Duvvuri Subbarao, governor of the Reserve Bank of India (RBI) loves to quote the story of Lakshmi Shellar. The 39 year old widow tends her crops, milks buffaloes and sells the milk by day. By night, she runs a financial literacy school for 20 women from the village. She also works as a business facilitator for Mann Desh Mahila Bank.
Women in rural India are waking up to the potential of financial freedom offered by Banking Correspondents (BCs) such as microfinance institutions and nongovernment organizations. Each facilitator is connected to hundreds of people, and on behalf of the bank, they create awareness about savings and other products, identify potential customers, collect and verify loan applications, monitor repayments and follow up for recovery. Subbarao hopes that more women like Shellar will help to promote banking deep within the country. It will be crucial for an organized financial system to find its roots in rural India.
According to the RBI 2009 report, only 30,000 population centers in the country out of a total of 600,000 have commercial bank branches. Less than 50% of the population has bank accounts. Only about 10% of the population has life insurance, less than 1% has other types of insurance. This is where the opportunity lies. As awareness and income grows, aspirations among the rural poor tend to rise. Also, rural savings deposits tend to remain in the customers’ accounts. This reduces the bank’s dependence on bulk deposits.
Indian banks, especially those in the public sector, have made substantial efforts to tap the country's rural population. But expanding through branches has been a costly -- and largely unsuccessful -- endeavor. Out of 50 public sector and private sector banks, 26 have therefore appointed BCs, through which eight million no-frills accounts have been opened as of March 31, 2009. Using BCs is gaining popularity, with the RBI recently adding six more types of correspondents including shop owners and public call centre operators to the existing list of BCs. The model has been adopted in Brazil as well, with over 15 million rural accounts beign generated through this channel.
In India, few banks have been as active as State Bank of India (SBI), India's leading public sector bank, which has 2.5 million no-frills accounts. It has expanded through 24,000 direct agents, including thousands of nongovernment and microfinance organizations. Migratory labor is a target, as remittances through banks make it easier to send money home. Huge sums are remitted across India, predominantly from migrant labor, and more than 90% occurs through informal channels. Banks have also added more sophisticated and diverse products.
In the insurance space, SBI has Grameen Shakti, a dual-benefit life insurance product. SBI also has launched Chota SIP (Systematic Investment Plan), an equity-based mutual fund plan with a minimum monthly investment of US$2 over at least five years. Chota SIP funds are invested in bigger funds, including a blue-chip fund, a balanced fund and a growth fund with a small value component.
Despite banks' success with informal channels, reaching rural customers comes with a price tag. The main challenge, bankers point out, lies in financial education: helping the masses to understand these products, and the benefits of saving and investing. The faster users of banking services learn of the benefits, the shorter will be the bank's gestation period in recovering its investment.
Setting up a banking infrastructure is costly, and requires a number of supporting services and infrastructure. The IUD initiative is considered one such, which will enable identification of depositors much faster.
But for banks the issue is not how to generate more accounts but rather how to ensure these accounts bring in revenue. The BC structure currently operates at a loss, and banks are unwilling to commit heavily unless they see returns soon. A recent RBI meeting with bankers and the Boston Consulting Group addressed concerns about financial inclusion. Many left with Subbarao's firm view about the opportunity at the bottom of the pyramid: The only way to reduce costs is to increase volumes. As the country grows at 8%, job opportunities grow. As people start earning, Subbarao reasons, their incomes will provide a growing source of bank deposits -- and banks that are ahead of the curve in establishing a presence in the hinterlands will likely have a first-mover advantage.
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