Bank on Unbanked
Indian Banking industry has been progressing rapidly over the last four decades and today it is one of the vibrant and strongest banking systems in the world with over 3.22 lakh delivery channels (Branches 1.23 lakh and 1.99 lakh ATMs) catering to the needs of more than 500 million client base with divergent backgrounds spread across the country. Compared to many developed nations, the size of Indian Banking is gigantic in terms of branch network, client base and business volumes (Rs.155 lakh crore) and has been growing steadily with double digit growth rate over the years.
Though, the banking industry has shown tremendous growth in volume and complexity during the last few decades, the fruits of the banking had not reached to the common man to the desired level. It is pertinent to note that even after 68 years of political independence, 46 years of bank’s nationalization and 22 years of liberalized environment, still vast segment of population, especially the underprivileged sections of the society, are deprived of basic banking services.
Rural India constitutes 68% of country’s population where as its share to total deposits is abysmally low at 9.9% compared to urban counterpart. It is evident from branch expansion statistics furnished in table no.1 that there is a skewed distribution of bank branches across population groups with one bank branch for every 7290 and 25800 residents in urban and rural segments respectively, which is far from the desired level compared to other countries.
Table no.1 – Branch Expansion Since 1971
Year
Rural Branches
Urban Branches
Branches
Population
Per Branch
Branches
Population
Per Branch
1971
4820
101450
8800
12390
1981
17660
29730
18050
8870
1991
35200
17840
25020
8670
2001
32640
22950
33640
8470
2011
32290
25800
51710
7290
Source: Census data & RBI Reports
While unbanked households are on the rise in rural areas, the presence of bank branches in villages have come down from 35,200 in 1991 to 32,290 in 2011 which speaks the fact that banks were reluctant to expand their operations in rural areas on account of operational and viability issues. Absence of banking services in villages is the primary cause to flourish informal financial markets which suffer from several imperfections such as loss of precious savings on account of fly-by-night operators, inordinate delays in effecting transfer of funds and settlement of the respective accounts and high cost of credit at exploitative terms.
Financial Inclusion Initiatives:
Today, the banking has become imperative to all the house-holds irrespective of their social, academic and financial status who expect minimum financial services from the banking system. In this direction, the initiatives taken by the government in the recent years is noteworthy which is yielding positive results. For the first time after 2 decades, there is a considerable improvement in rural branch expansion which is evident from below table.
Table no.2 – Rural Branch Expansion since 2011
Year
Branches
Population Per Branch
2011
32,290
25,800
2012
35,360
23,560
2013
38,450
21,660
2014
44,650
18,660
2015
48,030
17,340
Source: Census data & RBI Reports
The other notable achievement of the current decade is opening of 15 crore bank accounts under Prime Minister Jan Dhan Yojana (PMJDY) of which around 10 crore account holders are covered under social security schemes such as Suraksha Bhima Yojana (SBY), Jeevan Bhima Yojana (JBY) and Atal Pension Yojana (APY). It evoked good response across the country and majority of zero balance accounts are made operational. The deposits mobilized in PMJDY accounts have crossed Rs. 20,000 crore with in a short span of 11 months which speaks the potential of unbanked and under-banked segment. It is only a beginning of the massive program and many such schemes are on the anvil.
Out of 6.4 lakh villages in the country, so far we are able to cover 0.48 lakh villages with full-fledged banking services and another 2 lakh villages with partial services through Business Correspondents (BC); and still around 4 lakh villages remain unbanked which is a cause of serious concern. As per census 2011, around 42% of Indian households are away from banking mainstream and depend on informal players. The prime reason for suboptimal penetration of banking into unbanked areas is high transaction costs due to structural and operational issues. Today, place need not mean physical proximity; it could be electronic proximity or proximity via BC network. In the above backdrop, Nachiket Mor committee on financial inclusion has mooted the idea and this has necessitated RBI to redefine banking and introduced the new concept of setting up of “Payments Banks” and “Small Banks”.
The objective of setting up of Payments Banks is to usher the financial inclusion initiatives further by providing small savings accounts and payments / remittance services to migrant labour workforce, low income households, small businesses, other unorganized sector entities and other users in a secured technology driven environment. Though, the Payments Banks termed as banking entity but in reality it can be looked as a Differentiated Bank as these banks are allowed to undertake only restricted activities such as:
Ø Acceptance of demand deposits (current and savings bank deposits) with a cap of Rs.100000/- per customer. However, the Payments Banks cannot undertake lending activities.
Ø These Banks are allowed to issue Debit Cards to access funds and also can be leveraged to market non-risk simple financial products like micro mutual, insurance and pension funds. However, these banks are not allowed to issue credit cards.
Ø Workers living in cities and away from their rural homes would be able to send money directly to Payments Banks located in their village accessible by their immediate family members almost instantly. The Payments Banks will provide service to the customers/public through various channels like Branch network, Kiosks, BCs, ATMs and Micro ATMs.
Ø Payments Banks can facilitate per-to-peer transactions through Mobile applications. It allows transferring funds from mobile to mobile and mobile to account to make small payments such as Taxi or plumber or electrician, grocery shop or any other utility payments.
Ø A Payments Banks may choose to become a BC of another bank for credit and other services which it cannot offer.
RBI has mandated that these banks are required to invest a minimum of 75% deposits collected from the public in government securities up to one year maturity. They are allowed to hold a maximum of 25% in current / fixed deposits with other scheduled commercial banks for operational and liquidity management purposes. These banks are required to maintain CRR/SLR as applicable to the existing commercial banks and the minimum capital adequacy ratio stipulated 15 per cent of its risk weighted assets (RWA) on a continuous basis.
As per the extant guidelines, the eligible promoters will include existing non-bank Prepaid Payment Issuers, Non Banking Financial Companies, Telcom companies, Corporate Business Correspondents, Mobile Network Operators (MNO) and Retail Super Market chains. A promoter / promoter group can have a joint venture with an existing scheduled commercial bank to set up a Payments Banks. It is reported in the press that around 40 companies intend to enter into Payments Banks landscape and applied to RBI for approval. Broadly they are grouped as under:
Table no.3 – Payments Banks – Major Aspirants
Telcom Cos.
Mobile Payment Cos.
Software Cos.
Financial Services
Others
Airtel
Citrus Payment
Concept Tech
Cholamandalam
India Post
Vodafone
FINO PayTech
GI Tech
Eko India
Reliance Ind.
Idea
ItsCash Card
Novopay
Calibre
Future Group
My Mobile Payments
Smart payment solutions
Instant Global
Aditya Birla Nuvo
Oxigen
Suvidha Info
NSDL
Kalpataru
Pay point
Tech Mahindra
Muthoot
KKM Mangt
One mobikwik
Resource Square solution
Weizman forex
Videocon D2H
Youfirst money express
Renuka Society
A little world
Vakrangee
FX Mart Pvt ltd
Telcom Companieshave strong synergies with services already being provided by telecom operators and their existing distribution and technology infrastructure can be further leveraged upon. The operators will be able to increase touch points with their customers and provide a range of banking services to them. Consequently, over a period of time, they would be able to enhance customer retention and obtain a greater share of the customers’ wallet. At present these companies are paying commission to the banks on cash-out transactions which can be saved on becoming Payments Banks. Further, it opens another window for additional income by way of interest spread on the deposits collected from public. It is reported that Kotak Mahindra Bank with Bharti Airtel and State Bank of India with Reliance Industries & Idea Cellular with Future Group are likely to join hands to set up Payments Banks.
Mobile Companies:Till recent years, mobile phone used to be a status symbol or lifestyle product, and now it has become a necessity and inseparable with day-to-day life of the individuals irrespective of age, education and financial background. India accounts for about 1/4th of world’s mobile market with 965 million and making inroads in to remote rural areas. The share of rural subscribers is around 35% speaks growing potential of this segment and its usage by the common man has become order of the day. The swift growth in number of Mobile users and wider coverage of mobile phone networks has made this channel an important platform for extending banking services to customers. The evolving ecosystem for payment applications is on a fast track with customer payments to taxi, e-commerce, mobile, travel and entertainment companies shifting from cash to e-wallets. Many of the mobile companies are already providing e-wallet services to their customers which are close substitute to basic banking services.
Wallet
Merchant establishments
Oxigen
Bookmyshow, Domino’s, IRCTC, eBay, Zapak, Godaddy
Mobikwik
redBus, Myntra, Bata, Jabong
Paytm
Makemytrip, Bookmyshow, Fabfurnish, Homeshop18, Ubercab
Airtel
Airtelmoney
Vodafone
m-pesa
E-wallets have been around for quite some time and their popularity is on the rise at an exponential rate. Going by the present trend, it is expected that the number ofe-wallets may cross 100 million by next year. Though, e-wallets are very convenient to undertake purchases without carrying cash and credit/debit cards, the absence of wallet-to-wallet transfer facility is one of the concern and the funds parked in the wallet is not earning any interest. The recent RBI guidelines are truly enabling the e-wallet space to set up Payments Banks which obviate the above stated constraints and improve the profitability of these companies.
Bank on Gen-U (Unbanked):The game plan of the new players is clear that they are targeting the untapped rural hinterland and the contributing triggers are:
Ø Rural financial services are the fastest growing segment on account of spurt in middle class segment and it is expected to grow at accelerated pace in the ensuing years with distinct features viz., Educated, Employable and Bankable. The declining dependency ratio and increased non-farm income source are the triggers for the increased flow of savings to the banking system and a demand for retail banking services.
Ø As per NSSO data, the incremental consumption expenditure in rural has outpaced urban in the recent years. Noticeable shift in expenditure pattern is observed from traditional food items to non-food items i.e. Education, Housing, Cosmetics, and Entertainment etc. According to MART, rural India buys 46% of soft drinks sold, 49% of motorcycles and 59% of cigarettes. Further, Rural markets account for 56% of the total domestic Fast Moving Consumer Goods (FMCG) demand and 60% of India’s annual consumption of gold/jewelry is from rural India.
Ø As per census 2011, the literacy growth rate in rural area is higher (15.99%) compared to urban areas (5.73%), which clearly indicates that the rural population is keen to educate their children despite hardships. The increased literacy rate is providing employment opportunities and supplementing their family income.
Ø Multiple occupations in rural household are a common feature on account of integration between Rural and Urban area resulting mobility of labour, capital, products and credit. As per NCAER report around 25% of rural households solely depend on non-agriculture income.
Ø Government schemes like National Rural Employment Guarantee Scheme, which guarantees 100 days of employment to one member of every rural household, has provided employment opportunities and enabled the rural people to improve their income level.
Ø Considerable improvement is seen in agricultural productivity over the years due to adoption of better farm techniques coupled with improved irrigation facilities and reasonable rise in procurement prices.
The development of infrastructure connecting the rural hinterland to the rest of the country is another positive factor which is eventually blurring the rural and urban divide to a greater extent and paving the way to a quiet revolution in rural India.
Bank on Gen-Y (Young): The demographic profile indicates that 68% of population is under below 35 years age and this segment is likely to grow with increased pace and emerge as youngest country of the globe. Gen-Y has the ability to connect the external world swiftly using Information and Communication technology.
Impact on Commercial Banks: The evolution of commercial banks in India clearly depicts the fact that majority of these banks started operations confining to a particular state or region and later expanded across the country. But the fact remains that lion share of the business of the banks is from rural/semi-urban areas. Majority of existing players enjoy the huge spread on low cost deposits (CASA) since the average interest paid on these deposits is below 4%.
As per Basic Statistical Return 2014 published by RBI, out of Rs.7.87 lakh crore deposits of rural branches across the country, the CASA deposits stood at Rs.4.26 lakh crore (54%) which speaks the potential of the market and also the major trigger to evince interest by new players to enter into this segment.
Table no.4 – Deposit Mix (CASA Vs Term) as on 31.03.2014
(Rs. in lakh crore)
Category
CASA
Term
Total
% CASA to total
Rural
4.26
3.61
7.87
54.13%
Semi-Urban
5.73
5.68
11.41
50.22%
Urban
6.75
10.39
17.14
39.38%
Metro
11.45
31.69
43.14
26.54%
Total
28.19
51.37
79.56
35.43%
Source: Basic Statistical Return 2014 published by RBI
As of now, the foremost strength of commercial banks is its stable small value account base with relative higher low cost deposits. However, once the Payments Banks commence operations, the strength will be turning into weakness as the new players are likely to poach the strong low cost deposit segment of commercial banks especially PSBs. This may lead to slim down Net Interest Margins which no bank can afford at present.
The new set of banks is expected to be operational extensively on technology platform to provide the desired services with most cost effective way. These banks are not only eying Gen-U but also Gen-Y segment since this group is closely intertwined with the technology embedded products. Thus, target customers will be existing clientele of PSBs and Private sector banks as well as untapped, unbanked and under-banked population.
Though, there is heat in the financial sector with regard to setting up of Payments Banks, PSBs have not initiated any proactive steps so far to meet the competitive threat. Further, the PSBs seem to be struggling with basic issues like stressed assets and lack of capital infusion by the government. On the other hand, the new generation banks like ICICI and HDFC banks are in a blur of action and launched Mobile Payment applications such as e-wallet, SmartBuy, PayZapp etc., to remain competitive in the fierce competitive environment. If the PSBs do not act quickly, atleast now, they tend to lose business across the segments which may impact the bottom-line of the banks adversely.
The schemes (PMJDY, PMSBY, PMJBY, APY) which are launched recently for the benefit of common man are definitely be money spinners to the banks. Further, the Direct Benefit Transfers (DBT) amounts are expected around Rs.3 lakh crore every year and these amounts will be routed through bank accounts only hereafter. Thus, the banks which are in forefront in serving the unbanked and under-banked through the above schemes will be the beneficiaries as they enjoy substantial float funds as well as other income by way of commission on enrollment of social security schemes and DBT payments.
Way forward:
There is a strong business case for new set of banks as sizeable portion of the country’s population remains outside the ambit of formal banking. Potential aspirants would hope to capitalize on the synergies leveraging its distribution network, client base and their brand image in the market place. To keep the costs low, the new banks can effectively operate on mobile/internet platform with few physical branches with more focus on virtual banking. The biggest advantage of these banks is to provide the last-mile connectivity, which the formal players are unable to do on account of operational and structural constraints.
With phenomenal boom being observed in the e-commerce space, banks can use these channels as a means to reach out to new customers, including those in smaller cities and villages. Apart from exploring regular advertising strategies on these websites, joint product offerings could be an innovative opportunity. Tie-up with e-commerce websites and aggregators is another strategy for customer acquisition. Wallet providers are likely to enter agreements with banks for operational convenience and viability.
The views of Mr.Bill Gates, founder of Microsoft “Banking is necessary but Banks are not” is truly relevant across the globe including our country. The entry of Payments Banks is going to make the statement a reality shortly. To remain competitive, strategic partnerships with companies having vast retail outlets and agent network is a prerequisite for both existing Commercial Banks as well as new players.
The proposed nichebanks are ideal vehicles to achieve the desired financial inclusion objective by covering all households with basic savings bank products and micro insurance, pension and mutual funds. However, the players need to adopt appropriate cost effective, innovative and viable business models with a concept “High Volume & Low Margin”leveraging technologyto remain competitive in the market. Also it is the time for Commercial Banks to introspect and revisit their business models to stay in the market.
With this, the 2020 decade is going to be an icon for Bank on Unbanked with new set of players which definitely paves the way to achieve the long cherished dream of Inclusive Growth.
“The future lies with those companies who see the poor as their customers”
Prof.C K Prahalad
References:
1. CRISIL Research Report – November 2014 on Payments Banks tailor-made for Telcos
2. Report on “Banks taking quantum leap through Digital” presented in 9th CII Banking Tech
Summit 2015
3. RBI Draft guidelines on “Payments Banks & Small Banks”
Author: NSN Reddy, AGM, Andhra Bank
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