Opinion

Let’s bank on this duo

S. Dilli Raj | Updated on March 09, 2018 Published on June 30, 2013

Mobile banking as a last mile solution. — M. Govarthan

Banks and microfinance institutions should team up to improve financial inclusion.



What would be the best approach to financial inclusion in a country like India where the penetration of the banking network is still very low? India has 10.91 branches and 5.44 ATMs per 0.1 million adults compared with 13.76 branches and 120.62 ATMs in Brazil, 15.22 branches and 47.28 ATMs in Mexico and 35.74 branches and 173.75 ATMs in the US.

In recent times, thanks to the Reserve Bank of India’s initiatives -- including the Banking Correspondent model, opening of branches in sub-Tier 3 centres without the central bank’s permission and White Label ATMs -- there have been dramatic improvements.

Between March 2010 and December 2012, according to RBI data, the number of branches increased from 85,457 to 1,03,359, the number of rural branches from 33,433 to 39127, the number of banking outlets in villages from 67,694 to 2,11,234 and the number of basic savings accounts from 73.45 million to 171.43 million.

The need of the hour is more such innovative measures, with a view to offering a basket of cost-effective, convenient options tailor-made to meet the requirements of rural end-users and eliminate issues related to the last mile.

The idea is to increase the actual use of such formal options, while improving the penetration levels.

Credit delivery

In fast-tracking financial inclusion, cost and convenience are the two most important elements from a rural customer point of view.

The Eleventh Plan provides insight into the cost aspect. “The Working Group on Outreach of Institutional Finance and Co-operative Reforms examined… the actual costs incurred in financing small borrowers in the rural areas,” according to the document.

“A sample study of lending by a public sector bank showed that the all-inclusive cost of loans of Rs 25,000 and less is 21 per cent. In the case of a private sector bank, it was found that the cost of direct lending was much more than when the lending was through an intermediary MFI.

However, the cost difference declines as the size of the loans increases. The all-inclusive cost, as per this study, works out to as much as 33.1 per cent for the direct lending of loan of Rs 10,000 while this is 17.5 per cent for a loan of Rs 25,000 through an MFI.”

In addition to the service-provider costs detailed above, there is a cost angle at the service-receivers’ end in case the service is not provided in the neighbourhood of the latter during the time slots suiting them (including loss of wages, travel and other incidental costs) besides putting the end-users to inconvenience. That is where innovation in credit delivery channels assumes paramount importance.

Also, the single most important lesson that ought to have been learnt out of the East Asian crisis has nothing to do with ‘cross currency exposure’. The lesson is about avoidance of concentration of credit delivery channels.

India had an excellent system with Development Financial Institutions (DFI), banks and Non-Banking Financial Companies (NBFC), one complementing the other. DFIs were able to commit huge ticket size and longer tenure. But some of them had a mere 30 branches.

Banks have funding capability but some of them could not fully meet the requirements of niche segments such as microfinance. NBFCs have structural disadvantage in terms of funding as they bear the cost of intermediation. But their credit delivery skills are unquestionable.

India seems to have gone back on its wisdom. DFIs are a relic. NBFCs could have become an historical footnote in 1998 and likewise Non-Banking Financial Companies-Microfinance Institutions (NBFC-MFI) in 2010 post the Andhra Pradesh microfinance crisis.

But both have survived. In the final analysis, today all the credit risks are concentrated in the hands of banks.

Confluence, the solution

Considering this, the ideal solution is to achieve confluence between banks and NBFC-MFIs.

Mechanisms such as rated pool assignment and securitisation have been channelling meaningful sums to the needy and deserving rural entrepreneurs. There is a felt need to explore many more instruments and two merit a mention.

MFI-NBFCs should be allowed to act as correspondents for banks (BC) in view of their last mile experience and the cost advantage in terms of service delivery, as detailed above. A conducive ‘mobile banking’ policy environment to ensure bank-NBFC-MFI collaboration is the need of the hour. India’s rural teledensity is 39 per cent, while the rural bank penetration is 19 per cent. For this reason, it is easy to understand why riding piggyback on the telecom revolution makes immense sense for financial inclusion.

These BC-mobile initiatives will help MFIs reduce operating cost and facilitate a reduction in interest rates charged on micro loans to rural borrowers.

The MFIs, which served 26.8 million borrowers with a gross loan portfolio of Rs 20,913 crore in 2011-12, can easily increase their penetration if they are able to bring down costs further.

If ‘regulatory arbitrage’ and ‘single form of presence’ are the concerns, then a bank’s holding in NBFC-MFIs can be capped at 10 per cent.

Of course, the MFI sector has to walk the talk on client protection, compliance, credit bureau initiatives, etc., to fully gain the confidence of the regulators.

Considering the fact that the RBI has created a regulatory framework for the microfinance sector covering all aspects, the microfinance sector has no option but to live up to the expectation of all concerned on the above-mentioned aspects.

In view of these developments, all stakeholders should pool their resources to implement many more instruments of confluence to achieve the amalgam of the ‘Funding Capability’ of banks and the ‘Credit Delivery Skills’ of NBFC-MFIs to further the interest of ‘financial inclusion’.

Neither banks nor NBFC-MFIs can do it alone. But there is a high probability that they could do it together, and there could be a time-bound acceleration of India’s financial inclusion plans.

(The author is CFO of SKS Microfinance Ltd.)

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Published on June 30, 2013
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