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Indian banks should explore the subsidiary route to drive down distribution costs in their financial inclusion drive, according to Dr Janmejaya Sinha, Chairman – Asia Pacific, Boston Consulting Group.
Given that the average distribution cost of banks, at Rs 5.5 lakh per employee, is prohibitive, Dr Sinha said they should consider floating subsidiaries to bring down human resource costs. These subsidiaries could harness local talent (at a substantially lower average distribution cost of Rs 1 lakh or less per employee) in rural and semi-urban areas for reaching basic banking services to the un-banked.
Keeping in view the central bank's concerns on regulatory arbitrage, the BCG chief suggested that policymakers allow banks to set up subsidiaries only for the financial inclusion drive.
High cost
BCG, in its report Financial Inclusion: From Obligation to Opportunity , has assessed that in the traditional model for pushing financial inclusion, the cost-income ratio was about 1000 per cent, that is, the cost of rendering service (at about Rs 600) per account exceeds income earned from the account (Rs 60). Ideally, this ratio should be around 50 per cent.
Almost two-thirds of the respondents in the BCG survey, which interviewed 12,321 households in 60 districts and four metros across 15 States, said they took loans mainly for consumption-related purposes; 24 per cent took credit for income generation and 9 per cent for education.
Over 50 per cent of the respondents depended on the informal channel (money lenders/ friends and family) for credit to smoothen income gaps, said Mr Neeraj Aggarwal, Partner and Director, BCG.
Easy access
As credit from the informal channels is available 24x7, is easily accessible, and does not have any documentation hassles, respondents did not seem unhappy with this source of financing, he added.
To enhance revenues from the financial inclusion drive, the BCG report has recommended that banks offer credit products in addition to deposits and remittances; shift their transaction model from the conventional rich man's float-based model to poor-friendly, transparent pay-per-use model.
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