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. Inclusion can 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 lesson on how to make profits with a purpose. Banking with such a segment is quite a lot about relationship and the use of soft 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 niche market. 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 rousing interest among the commercial banks and inducing competition with the micro-lenders. The banking sector in India, with a reach of 59 million households through SHGs and approximately 9 million others through microfinance institutions (MFIs), has only penetrated 15 percent 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 huge market unexplored. Essentially microcredit has functioned under 3 different models: 1. When in 1992 the microfinance movement began in India and for the first time Self Help Groups 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 high transactional 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 of Grameen Bank, Bangladesh, with a 2.1 million customer base, which has shown how remarkably high repayment rates within the poor can be achieved, if effective financial and credit packaging strategies are adopted. Amongst several issues, some primary environment enablers are:

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Evolution of public policies Regulatory framework Commitments from the state and local representatives Financial model improvement- market research for the right products and services Innovation in existing structure of credit and delivery models Technology innovations Financial literacy and debt/credit counseling centers

Coverage of Poor In 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 abysmally low 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 million are 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 nearly 50,000 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 a strong 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 meager 106 USD loan per borrower. The objective of merely raising living standards needs a revival. It is essential to determine 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 literacy programmes. 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 ensure high 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 such as 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 to borrow 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 banks respectively, profit margins can substantially rise if savings are mobilized effectively. Regulatory Framework Having introduced the No-frills Account and General Purpose Credit Card, through

simplification of the KYC (Know Your Client) norms and propagation of Business Correspondent 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 cooperative 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 pump prime savings into new alternate banking entities, without a threat to their tax free status should 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 can provide 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 banks to 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 as branches 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 to demand 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 IT and 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, near infeasible 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 or MasterCard, 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 standards which 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 will lose 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 the National 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 telephony augur well for MFI. Low transactional costs, easy remittances, identity proof fulfilling and ease of credit management can make mobile banking a catalyst for inclusion.

WIZZIT, a startup mobile banker in South Africa has shown how much of the low income customer 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, who were 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 possible sectors, 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 growth momentum of the country.