The Hindu Business Line : Changing paradigms for development banking

Micro-credit will have to play as critical a role in the urban context as in the rural areas if India aspires to make any positive impact on its citizens' economic well-being. It just requires a little bit of financial and business acumen to develop a model that will not only be profitable but also has a lasting social impact on the developmental agenda, say SAMIK DASGUPTA and RISHABH BAJPAI.

WHICH AGENCY will give such persons in urban areas a home loan?

For long, provisioning for the financial needs of the poor has been driven either by philanthropic considerations or by priority sector regulatory compulsions. However, with products and services getting increasingly commoditised in maturing markets — leading to intense competition and pricing pressures — building commercially viable business models for the Base of the Pyramid has found renewed focus from such academicians as Profs C. K. Prahalad and Stuart Hart, and endorsement by such global organisations as Du Pont and BP, which hope to leverage micro-credit as a tool for penetrating low-income markets.

Now, there is an increasing realisation that welfare orientation and commercial prudence are not necessarily disjointed objectives. The recent Nobel Prize awarded for the micro-credit initiatives of Prof Mohammad Yunus and the Grameen Foundation is a further endorsement of this fact.

Talking specifically about micro-credit, many successful interventions across the globe have started in cities and subsequently branched out into the rural regions as processes and operations mature. This approach has found favour because high population density in urban markets helps in dramatically lowering operating costs, especially when compared to rural micro-credit.

High rates have actually received criticism from some quarters in India as unjustifiable — though they are significantly lower than the next best (money-lender) rates and despite the fact that primary reason for them being high is for covering operating costs. There is, therefore, always an imminent danger of this excuse being used as a reason for either putting a regulatory cap on these rates to commercially unviable levels, or even completely stalling such interventions. While reduced political risk is one advantage, lowered micro-credit interest rates, given the lower operating costs, also make the project financially more viable for the poor borrower, having a greater impact on her economic upliftment.

There are other compelling financial reasons why urban micro-credit makes sense. Income-generating activities, in which most urban poor are involved, are either vending or manual labour. The cash-flows generated by such activities are not only non-seasonal in nature, there is also an opportunity for them to simultaneously engage in multiple activities. Thus, an urban poor person is a potentially more credit-worthy candidate, given the reduced volatility and more diversified cash-flows for debt-servicing.

Another segment in urgent need of financial inclusion intervention is the set of poor people who are not micro-enterprise owners. This market segment has rarely been talked about in forums, leave alone anyone making any serious effort to address its needs.

There is, however, an opportunity to develop viable financial and business models that can provision micro-credit to non-enterprise owners in the informal sector who have a small but regular income. This will mostly be small-salaried class, employees of small establishments, rickshaw-drivers, etc. The segment actually exists across geographies but will be larger in the urban areas. More importantly, not everyone has the will or ability to be an entrepreneur, but definitely has financial needs that need to be taken care of.

Rural-centric

In India, things have, however, been different. Possibly driven by the Gandhian ideology that India lives in its villages, most of the action has been rural-oriented till now — initially through various developmental schemes, and then later through interventions such as Nabard's SHG-Bank linkage model and rural pilots of potentially sustainable financial-inclusion models by the private sector.

However, the Gandhian premise, though true till date, has undergone a structural change over the years. Sixty years of Independence has witnessed the increasing incidence of mass migration to cities — driven as much by little-impacting rural development schemes unleashed year after year, as by the lure of a better city-life. Various estimates suggest that in the near future, more of world's population will live in cities, India being no exception.

Given that, and the fact that even our cities have not been able to keep pace with the burden of supporting this swelling migrating population — evident by growing slums in India's mega cities, it is only prudent to argue that micro-credit will also play an equally critical role in the urban context if India aspires to make any positive impact on its citizens' economic well-being.

Even from a practical standpoint, many more financial institutions will actually be amenable to the idea of first piloting any developmental financial inclusion intervention in urban areas — where they can exercise better monitoring and control at reduced costs — and develop robust business models, before scaling up the proven ones to other geographies.

Multiple financial institutions pursuing the micro-finance agenda will not only lead to more innovative models being piloted, but increased competition in the space will also have a positive bearing on the pricing and services from a customer perspective.

Urban micro-credit is not without its own set of challenges though. If one were to analyse the behavioural patterns of urban poor, it is observed that there is a migratory tendency among urban poor, which, therefore, leads to lower bonding between people living in a neighbourhood. There are also many occupational and cultural variations within a single municipal limit. Further, most micro-credit interventions have been linked to women empowerment, while males form a sizable part of urban clientele. All these reasons make the group-formation activity difficult in the urban context, which otherwise is a key step of the most tested models globally. Therefore, urban micro-credit requires a new and innovative service and pricing approach.

Urban intervention

However, despite the operational and behavioural differences, fundamental financial needs of poor do not differ because of their place of domicile. Poor people are disadvantaged and feel reluctant to go to a bank branch everywhere.

Primary credit requirements of urban poor still have to be provisioned as small inflows of capital, which will be most easily serviced by frequent repayment instalments.

This credit will still be used as working capital for income-generating activities, meeting consumption needs or other contingencies. It is, therefore, only fair to infer that both rural and urban micro-credit interventions are critical if India aspires to achieve holistic development across various population segments, as also charted out by the Millennium Development goals of UN.

What should, therefore, be beyond reasonable doubt then is that there is a strong developmental and business case for micro-finance intervention in urban geographies.

While urban micro-credit opportunity is just a particular case, the moot point made through this example is that there exist huge and untapped financial services market segments that are crying for urgent attention, and can be commercially very attractive as well.

It just requires a little bit of financial and business acumen to develop a model that will not only be profitable there, but also has a lasting social impact on the developmental agenda. Possibly however, what is required in a much larger measure is the strong will to break through the inertial mindset of what organisations conventionally view as viable businesses to get into.

(The authors are part of Development and Knowledge Banking Division of YES Bank Limited and can be contacted at Samik.dasgupta@yesbank.in and Rishabh.Bajpai@yesbank.in respectively. Their views are personal and not necessarily those of the organisation they work for.)

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