At first glance, India’s financial sector is doing extremely well. Banks have doubled their loan assets in four years and the price-to-book value of Indian banks is second only to China. But the irony is that despite so much growth and wealth creation, two-thirds of the country continue to have no access to organised financial services.
According to a report by the Boston Consultancy Group (BCG), India has the second highest number of financially-excluded households in the world of about 135 million, which is second only to China. “India's financial sector is growing very rapidly — it is the fastest-growing incremental revenue pool in the world, growing at a rate faster than even China.
But barely 35% households are truly included and have access to financial services from the formal sector. Financial services may have taken off for financial institutions, but has not taken off for India and all Indians,” says Janmejaya Sinha, senior partner and MD, BCG India.
What is worse, last decade’s record growth in financial services has widened the gap between urban and rural India. Since 1999, bank deposits have grown 3.75 times to Rs 29.29 trillion, but it is the cities where bank deposits have been piling up.
Top 10 cities which accounted for only 50% of bank deposits in 1999 today account for over 60%. “Metros have emerged as the largest beneficiaries of the high economic growth in India, as corporates posted robust performances resulting in higher corporate savings," says Hemindra Hazari of Karvy Stockbroking in a report.
The change in ideological profile of Indian banks, post-liberalisation, has also diluted the focus of state-owned banks on rural credit. After losing their ‘creamy layer’ to private banks, state-owned banks have also begun to structure themselves in the form of new private banks.
Many of them increased their minimum balance requirements, prompting the central bank to come out with a diktat asking banks to open ‘no-frills’ accounts with minimum or zero balance.
Most private banks have introduced such ‘no-frills’ accounts only to fulfil statutory requirement and have made no effort to publicise the availability of such a product. As a result, there is move to build a business providing financial services to those who are at present financially excluded.
On the lending side, there has been some progress towards financial inclusion with mi-crofinance institutions (MFIs) becoming active in rural pockets and private and foreign banks lending in the urban subprime sector. But there have been setbacks as well. Private and foreign banks have pulled out of the subprime segment after facing flak for deploying recovery agents. Besides, mi-crofinance institutions are facing increased regulatory scrutiny and a possible cap on interest rates.
Yet, there are enough indicators to show that the financial sector can take a big leap forward in the next two years in terms of financial inclusion. Two developments have made this possible. One is the penetration of mobile telephony. The Boston Consultancy Group report highlights the fact that many of the next billion potential customers are unlikely to have a relationship with a financial services provider but may already be tied to a telecom provider.
ICICI Bank, which pioneered ATM culture in semi-urban India, believes that the next big opportunity lies in the villages. The bank feels that the channel for growth would be the mobile phone, which is gaining faster acceptance than any ‘no-frills’ account. Secondly, the technology gap is closing too. Even as the cost of mobile handsets is coming down, service providers are working at developing java-based applications which will provide a simple yet comprehensive interface for banking transactions on ordinary handsets.
At the back-end too, technology is falling into place. In 2008, most large public sector banks will have migrated from branch-banking to a core banking platform. Having all account information in a central database will allow the bank to plug into any distribution channel for banking transactions. The Mangalore-based Corporation Bank, for instance, is working on a mobile e-purse which will allow account holders to make payments to merchants through their mobile phones.
The bank is in the process of tying up with 2,000 merchant establishments for a pilot project. “With the entry of aggregators, we do not have to tie up with individual telecom companies as they provide access to all providers,” says B Sambamurthy, chairman, Corporation Bank.
Cynics may point out that India has a long way to go in terms of general literacy, leave alone financial literacy. But they underestimate the Indian ingenuity in dealing with numbers. Gaurang Shah, MD, Kotak Mahindra Life, reminisces of the days when he led an auto-finance business: “We have had all kinds of people coming to us for auto loans.
There were uneducated people without any knowledge of interest rates, but they would compare two loan schemes by simply adding up the total fees and installments to be paid out under one scheme and comparing it with the total payout under another scheme.” And they never erred in identifying the low-cost loan.
The country’s largest bank — State Bank Of India — is planning to triple its ATM network by 2010, taking the total number of machines to over 25,000. A large number of these will be in non-urban areas and be more user-friendly. The bank has targeted to issue around 10 million biometric cards by 2009.
The building blocks for improving financial inclusions are already in place.
It is for the players now to grab the moment. “Including even half of these excluded households provides an opportunity to bring in some 60 million households into the mainstream. The positive economic, not to mention social, impact of this is huge. Since much of this will be in the retail segment which is a local business, it is robust to external shocks.
