The banking sector today has 170 regular banks ( and over 2,000 Cooperative banks with close to 80,000 branches. In spite of this, according to a World Bank report, more than 87 per cent of India's poor cannot access credit from a formal source and have to depend on moneylenders.

The key stated goal of the RBI in considering granting new private sector banking licences is promoting financial inclusion as well as increasing competition. While this is a positive step for the sector as a whole as it reduces barriers to entry, it is important to understand the reasons for lack of financial inclusion to assess how this measure should be implemented in conjunction with other measures to further the cause of financial inclusion.

The challenges

The primary reasons for poor financial inclusion in India are economic in nature. The ticket sizes (both saving and borrowing) are low and the geographical spread of the rural customer makes it uneconomical for banks to set up branches close to them to serve them profitably. As a result, the majority of bank branches in India are concentrated in urban areas and large towns and last mile access remains a hurdle in regular use of banking services. While the regulator has been trying to promote financial inclusion through regulations mandating banks to have a certain number of branches in under-banked areas, lending a minimum of 40 per cent to the priority sector (32 per cent for foreign banks), opening no-frills accounts and allowing business correspondents amongst others, banks view these as obligations and make limited effort to bring about inclusion in the true sense and promote usage of financial products amongst the underbanked. It is unlikely that a ‘generic' greenfield entrant will be able to develop a profitable business model to facilitate financial inclusion given the smaller revenue pool, initial high set-up cost and the lack of a large asset book to spread these costs over.  Furtherbuilding a branch network takes time and there will be a long gestation period before any significant scale is achieved by a greenfield bank.

The goal of financial inclusion through new entrants would be better served if the regulator were to facilitate the entry of ‘brownfield' NBFCs that already have a strong physical network and meet certain ‘fit and proper' criteria, into banking. Several NBFCs have built a low-cost operating model and provide loans profitably to the lower income segment which banks do not want to serve. They have historically focussed on this segment and will align themselves to banking them profitably.

Last mile access

To improve last mile access, the regulator would also need to take various other steps with appropriate safeguards. The RBI may look at allowing all NBFCs to become Business Correspondents and raise deposits on behalf of banks. The regulator should aencourage more corporates that have strong procurement, payment and distribution links with the rural sector to become Business Correspondents for banks viz. milk, egg, agri-produce, handicraft procurers and FMCG companies.

The business correspondent technology platform across the banking sector should be simple and standardised. Mobile phones can be used as the standardised platform across the banking sector as this channel is much cheaper than card-based technology and mobile penetration is already significant. The UID (unique identification number) should be leveraged as a standard tool for identification to facilitate Know Your Customer and lending. The regulator may also look at reforms aimed at co-operative, regional rural and old private sector banks. Some of these banks have strong presence in certain rural pockets and these reforms could help in achieving the goal of financial inclusion through an already existing network.

(The author is Associate Director, KPMG)

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