Financial inclusion. The urban hurdle

It is past noon and 21 women are assembled in a house on a narrow lane off the iconic Ice House, close to Chennai’s Marina beach. They are chatting, catching up with each other’s lives. Each is also clutching a wad of currency notes. The chatter ceases when one of them points out the time. It is 12.30pm. And as if on cue, M Madan enters. The group is now in quorum and the monthly meeting starts.

The women are neighbours, and also members of a self-help group for over five years under the aegis of Equitas Micro Finance. As a group, each of them took a loan of ₹18,000 from the microfinance company and together they share the responsibility for repayment – commonly known as a joint liability group. If one of them defaults, the group suffers. Madan is the Relations Officer of Equitas, and is here to collect their monthly payments. “This is their third loan. So far there has been no delay in paying EMI,” he says.

Mostly middle aged, the women have taken the loan for their enterprises, which range from selling saris to running a roadside eatery. “Can you give us a larger loan amount?” Chitimma R asks Madan. Others also nod. She explains how they can earn better returns by expanding their business.

Their businesses seem to be doing well. So do they put away some money in a bank as savings? In a metro like Chennai, which has 120 branches of State Bank of India alone, getting access to a bank should not be a problem. But only two of them have an account. “What do we have to do with a bank?” asks Rajam, looking amused. “The amount that is left over (from the business) is small. And when we go for loans, they (bank officials) ask for documents. We don’t have any,” explains Manisha Begum. Others say they live in rented houses or as a joint family with no property document in their names. It was relatively easier for them to open an account with Equitas; you just need an identity proof.

This will be a concern for India’s policy-makers. Providing affordable financial services to low income households — access to banks account, credit or other products such as insurance — have been central to the objective of financial inclusion.

While the government’s mandate is often linked to the rural markets, the challenge of financial empowerment is equally daunting in urban India, where 13.8 per cent of the population is below the poverty line.

Microfinance institutions (MFIs) like Equitas have helped reach the unbanked sections of the population. “MFIs play an important role in weaning the poor from dependence on moneylenders and bringing them into the organised sector,” says VP Nandakumar, MD & CEO, Manappuram Finance. He adds the joint liability group model has lowered defaults, which are as low as 0.1 per cent in MFIs.

But there is a limitation with MFIs. They offer loans, but can’t accept deposits. A bank, on the other hand, offers both savings and loan services. Also, banks charge a lower interest of rate for loans – typically under 18 per cent for personal loans, compared with 23.5 per cent in the case of MFIs.

Financial inclusion has other challenges, which vary between rural and urban markets. In the villages, where the density of banks is low (5 per cent of bank branches are in rural areas), a daily labourer has to take time off his job to travel to a bank. He loses a day’s wage. On the other hand, in a city the poor, who are often illiterate or school dropouts, are intimidated by bank branches, which focus on catering to the ‘educated’ customer. Even incentives don’t work. “Those who open a bank account are granted an extra ₹2,000 in loans,” says John Alex, Head-Social Initiatives, Equitas Micro Finance. But the inhibition remains.

The story is not dismal everywhere. K Siva Krishna, who works as a peon in a company in Hyderabad, opened an account with SBI after the bank’s ‘no-frills’ campaign four years ago. But “it was only a couple of years ago that my bank account became active after the introduction of the Direct Benefit Transfer (DBT) scheme,’’ he says. DBT is the mechanism to transfer subsidies.

Similarly, Shobha Rani, leader of a women's self-help group in Warangal, says, “Unlike a few years ago, now almost all members of help groups in our area have bank accounts. It is not just for availing credit, we also use the accounts for sending money to our children studying away from our villages.” But these green shoots are few in the large expanse that is urban India. For most, a bank still looks like an insurmountable fortress. The 21 women in Chennai, for instance, don’t seem to grudge the 23.5 per cent interest rate they pay for loans from MFIs. “I used to borrow from the moneylender; paying 5-interest (a term denoting 5 per cent rate of interest monthly, or 60 per cent annually),” says Karpagam, a member of the group.

The women like that their loan officer, Madan, comes home, treats them with respect, calls them “madam” and the entire process is transparent. “Dignity is more important to the human spirit than wealth,” says Jacqueline Novogratz, Founder and CEO of global venture fund Acumen, who started Rwanda’s first microfinance bank.

Moreover, the ‘corporate’ look and feel of banks intimidates women customers. “I take the help of the people in the homes where I work as a maid to deposit and withdraw money,” says S Kasturi. She owns a home in Kundrathur near Chennai, but instead of going to the bank for loans, opts for the moneylender and chit funds when she needs money. “I can talk to them (moneylender) and explain my situation. But for every visit to a bank for a loan, I end up bothering my employer," she explains. Even those who want to take a larger loan (more than ₹1 lakh) keep out of banks. They typically opt for avenues such as gold loans from NBFCs like Manappuram.

One possible way to overcome the inhibition factor is to make use of post offices for banking, says VG Suchindran, CEO of IFMR Investments. But he cautions that there should be enough staff to attend to customers.

He is hopeful that the new rule that allows 10-year- olds to open a bank account will help. “Children go to school and are likely to be more comfortable with the banking system. They can bring their parents to participate in the system,” adds Suchindran.

The direct benefit transfer has the potential to take the expected benefits of financial inclusion to the customers at the bottom of the pyramid. Once the relevance of a bank account is introduced to the clients, they tend to use it more and more, says J Sitapathi Sarma, General Manager, Financial Inclusion, State Bank of Hyderabad. For instance, one can graduate to bank loans after building a credit history through micro-loans from MFIs.

With inputs from G Naga Sridhar