Banking for all: Hurdles and fixes

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Bengaluru: Imagine someone living in a remote area in Assam or in a slum in Mumbai. Their needs may range from buying a tractor for farming to a second-hand car to drive for Uber. He may want to borrow money from a bank instead of a usurious moneylender.

Does it make sense for microfinance institutions or banks to open a branch to reach out to remote areas? What about the cost? Is technology the answer? What is the right model for financial inclusion in India that delivers value to the customer and manages the portfolio of the lender as well?

Some of the top leaders from the banking and microfinance sector brainstormed on these ideas during a panel discussion on “Inclusive Finance: Last Mile Connectivity is the Key” at the South India Banking Conclave organised byMint in Bengaluru on Friday.

The panellists were R. Baskar Babu, chief executive and co-founder of Suryoday Microfinance; V.S. Radhakrishnan, managing director and chief executive of Janalakshmi Financial Services Ltd; Chandra Shekhar Ghosh, managing director and chairman of Bandhan Bank Ltd; and P.N. Vasudevan, managing director of Equitas Micro Finance India Pvt. Ltd. The discussion was moderated by Mint’s consulting editor Tamal Bandyopadhyay. Edited excerpts:

Everyone is celebrating that India has now finally come to a stage where almost everybody has access to banking. Lots of things are happening in terms of inclusive finance like Pradhan Mantri Jan Dhan Yojana (PMJDY) and on the technology front, there are lots of disruptions happening like the Unified Payment Interface. But how much of this is noise and how much of this is really changing the reality?

Baskar Babu: A PMJDY has enabled them to open an account. But how many of them are truly transacting? When they want to transact where do they go? Are they using net banking? How do they transact the remittances? We have a 30,000 customer base in Mumbai; all of them have a bank account. But if I have to transact with them or request them to repay our loans through the electronic mode, it just isn’t convenient. The receivables will be at 0.5-1% at this point of time for Mumbai portfolio which can easily climb up to 5-6%. It is not because they don’t have the intent but the time taken, the half an hour spent to stand in the queue, and above all of that, not really welcome on the premises is a key point for the financial exclusion. Hopefully, with many of the small finance banks coming on, we will make that transactions far smoother and convenient and above all, transacting with dignity, being welcome, is probably what will make the difference.

How do you actually reach out to people? What are the obstacles?

Vasudevan: We are into microfinance, then NBFC (non-banking financial company) where we offer finance for used commercial vehicles, micro SMEs, which are Rs.50,000 to Rs.5 lakh loans, and affordable housing.

Our credit officers have to spend one full day per customer who may be taking a loan of Rs.50,000-80,000. We don’t know whether that person has any fraudulent intent, so we have to put another layer of supervisory structure who will again have to go out and do a secondary test on the customer’s cash-flow to ensure that what the first person puts up is correct. So you are talking of layers of cost adding up.

From the credit perspective, put every government report together and the total business opportunity in the products that we are in Rs.25 trillion. And out of this, the current supply is around Rs.6-7 trillion. We are still talking of Rs.15-17 trillion demand which is not met in these segments. I think that is where the expectations really are.

Radha, you are also primarily in the urban area. And you are also the most aggressive microfinance institution if I may say so. What’s the growth, 100% plus?

Radhkrishnan: Yeah.

So there is a huge opportunity. One way of looking at it is that very aggressive growth, and the other way of looking at it is that probably a huge opportunity and if you wish you could even grow faster. Give us a sense of what is the right model, how do you actually cover the last mile?

Radhakrishnan: The reason why financial inclusion has not happened in India is to some extent the regulatory framework that we had. The reality is if you want to do small ticket transaction, whether it is a small shampoo sachet or a small ticket loan, it has to be profitable and sustainable. Driving it through regulatory requirements is not going to achieve it.

“Why financial inclusion hasn’t happened is to some extent due to the regulatory framework that we had.”- V.S. Radhakrishnan, MD, CEO, Janalakshmi Financial Services

At this point of time, I think India is in a unique spot. We have mobility penetration which is pretty high. We have NPCI (National Payments Corp. of India) etc., the government wanting to drive that whole initiative. We have Aadhaar, which creates a new ability for the customers to be easily identified and finally the government’s focus on trying to do digital payments for direct benefit transfers, which is going to create stickiness and provide transactions on customer accounts, etc.

Technology is another big advantage that has come in. The ability to be able to leverage all this will be an opportunity for institutions who want to do the business. You need the physical connectivity to the customers; you got to be able to meet these customers periodically, at their doorstep. But you also need strong technology, to be able to ensure the proper controls are in place, etc.

The customer today does not want just a loan. He wants a loan, he wants a savings solution, he wants a pension solution, etc. And organisations that can provide the full range of products to the customers are very important, especially in urban India where income is not challenged. If you take a taxi or bus driver or a maid, they are all earning well. Their problem is that they need financial support for certain transactions that they need and the reality is that to a large bank focussing on this segment has not been a priority. Because you do need a different technology solution, you need a different strategy. You need different human resources to reach out to this customer, you can’t expect an MBA graduate from IIM-Ahmedabad to go out and reach out to this customer.

So I think the reason why it (financial inclusion) has not happened is because of certain circumstances. But the circumstances have changed, it is creating an opportunity. And I think institutions that can leverage all these various infrastructures that the government or the private has created, either through mobility or Aadhaar etc… if you are able to harness the power of all these and if you have a strategic approach to inclusion, which is what the government is attempting to do, I think it will succeed. So I think the market is real, the numbers that Vasu talks about are real. And we think this market is growing at a pace more than the Indian economy. So I think this market can be as big as the entire banking sector today. Today the Indian banking sector is Rs.60-70 trillion. In seven years’ time, I think the inclusion market itself will be Rs.70 trillion market. This is exactly what happened to the retail banks, which was, in 1979, literally nothing. Today, it’s 45% of the banking sector. These skills of physical and digital connectivity, which we in Janalakshmi called “physital”, are going to make the difference for success.

Ghosh, you tell us how difficult or easy it is to reaching out to the unbanked and serving them, and keeping your default rate to the minimum. And also, has the soul of your business remain unchanged after becoming a bank?

Ghosh: Because of microfinance services, credit demand has increased from the customers, which is a big opportunity for the banks if they can bridge the customer from one level to another level. Some customer may have started with Rs.5000 loan but after years, if his demand has come to Rs.50,000, it is not unexpected. We saw that.

Of course, this is a risky area. One challenge is to build the capacity of the staff. The credit officer should know the culture and the behaviour of the customer to assess his demand. If you know the culture of the customer, you can give that loan even without collateral.

“Because of microfinance services, credit demand has increased from the customers, which is a big opportunity for the banks.”- Chandra Shekhar Ghosh, MD and chairman of Bandhan Bank Ltd

The next challenge is in the infrastructure of the banking industry. We have opened 661 bank branches and 2021 micro credit office that means our total outlay is around 2,600. Out of the 661, 67% is in rural, 34% is in unbanked rural and 73% is in the eastern region. Whenever we are going more rural, we are getting more unbanked people. In the last seven months, 10 lakh new customers have opened accounts in Bandhan bank. In that sense, people like to get banking services, but they would like to open an account in a bank branch… a physical infrastructure. The challenge is that the connectivity is not very good. So when you go to the interior, the connectivity is very low… if a BSNL (Bharat Sanchar Nigam Ltd) connection goes down, it will take three days to restore it. For last mile connectivity, we need to build the IT infrastructure in a big way.

But microfinance is quicker than the bank. To open a bank account you need 24 hours. And then the cheque book, ATM card distribution and all of it takes five to six days. Let’s say a customer is coming for a gold loan, they need the money immediately but you need them to open an account. If you need 24 hours to open an account and then some more time to tranche that money to him, chances are there that he may go back to the microfinance service. There is a challenge in this area.

So all of us agree that there is a tremendous opportunity. But there are also challenges. Technology is still not the right answer because of the connectivity. The other answer Vasu said that I need to invest on one gentleman an entire day, and somebody else, another layer, to oversee the thing and all. How do you justify the cost? How do you protect your balance sheet?

Vasudevan: If you look at our used vehicle financing, we have financed around 60,000 customers in the last four and half years. Eighty percent of them were first to borrow money from a formal finance. In the micro-SME, around 55,000 people we have financed so far, 100% of them are first-time finance buyers. It shows the quantum that has been done by the banks is still so small compared to the overall demand.

On the question of a model, see… the customers in this business have no income document. If you look at our commercial vehicle driver turning into an owner, you know he is drawing a salary as someone operating in some private transporter. When we finance a vehicle for him, based on the margin he brings and we fund the balance, the only source of income he has got today is his salary stocks. So what am I supposed to assess? I’m supposed to assess his income and see out of that income will he repay my loan. But the income that he is earning currently is going to stop the moment I fund him and that’s got to be replaced by some other income which is freight income. And he has no freight income today because he is a driver. So then we have to sit with the driver and understand how he understands his business, what type of vehicle he is driving, what type of load is moving and how confident he is of getting the load for his own vehicle. And then take a call, saying, okay this person may probably be able to manage it.

That’s the kind of field level investment this model requires. Similarly in SME or affordable housing, we have to sit and do a huge amount of work with customers. But if you can do that, then obviously you have cracked this model. There is a cost element involved in it, and you just can’t help it. That cost has to be priced. But how much can the cost be reduced and how much technology you can use, productivity… all these are questions. And also, in these segments always our approach should be how can I charge the lowest level of rates possible for the customer.

So essentially what you are saying is that technology cannot replace the human interface. You need to actually understand the business model; you need to understand their psyche and you need to be with them. All these advertisements we see about you apply for a loan and within three minutes we will grant you… These are all very urban phenomena; you cannot do it in the hinterland in rural India.

Vasudevan: Whenever the customer has very documented sources of income then assessment can be done online… everything can be done sitting in the office… But there is a second segment of the population where they have no documented income; they don’t have a history of credit repayment with a rating agency. Their bank statement does not reflect the full cash-flow that their business is generating. They have no IT returns… there is nothing that you can do for assessing unless you go out, sit with the customer and walk through his business with him and then you get a feel.

Is this the same experience that you have in your area.. that you have to handhold the customer in every stage? Or do you use analytics to track the behaviour of the people because you are more urban in your approach in your business?

Radhakrishan: Traditionally microfinance worked on regional, local players. I think what microfinance industry has done is that (we) replicated that local community model with a strong backbone of processes. The reason why we all had to do that is the biggest risk in this business is an event risk, like what happened in the Andhra. So, unless you are geographically diversified, you are exposed to risk. So, I think the learning that the microfinance industry has had is to know how do you convert that community approach into a national approach but leveraging the local knowledge. So, you need local people, who understand the local market, but you also need to build it on the top of some standardised process.