Government wishes that the poor people should be benefited by financial inclusion. They have to be given loans for trading activities or paying back the loan from money lenders. The Reserve Bank of India permits for financial inclusion by allowing banks to grant loan to non-registered bodies, subject to certain norms. By watching the functioning of group activities, the loan may be sanctioned to individuals or groups. The savings, repaying capacity and cash flow are the main criteria.
The weaker section of India, still hesitate to take part in financial inclusion. The low income people should be approached by banks personally. They should be asked to open bank account for saving purpose. Small loans may be granted for them to encourage cash flow. At an affordable cost, the low income group should be allowed credit facility. The financial facilities should be arranged for poor people living in rural and semi urban areas. The poor people in urban area should not be left out. By opening microfinance branches in urban areas, the needs of poor people there may be considered favorably.
Growth due to financial inclusion: The world is watching eagerly the growth in Indian economy. The growth rate is increasing year after year. The Government of India is very keen on financial deepening. There is a slight decrease in population growth in India. The common people in India enter share market and start investing money. The economic grow is healthy in India now. Due to globalization, many people involve in trading activities. A rapid growth is noticed in corporate sector. The rich people in India have become more rich. The medium range people are striving hard to find place in the list of rich people. Most of the common people in India have got some arrangement for livelihood and due to grant of housing loan, many people in India are living in own house. We have to see whether there is growth of small and medium enterprises and whether they are able to withstand in tough situations. The financial deepening bothers about these issues. The needs of every citizen should be considered and fulfilled by the Government. That is the main aim of financial inclusion.
Still banks are trying to accelerate the rate of deposit mobilization. The momentum in financial inclusion activities will increase only when there is a steady growth of deposit mobilization. The Government of India is concerned about triggering financial inclusion in rural areas, in particular. The development activities should be spread evenly throughout the country. The encouragement of banking habit among less privileged people should be given top priority.
Financial inclusion plays a major role in driving away poverty from the country. In India, a day will come when all the Indians will have bank account and everybody will take part in financial inclusion.
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