Recent announcements by India’s central bank promoting financial inclusion has brought a new focus to this sector of the market. RBI’s Asia correspondent Sruti Rao looks at the current state of banking in rural India and what lies ahead for the future
India’s huge number of unbanked rural customers offer a significant opportunity for the country’s banks to grow their customer numbers and play their part in promoting financial inclusion.
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According to the 2011 World Bank financial inclusion index, only 35.23% of the India adult population had a banking account with a formal institution.
The country’s central bank, Reserve Bank of India has honed in on catering to this segment through recent developments in their policy framework.
In September 2013, the Reserve Bank governor Raghuram Rajan set up the Mor panel to study the framework for financial inclusion. The panel suggested a focus on accessibility of banking services, with an aim of every resident being within a 15 minute reach of banking services by 2016.
Established solution providers in this space have caught on to the potential offered by targeting an increase in financial, implementing strategies that specifically focus on the rural community.
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By GlobalDataFINO PayTech for example, a payments technology company and India’s largest alternative banking channel services firm, has recognised the need to target its payment solutions to the unbanked segment.
Shailesh Pandey, Vice President, FINO PayTech tells RBI: "In our current strategy, we provide technology services for the financial services sector, in a low cost manner. We work with 25 private and public sector banks and other financial services firms, to adopt a low cost transaction platform, primarily to serve the unbanked customer base."
The smart banking technology used by the company is built keeping in mind illiterate and rural customers and their unique challenges. The company has pledged to serve 100m under-banked customers by 2015, from its current base of 50m.
Visa has also been keen to promote financial inclusion; its financial inclusion expert Gordon Cooper tells RBI:
"The unbanked are excluded from the formal financial system because they have low intermittent incomes, modest savings capacity, lack of physical access to financial institutions due to remote conditions, low literacy and low financial literacy. A multifaceted approach is required to address these many challenges.
"Visa is committed to supporting financial enablement in South Asia (with specific focus on India) and through our local operations we’ve identified the uncertain financial futures facing low income workers as a critical area in need of action and attention."
To make banking more accessible, Visa has partnered with Aadhar, the identification network launched by the government to develop an eKYC platform allowing banks to identify individuals and obtain their Know Your Customer (KYC) information electronically.
With this provision, over 560 million Aadhaar holders can open an instant paperless bank account; Visa is working with Axis bank among other local players, to implement eKYC in 1,000 of its branches.
Understanding the customer base
As Cooper points out, the needs of the rural customers are different to that of the traditional customers of retail banks, and must be recognised as such for effective servicing.
Says Cooper: "While at a certain level the needs of low income consumers are no different from those of richer people (everybody needs to save, pay bills, borrow money or send money to other people every once in a while) it is a mistake to take a one-size-fits-all approach to product development. "
Pandey says that within the under-banked and un-banked population in India, sit more streamlined sub-segments of customers.
"There is the urban poor, who are entrepreneurs with some funds. This group primarily looks into remittance services, government payments, and providing loan and savings products. Once we do that, we move cross-selling and up-selling into protection, insurance and other products."
"Below this strata, there is the rural poor, primarily interested in government and savings products. Finally, there is the destitute population, who do not have the proper channel to bank."
Developing payment channels
With accessibility being a core priority in banking India’s poor, developing the most effective payment channel to facilitate this is naturally a poignant focus. Mobile has developed into a key payment channel for the rural population, but experts contest that other factors have developed into viable alternative solutions.
Pandey adds: "In the current model, you have various form factors, from biometric, kiosks, the mobile phone, and in this sense, there are different models currently being pursued. Each one has its own costs and benefits to it. The mobile phone for instance is an accessible development, but may have its own limitations, in terms of not everyone necessarily having access to a network."
Pandey says that the involvement of public entities has proven to be an effective and sustainable solution.
"Government-to-person (G2P) has developed into one of the best payment channels in reaching out to these customers. Our view is that this will be the biggest driver of this channel going forward.
"There is a commitment to provide benefits and with our biometric system in place, it can be ensured that they are paid securely, and at a reasonable cost."
Exclusive to the financial inclusion space is also the adoption of biometric capabilities to cater to the unique limitations of the rural poor. FINO Paytech predominantly uses the biometric system for identification.
"The rural set of customers is mostly illiterate, making most of their signage and documentation with the thumbprint. So biometric creates a strong authentication in helping customer identification through the transaction."
Pandey concludes:
"We are in a watershed year. Regulators are focusing on this with financial inclusion styrategy the maker or breaker of getting license."
Visa sees this as becoming more of a focus within banks. Says Cooper:
"Financial inclusion is becoming more of a core focus for Visa’s client banks. This is not because it’s new, or the latest trend; it’s because new technologies and new business models now make it possible for them to offer services profitably when previously there was no sustainable business model.
"Add to this the commitment of governments, financial regulators, multi-lateral organisations, civil society, and other entities who are working towards the cause of a more inclusive financial system and the momentum behind financial inclusion is strong."
