In the western Indian state of Maharashtra, in the Mann Desh region, lives 39-year-old Lakshmi Shellar. She spends a typical day in the field tending to her crops; she also rears buffaloes and sells their milk in the village door to door. A widow since the age of 17, Shellar got in touch with Mann Deshi Mahila Bank, a cooperative bank in rural Maharashtra, a few years ago, where she learned the basics about banking products. Now she runs a financial literacy school by night, attended by 20 women from her village.
Women such as Shellar act as business facilitators to India’s banks. Some work directly for the bank, others through banking correspondents (BCs) such as microfinance institutions and nongovernment organizations. Each facilitator is connected to hundreds of people. On behalf of the bank, they create awareness about savings and other products, identify potential borrowers, collect and verify loan applications, monitor borrowers’ repayment and follow up for recovery.
Shellar’s story is told whenever Duvvuri Subbarao, governor of the Reserve Bank of India (RBI), delivers speeches on financial inclusion across the country. Subbarao hopes more women like Shellar will help to promote banking deep within the country. It will be crucial for an organized financial system to find its roots in rural India.
A December 2009 RBI report, “Financial Inclusion: Challenges and Opportunities,” points out that the country has 600,000 habitations — clusters where the population is 100 or more — but only 30,000 have a commercial bank branch. Less than half the population has a bank account, with the disparity greater in the northeast. Only about 10% of the people have life insurance, and less than 1% have other types of insurance. A full 37% of the population still lives below the poverty line.
It is here that Subbarao sees opportunity. As incomes grow and awareness increases, aspirations rise among the poor. Moreover, rural savings deposits tend to remain in customers’ accounts. In the long run, this reduces a bank’s dependence on bulk deposits, minimizing the risk posed by sudden large withdrawals. Subbarao stresses that some bankers will need to convert “what they see as a deadweight [social] obligation into an exciting opportunity, and move aggressively on financial inclusion.”
Indian banks, especially those in the public sector, have made substantial efforts to tap the country’s rural population. But expanding through branches has been a costly — and largely unsuccessful — endeavor. Out of 50 public sector and private sector banks, 26 have therefore appointed BCs, through which eight million no-frills accounts have been opened as of March 31, 2009.
Using banking correspondents in such a way is gaining in popularity globally. A recent RBI directive added six more types of correspondents — including shop owners and public call office operators — to the existing categories of microfinance institutions and nongovernment organizations. In Brazil, several banks have adopted the correspondent banking model, acquiring more than 15 million accounts this way. In the networks of two of the largest players, half of account holders earn less than US$4 a day.
In India, few banks have been as active as State Bank of India (SBI), India’s leading public sector bank, which has 2.5 million no-frills accounts. It has expanded through 24,000 direct agents, including thousands of nongovernment and microfinance organizations. “From 12,000 villages in 2008, we now have a presence in 50,000 villages,” O.P. Bhatt, SBI chairman, told business publication Business India recently. The goal, he added, is to double that number by March.
Migratory labor is a target, as remittances through banks make it easier to send money home. Huge sums are remitted across India, predominantly from migrant labor, and more than 90% occurs through informal channels.
Banks have also added more sophisticated and diverse products. SBI, for instance, has a product where a customer deposits up to US$21 at any one time for one to five years. At the end of the term, the customer gets principal plus interest at a fixed deposit rate of 6% to 8%.
In the insurance space, SBI has Grameen Shakti, a dual-benefit life insurance product. For a five-year term with a US$520 benefit, the premium is about US$6 a year. Upon the group member’s death, the beneficiary receives the benefit. Upon maturity, the group member recovers half of the premiums paid over the five years. SBI also has launched Chota SIP (Systematic Investment Plan), an equity-based mutual fund plan with a minimum monthly investment of US$2 over at least five years. Chota SIP funds are invested in bigger funds, including a blue-chip fund, a balanced fund and a growth fund with a small value component.
The Price of Growth
Despite banks’ success with informal channels, reaching rural customers comes with a price tag. The main challenge, bankers point out, lies in financial education: helping the masses to understand these products, and the benefits of saving and investing. The faster users of banking services learn of the benefits, the shorter will be the bank’s gestation period in recovering its investments.
In response, financial literacy centers are being set up across India. Members of SEWA Bank — a cooperative bank established in 1974 by 4,000 self-employed women — have held three-day financial education camps in the state of Orissa. Such centers provide individual counseling services on responsible borrowing and early savings. “There are advantages to being connected to the financial sector, and there is a need for the people to understand that,” points out Haseeb Drabu, managing director at J&K Bank.
Likewise, establishing a more highly functioning banking infrastructure will require increased investment. “There is a lack of supporting infrastructure, like credit bureaus, penetration of mobile banking and biometric cards, and a national identification system,” says a November 2009 McKinsey report titled, “Banking — Crisis and Beyond.”
Technology is expected to be one enabler. SBI’s Tiny Cards concept, initiated in 2006, is a big step forward. A microchip in a smart card stores a customer profile, including photograph, fingerprint and transaction details. Says Anup Banerji, deputy managing director of rural business and national banking at SBI: “This scheme has been rolled out in 19 states in India. In 2008-2009, the number of cards issued rose from 270,000 to more than 2 million. In that same period, the number of no-frills accounts has doubled to 2.5 million.”
SBI’s Tiny Cards are connected to the network through a mobile phone or point-of-sale machine. They are used along with handheld devices with fingerprint-scanning facilities, made available to women like Shellar. If used through the banking-correspondent route, nongovernment organizations such as Zero Mass Foundation and Little World, and technology providers such as Financial Information Network and Operations (FINO), bear the cost of the devices. They, in turn, recover costs by working with banks around predefined service agreements.
In the state of Andhra Pradesh, for instance, 350,000 people receive money from the government through such programs as the National Rural Employment Guarantee Scheme, social security and pensions. Of the 2% commission SBI receives from the government for distributing these funds, it passes on 1.5% to the correspondent or facilitator.
Bringing Life to Accounts
For a bank the size of SBI, acquiring new accounts is not the problem. The real issue, across the industry, is deriving revenues from these accounts. “We are still a country with over a billion people where nearly half the nation is unbanked,” says M.D. Mallya, chairman and managing director at Bank of Baroda. At a recent Indian Merchants’ Chamber conference in Mumbai, Mallya called for the inclusion of a small charge on the customers’ end, to make the banking correspondents’ route more viable. “The challenge for the bulk of the poor is financial services, not affordability,” he says.
Funds distributed through government schemes, for instance, are rolled out into 400,000 accounts in Andhra Pradesh, while the total number of no-frills accounts acquired has crossed 1.8 million in the state. There is little or no life in accounts acquired outside such schemes; the average balance in such accounts hovers around 50 cents. Meanwhile, costs to maintain the accounts continue to rise. BCs keep up servers that interact with point-of-sale machines. The BC servers interact with a server at the bank (which can cost up to US$141,000 upfront). This server, in turn, connects these accounts to the bank’s core operations.
According to Pradeep Kulkarni, deputy general manager at SBI, “There are also operational issues — like the facilitator’s travel expense from branch to home and the security of funds while at residence — that have yet to be resolved.” Expenses mount as new accounts register, and there is already a mismatch between revenues earned and costs incurred in undertaking BC operations. Banks charge BCs interest for the temporary overdraft provided to them. This adds to operating costs. Further training of BC staff involves even more outlays.
T.S. Ramakrishna Rao, associate dean at ICFAI University, says the commission paid by banks to the BCs is not adequate for a viable business model. “A majority of BCs have reported losses, and some of them have even suspended their operations. This, in turn, affects the banks [since] it becomes difficult for banks to [find substitutes for them]. Financial inclusion, however, is not an end by itself. It is a means — the end being social inclusion. Banks play the role of financial intermediation and, therefore, are an important catalyst in attaining inclusive growth.”
The government has been active in this area. The National Bank for Agriculture and Rural Development (Nabard) launched two financial inclusion funds in 2007-2008 with about US$100 million each. These funds have equal investments by the government and the RBI, and an additional 20% by Nabard. The latter disburses these funds annually to Indian banks. One fund actively invests in developmental and promotional activities in backward regions and unbanked areas. The second promotes the use of technology in similar places. Yet bankers say greater support will be required to make the BC route a success.
A recent RBI meeting with bankers and the Boston Consulting Group addressed concerns about financial inclusion. Many left with Subbarao’s firm view about the opportunity at the bottom of the pyramid: The only way to reduce costs is to increase volumes. As the country grows at 8%, job opportunities grow. As people start earning, Subbarao reasons, their incomes will provide a growing source of bank deposits — and banks that are ahead of the curve in establishing a presence in the hinterlands will likely have a first-mover advantage.