Financial Inclusion: Grassroot Innovations

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Financial InclusionGrassroot Innovations

• By Abhinav Rishi

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Grassroot Innovation

• Innovation is about thinking and creating
  solutions with an uncommon perspective, that tend
  to positively impact the environment, both
  socially and economically.
• In terms of subject, grassroots innovation is a
  bottom up innovation starting from the grassroots
  wherein grassroots refers to disadvantaged class
  as opposed to mainstream elite
• In terms of type, grassroots innovation is the
  practical low-cost innovation based on technology

I would like to discuss how concepts of grassroot
level are being applied to the field of Financial
Inclusion In India to bring about a constructive
change.
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Financial Inclusion

• What is Financial Inclusion?
• The process of ensuring access to financial
  services and timely and adequate credit where
  needed by vulnerable groups such as weaker
  sections and low income groups at an affordable
  cost - The Committee on Financial Inclusion
  (Chairman Dr. C. Rangarajan, 2008)

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Scope of Financial Inclusion

• Scope Financial Inclusion should include access
  to financial products and services like
• Bank accounts
• Check in account
• Immediate Credit
• Savings products
• Remittances Payment services
• Insurance
• Mortgage
• Financial advisory services
• Entrepreneurial credit

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A large population financially excluded

• Coverage of (Estimates based on various studies
  and Market Surveys)
• Check in accounts - 40
• Life Insurance - 10.0
• Non-Life Insurance - 0.6
• Credit Card - 2
• ATM Debit Card - 13
• Geographical coverage Only 5.2 villages are
  having a bank branch

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• The future of democratic polity and social
  harmony of India rests on the premise of
  inclusive growth
• Financial inclusion is a crucial driver for such
  growth
• The political leadership is looking at the
  banking industry to deliver on this promise over
  the next few years
• The various approaches to deal with this that are
  coming from grassroot have been discussed in the
  following slides

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Requirement of a new business model

• The business model to profitably serve excluded
  customers will be significantly different from a
  conventional bank model. It needs to be created
  from a clean slate to prevent existing models
  from influencing the design.
• Challenges faced are
• Low ticket size
• High cost in last mile
• High risks (no credible collateral)
• Unique customer traits (like low financial
  literacy, unpredictable cash flows, etc)

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Use of Mobile Phones (1/4)

• Research by The Boston Consulting Group in 2006
  found that a large segment of customers just
  above the bottom of the pyramid are excluded from
  formal financial services.
• They could be profitably served with an
  innovative low cost business model. This segment,
  with annual household incomes in the range of Rs
  60,000180,000 is termed The Next Billion
  segment

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Use of Mobile Phones (2/4)

• REACHING OUT Mobile banking has the potential to
  emerge as a game changer in terms of costs,
  convenience and speed of reach for banks to
  address the needs of the urban poor. In the
  picture, a member of a self-help group putting
  her thumb impression to use RFID/smart card based
  authentication.

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Use of Mobile phones (3/4)

• Transaction costs must be reduced by as much as
  90 percent to achieve a sufficiently low
  breakeven to accommodate the low ticket sizes
• Use of mobile phones for financial inclusion
  enable a shared accounthosting infrastructure to
  reduce the cost of technology for very small
  balance accounts
• UIDAI infrastructure (Aadhar cards) would reduce
  KYC costs in new customer acquisition.

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Use of Mobile phones(4/4)

• Many of the unbanked are illiterate, and may
  not be able to type on their mobile phones.
• The solution that is offered to promote financial
  inclusion is thus voice-based, said Ashok
  Jhunjunwala, an expert who leads the
  Telecommunications and Computer Networks Group
  (TeNeT) at IIT-Madras
• The Mobile Payments Forum of India (MPFI) has
  been trying to put in place unified technical
  standards to make it possible for banks, telecom
  service providers and companies to jointly use
  the mobile platform for payments

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Product Offerings
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Product Offerings (Contd.)

• Expansion of bank branches to provide transaction
  facilities to rural population
• Credit facility Micro credit, group loans for
  as low as 200
• Micro-insurance Insurance of agricultural
  produce as Indian agriculture is largely
  dependent on good monsoon
• Savings through deposit account Investment of
  those savings into real assets Gold, Real
  estate
• Co-operative systems
• Rural credit cards

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Penetration of Banks

• Business from urban and big cities still account
  for 75 of banks business and has been growing
  over the years
• Size of deposits and advances per account has
  also increased significantly indicating that the
  increase in business is not due to the
  acquisition of additional customers at the bottom
  of the pyramid
• Evaluation study by RBI indicated that most of
  the accounts that were opened in backward
  districts remained inoperative.
• The awareness regarding the non-frills accounts
  continues to be virtually non-existent in many
  districts

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Credit

• The increase in number of accounts of size INR
  25000 and below in the banking system rose from
  36.8mn in 2004 to 39.2mn in 2009 (a mere 6.5)
• The number of borrowers with credit accounts of
  less than 200,000 increased from 61.9mn in 2004
  to 95.8mn in 2009 an increase of 54.8
• Priority Sector lending scheme this policy
  has helped in imparting resilience to the
  agricultural sector despite the global financial
  crisis
• Overall priority sector lending constituted 42.7
  of the total by the banks

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Coverage through Micro Finance

• Two major models for delivery of microfinance
  services the SHG bank linkage programme (SBLP)
  and the MFI model
• SBLP - coverage of 89mn low income households
  through 6.81mn SHG
• Provides group saving facility and bank credit
  facility to low income families
• MFI Model Microfinance portfolios grew by 100
  lately compared to 17.5 growth in overall bank
  credit
• MFIs, except the cooperatives are currently not
  allowed to provide deposit services to their
  clients

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Ring Fence Financial Inclusion(1/2)

• The business model for this segment will be
  substantially different from that of a
  traditional bank, it will be crucial to
  ringfence this business
• The banking industry should draw learnings from
  the airline industry where companies often create
  a separate low cost airline to capture the entire
  range of customers

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Ring Fence Financial Inclusion(2/2)

• In inhouse approach, the bank ringfences the
  Financial Inclusion business unit into a separate
  SBU with separate PL, organization, and HR, as
  seen in the diagram.
• This is to ensure that the business model can be
  created without any bias from the existing
  practices and mindset of the current business
  model.

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References

• http//www.afi-global.org/about-us
• http//www.gpfi.org/sites/default/files/documents/
  0120GPFI_Principles.pdf
• http//csc.gov.in/index.php?optioncom_contentvie
  warticleid135Itemid277
• FICCI- IBA report, Indian Banking 2020,
  September 2010

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Thank you!