Financial Inclusion: Grassroot Innovations

1. Financial Inclusion:Grassroot Innovations By: Abhinav Rishi

2. 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.

3. 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)

4. 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

5. 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

6. 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

7. 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)

8. 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 60,000–180,000 is termed “The Next Billion” segment

9. 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.

10. Use of Mobile phones (3/4) • Transaction costs must be reduced by as much as 90 percent to achieve a sufficiently low break–even to accommodate the low ticket sizes • Use of mobile phones for financial inclusion enable a shared account–hosting infrastructure to reduce the cost of technology for very small balance accounts • UIDAI infrastructure (Aadhar cards) would reduce KYC costs in new customer acquisition.

11. 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

12. Product Offerings

13. 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

14. 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

15. 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

16. 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

17. 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 ring–fence 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

18. Ring Fence Financial Inclusion(2/2) • In ‘in–house approach’, the bank ring–fences the Financial Inclusion business unit into a separate SBU with separate P&L, 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.

19. References • http://www.afi-global.org/about-us • http://www.gpfi.org/sites/default/files/documents/01%20GPFI_Principles.pdf • http://csc.gov.in/index.php?option=com_content&view=article&id=135&Itemid=277 • FICCI- IBA report, “Indian Banking 2020”, September 2010

20. Thank you!