Banking Onn the Bottom of Pyramid

8/3/2019 Banking Onn the Bottom of Pyramid

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Banking on the Bottom-of-Pyramid-Inclusion and Microfinance Landscape in India -Shruti Koley

Forty percent of the adult population in our country, comprising mainly the low income

group without any collateral, is unable to access any form of mainstream finance. They

turn to informal credit markets often on exploitative terms and exorbitant interest rates.Nearly 73 percent of farmer households are excluded and cannot access any source of

formal credit.

It is known that the poor saves for tomorrow. When they come together in Self-Help-Groups

(SHG), they not only save but also practice financial prudence due to peer pressure. Inclusioncan happen in several ways. Regional Rural Banks, Cooperatives, NGOs or commercial banks all

have a stake in this pie. However, in spite of the vast opportunities that this BOP segment offers,much remains to be done.

Amongst a plethora of challenges, it's the few banks that have come out strong, like the

Grameen in Bangladesh or the Banco Solidaro in Bolivia, that have taught the world a lessonon how to make profits with a purpose.

Banking with such a segment is quite a lot about relationship and the use ofsoft information;methods like credit scoring act as a proxy for collaterals. However, investment in building

relations and high transactional costs have kept the bigger players from fishing within this nichemarket. Of late though, the top rung of the low income group, having proved its potential as a

market for loans for primarily SME operations as well as its credit-worthiness, has been rousinginterest among the commercial banks and inducing competition with the micro-lenders.

The banking sector in India, with a reach of59 million households through SHGs and

approximately 9 million others through microfinance institutions (MFIs), has only penetrated 15percent of the estimated demand. Sa-Dhan, the apex body of microfinance in India projects that

in the coming decade a client base of 300 to 400 million can be tapped, which leaves a hugemarket unexplored.

Essentially microcredit has functioned under3 different models:

1. When in 1992 the microfinance movement began in India and for the first time Self HelpGroups were linked to banks, it was considered a risky proposition. But by 31st March

2007, the number of SHGs financed had reached a good 2.925 million.2. Then, there is the individual banking model which works on the typical risk

management systems of asset-based lending or fixed-asset lending. Averse to hightransactional costs, they have usually had high requirements of collateral and hence not

penetrated deep within this unbanked segment.3. Thirdly, there is the group credit structure ofGrameen Bank, Bangladesh, with a 2.1

million customer base, which has shown how remarkably high repayment rates within thepoor can be achieved, if effective financial and credit packaging strategies are adopted.

Amongst several issues, some primary environment enablers are:


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y Evolution of public policiesy Regulatory frameworky Commitments from the state and local representativesy Financial model improvement- market research for the right products and servicesy Innovation in existing structure of credit and delivery modelsy

Technology innovationsy Financial literacy and debt/credit counseling centers

Coverage of PoorIn a sample survey of 5.6 million rural clients in September 2006, it was found that nearly 75

percent belonged to the southern states and 20 percent to the east. This implies an abysmallylow coverage for the north and western states, many of which account for the poorest 13 states,

very sparsely banked. Of the 20 million clients being served by microfinance, less than 3 millionare connected through the bank-SHG linkages.

It is a matter of grave concern that despite a banking sector with its century-old cooperative

credit structure and 1 lakh retail outlets, 40-year-old public sector commercial banks with nearly50,000 rural and semi urban branches and the recent evolution of regional rural banks (RRBs),

the system has still not been able to leverage itself by tying up with local NGOs (who have astrong rapport with the village community and the SHGs) to penetrate the BOP segment.

After 2 decades of presence, Microfinance banks can only boast of a meager106 USD loan per

borrower. The objective of merely raising living standards needs a revival. It is essential todetermine the exact requirements of the BOP segment through intensive market research.

Currently, credit provided primarily covers requirements such as consumption loans, retail trade,small businesses etc. These need to be expanded to cover a wider purview of utilization, such as

credit needs of tenant farmers, share croppers, microfinance for cottage and rural industry.Indicative of the shift, the strategy now has to concentrate on not just providing credit but also

ensuring that it is used in the most efficient way possible through training and literacyprogrammes. It would be critical to ensure that technological inputs/ raw materials sourcing and

operations/ marketing services are undertaken and financial planning is done properly to ensurehigh quality output.

Since the BOP segment is primarily constituted by farmers, a bad monsoon can also mean

several non- performing loans. Risk mitigation for such times along with financial services suchas savings, insurance, remittance products for an improvised 'Alternate Banking Model' must

succeed the Pure-Lending model.

Thrift Deposits

SHG savings (called thrift savings) mobilized for lending can reduce the need for MFIs toborrow from commercial banks, which currently comprises 3/4ths of the liabilities on their

balance sheets. Given 10 percent and 14 percent interest rates from private and public banksrespectively, profit margins can substantially rise if savings are mobilized effectively.

Regulatory Framework

Having introduced the No-frills Account and General Purpose Credit Card, through


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simplification of the KYC (KnowYour Client) norms and propagation ofBusinessCorrespondent model, RBI has been liberalizing norms for inclusion. What now needs to be

done is relaxation of the entry level capital requirement. Under the current norms, an urban co-operative bank can only be set up with a start-up capital of INR 50 lacs.

Also, with respect to NGOs, formation of a for profit fund to act like a NBFC which can pumpprime savings into new alternate banking entities, without a threat to theirtax free statusshould be allowed.

Social security transfers like National Rural Employment Guarantee Programme (NREGA)

can take place through the 'Electric Benefit Transfer' (EBT) route, where in the government canprovide financial and material compensation through plastic debit cards. Cashless transactions

such as these are bound to become increasingly popular in coming times as they will allow banksto minimize transactional charges and eliminate leakages.

Infrastructure Requirement

Indian banks have increased their overall reach tremendously compared to their 1969 status.While back then, a little over 8000 branches existed with the average population per branch

being 64,000, customers being served per outlet have substantially come down to 15000 asbranches have gone up to 71000. However, compared to our international counterparts, we're

still lagging behind and the inequitable distribution makes it worse.

This, as Dr. C Rangarajan, chief of committee on financial inclusion, points out, is due todemand being weak in the rural segment as a result of which a lot of effort is required to improve

resources, productivity, mitigate risk and strengthen market linkages in this segment.

Apart from the various financial solutions that have been discussed, infrastructure - both ITand physical - needs heavy investment. Lack of power, connectivity and illiteracy has made the

deployment of ATMs, both biometric as well as ordinary, or running of bank branches, nearinfeasible in remote areas.

The Smart Card, which can securely store biometric data with its contactless variants and

mobile banking have come in as a breather. However absence of an apex body like VISA orMasterCard, as in case of debit and credit cards, has made inter-operability an issue of concern.

RBI in its circular issued in May 2007 has urged banks to follow accepted open standardswhich due to propriety nature of all solutions on offer today, becomes rather difficult to

implement. This basically means that a company that follows the accepted open standards willlose its advantage, as its infrastructure could be used for making transactions from smart cards

issued by competing firms as well. In this regard, using the standards that are to be used for theNational Unique Identity project along with standards for card specifications, security

implementation and message formats can solve the problem.

With respect to mobile banking, low cost handsets and the tremendous growth in telephonyaugur well for MFI. Low transactional costs, easy remittances, identity proof fulfilling and ease

of credit management can make mobile banking a catalyst for inclusion.


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WIZZIT, a startup mobile banker in South Africa has shown how much of the low incomecustomer band may be captured through innovative marketing. The marketing strategy used by

the company included recruiting 2000 WIZZ kids from within the low income segment, whowere trained and asked to further educate and convert prospective customers, for which they

were paid commissions.

With rising awareness about the bottom of the pyramid being the fortune indeed in all possiblesectors, innovation and social sensitivity-led banking trends in the coming decade could act as a

great leveler bringing both rural households and the urban settlers at par, driving the growthmomentum of the country.

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Banking Onn the Bottom of Pyramid