India and the Race to Financial Inclusion

I just returned from my annual trip to visit partners and customers in India. In one year I could see quite a difference in the infrastructure developments, but also how the pace has picked up in developing new banking services. The economy is expanding rapidly on an annual basis (8.9% in 2010),  and growth is exceeded only by the economic powerhouse of China. Much of India's banking system has been through a recent automation spree, but the pace of growth and demand for new banking services has been stretching the country's banks, especially the state banks that currently cover large percentages of the existing banked population. But some estimates indicate that up to 60% of India's population remains unbanked.

A prevalent theme in all the emerging banking markets is "financial inclusion;" providing low cost, accessible banking services to low income groups, typically at or below the poverty line in each country. In India, financial inclusion has been a pressing national policy issue of the central bank, the Reserve Bank of India. A 2006 report exhorted the nation's banks to offer such banking services, but many of these people groups are in rural areas where a lack of infrastructure and the cost of service provision make development of physical banking centers an unrealistic proposition. But that might be about to change.

For the first time in years the Reserve Bank of India seems set to grant some new banking licenses to commercial enterprises. In addition to more mainstream banking services, organizations applying for a license must submit plans for addressing financial inclusion. Clearly, efficient and innovative use of technology will be a cornerstone of any strategy to overcome the cost issues of rural banking, including the cloud and mobile phone technologies to deliver 'branchless banking.' With up to seven new banks being created, the existing commercial and state banks have a small window of opportunity to accelerate solution development before the newly licensed banks enter the space with the advantage of deploying state of the art banking infrastructure.

The race to financial inclusion will be a significant challenge for all the banks, but at the same time an incredible opportunity to change the future of banking. As someone focused on innovative banking and payments solutions, it's an exciting time for the industry.

Comments (3)
  1. Venugopal PSV says:

    Hi Colin – Thanks for sharing these views. I agree with you that the demand for technology solutions to support offerings under financial inclusion in India will be high. I wanted to share my observations on couple of aspects that are likely to shape this market quiet differently from what is widely expected.

    Coverage: Rather than reaching low income profiles in rural areas, these new services are likely to address 'bottom of pyramid' customers in India's Urban neighborhood i.e. serve low income residents in urban areas. Classes include – vegetable vendors, daily wage labourers (often migrants hence need economic ways to ‘store and send’ money home) etc. Structural constraints like literacy, technological awareness and the need to keep transactions in ‘cash’ (read: to avoid government interference) etc may not, in my view, allow the 'geographic' aim of inclusion to yield results in the near future.

    Players: For the new-age banks that will be granted licenses, I would believe their focus on inclusive banking might be a 'tick in the box' rather than a leading strategy. This is likely because:

    a) Most of these new licensees already have a NBFC (non-bank Finance company) or run aspects of investment banking. A banking license is a 'key' to access cheaper source of funds- CASA deposits. CASA deposits follow the 'Pareto principle’ and are concentrated in and around the tier1/2 cities.

    b) Rural areas are also characterized by ‘low decoupling’ of banking relationships and lower level of maturity for ‘self service’ vis-à-vis assisted banking. By ‘decoupling’ I mean the maturity to source loans and share deposits with different banks. A consumer would mostly have CASA and credit relationship with the same bank. High touch is a pre-requisite for lending. In essence, consumers may not migrate to ‘click-based’ transaction services of a new age bank unless backed by a touch enabled lending services. Blending touch and click, from a geographic coverage point of view is possible only for a few of the largest Public sector banks.

    c) Lending in rural areas is very tricky. Micro finance institutions (MFI's) have been in trouble over the last three to six months across India.

    Owing to the above, in the near to medium term, I would believe that both existing and new players would align their offerings to address the 'lower rungs of the Urban pyramid' than 'scrape the geographic bottom'.

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