Moderator – N Srinivasan, Sector Expert
Rural Development Department, Govt. of Madhya Pradesh
a representative from ACCION)
– Nilanjan Majumdar, Vice President and Head, Financial Inclusion, Axis Bank
- Basic banking accounts – NFAs have increased 150% over the last one year. RBI’s financial inclusion banks have really ramped up network presence – but does this mean we are achieving financial inclusion (FI)? Cooperative sector has really contributed but they feel they that are not included in the FI agenda. Why have MFIs and SHGs been excluded? And what do we mean by FI? These are a few questions we would like to speak about today.
- I know that the last time I spoke about the MFI bill, it generated a lot of debate. Today, I’m going to speak about inclusion from a banking perspective. First we need to insure infrastructure is there for people to access finance. Eg. a BC must visit every village every 2 weeks. Districts are very diverse, for example there are some with a 1000 Sq. m population of a hundred versus densely populated estates. Thus, this diversity makes it difficult to service every district equally. Direct benefit transfer (DBT) problems reported to us – even if you give it to the beneficiary then how will they withdraw the money? Thus, we had to make sure there was an outlet you could serve. The 2016 RBI target for full FI will be met. Next, we have to look at quality – how many HHs are using the accounts? Once we reach 85%, the marginal costs of including the last 15% of the population will be even greater. We also have to look at superimposing other services such as credit. There are different types of models which provide different services– one is credit, one is providing insurance and third is to provide the ability to provide deposit services.
- Could we speak about how banks believe that FI is not profitable?
- How do banks who have a thin branch network, go about achieving financial inclusion? So in any case, sett
ing up only the branch network to cater to the financially excluded population will never be viable for any bank. The cost of setting up the branch etc. will be more than the profit. So we have to look at agent banking models. Lets talk about agent banking – you have a bank, an agent outlet, an agent network aggregator and then you have the technology provider. Sometimes one player will don multiple hats but these are the key roles to be fulfilled. What are the types of agents? You need to choose your agent network in such a fashion that you pick people with a strong connection with the people they have to serve.
- My opinion is that we have given undue attention to technology, more than it deserves, The agent has to understand the cash flow cycle of each client. Where does the money come from and where does it get expended? This information can help give banks information for product design. It is very important that the agent network which is set up under stands this. When I started, the private sector banks tried to outsource it. Banks perspective is that you just give me the bank account numbers so I can fill the RBI quota.
- Now the time has come to introspect as to if we need technology service providers or do you internalize it such that you can gain the power balance from the tech providers? Such that banks can change service providers overnight based on performance. Person at the front end who is actually providing the service is not paid adequately. Even with an aggregator in place, agent viability has to be maintained. It is very critical that as a bank you follow that agent outlet closely and treat it as a bank branch. So agent banking is critical to FI but there are some caveats. – Eg. some customers don’t even know they have a bank account with Axis bank. They think the account is with the services provider. This brings the trust down two notches immediately. So banks must make an effort to reach out to BC model customers as well. This can give clients the confidence that they are dealing with a bank and not a network aggregator. Agents must be chosen carefully and we should ensure that viability starts with agent regulation.
- Madhya Pradesh seems to have done a lot for FI which is unusual for a state. Do you think the state government has a role to play here with banks on one and NGOs on the other side
- The platform we took was the state-level bankers community. I would like to take up one paradigm shift after the other and move on to addressing and achieving the result of FI.
- The strategy we followed included – Using the lead bank officer to map the services available. MP is a low density state and we can evolve the model to include the government more. We provided a 100Sq feet area and said that this area belongs to any bank coming to open an ultra-small branch (USB). So we address the idea of FI – Identity of the bank with a board and marketing was key for community integration. What we did was that in a 5KM radius, we made everyone to sign up.
- What is left? Insurance and financial literacy and internet networking are challenging. First thing we need is insurance for the unorganized sector. We’re looking to use UID for all devolution of funds to the people in the near future.
- The ultimate objective of FI should be to alleviate poverty by creating impact in a holistic way. Two important things – willingness of targeted people to participate and creating an environment for FI and engagement. We should not follow an unsustainable model. Can banks do FI without an agent model? YES. They can offer savings, insurance, financial literacy, and most banks have a wider network in remote and rural places and direct access to BoP customers. Objective on livelihood finance should be to generate employment. When income levels go up after the intervention, people can independently take care of other life aspects such as sanitiation, health etc.
- Existing players (govt, banks,moneylenders) are not adequate. And how do we deepen banking services even during expansion? I believe the approach should be complete (provide all financial products) even when reaching to a small remote area, which just gets ride of the question above. All players should create their own solution which is affordable, geographically specific and people specific.
- Where are we as a country? What is the big picture here? The way I see the world evolving over the next 7 years is a banking landscape which is able to reach out and deliver at a reasonable cost and is able to connect well with the client segment. Here is where MFIs come in – call them small banks or whatever, the fundamental challenge we have, the banking and financial services architecture delivers by 2020. MFIs are integral to this because the way I see things evolving is to a positive outcome. What we need is a policy framework to regulate, and a diverse set of institutions to help with delivery of financial services to the BoP sector.
- The govt has spent 2M$ to reform the financial sector and make it inclusive. But MFIs don’t seem to figure as a part of the RBIs plans.
- Micro planning is done at district level and not by village. If a village is covered by a coop bank, we don’t go there. Planning has to be coordinated by the lead bank (RBI). With a Coop. bank the challenge is to put everything on a network. The concept of USB came from an experiment in Madhya Pradesh. Basic trust comes from the fact that the person SITS there. I think its amore efficient delivery system if there is competition between the MFIs and USBs.
- How can the agent model be fixed by 2020?
- To make agent model viable, you need to make sure account usage is taking place. If we go about opening accounts for clients who are actually using these resources, if you have regular transactions happening, the agent viability issue is sorted. Once you have financial literacy, and once you start offering more products, that is when the people will see the value of the bank account. Starting point is to open accounts to capture these income flows and where account have been opened, there need to be more services provided.
- Service area approach was followed in MP where the areas which were given credit had to be defined. We are also trying to define unbanked, rural areas. We say the rural branch should have the same shadow areas as a real bank. Remote shadow areas have a LOT OF MONEY. Sadly, we hear about small obscure banks providing services only when someone absconds. There is a need for the Ministry of finance to issue clear guidelines which otherwise create confusion in the sector.
- What does FI 2020 mean to you? Everyone agrees that it should be holistic and not just one service.