Bindu Ananth, Chair - IFMR Trust & IFMR Holdings (Photo: Vivan Mehra)
ABOUT: Despite the best efforts by policy makers and state-owned banks, the last mile problem has been an insurmountable hurdle in the way of financial inclusion for the poor. Many solutions have been tried but most have reported partial success. Bindu Ananth, Chair - IFMR Trust & IFMR Holdings, is possibly the best person to write on this given the number of years she has spent in studying the problems at the ground level and figuring out solutions that work. In this column, she busts some common fallacies about financial inclusion.
I write this from the sidelines of my city's (Chennai's) worst flooding in 100 years that has rendered lakhs of people homeless and bereft of livelihood. As the daunting task of re-building looms ahead, one key issue, among others, is going to be how to provide people timely and reliable access to financial services? Can we rapidly honour claims related to life, accident and asset insurance, enable withdrawal from savings deposits to meet the immediate need for food and medicines, and provide people short-term liquidity to repair leaky roofs, pay school fees and re-stock inventory? These are "moments of truth" for those offering financial services and, unfortunately, we are too often found lacking. A lot of this can be traced to fault lines in the last mile of financial services delivery.
A study has found that 19% small farmers rely on non-institutional sources for loans despite the well-documented concerns over the costs of informal borrowing. It reveals that more than a third of non-institutional borrowing is at annualised interest rates of more than 30%.
The last mile is the "plumbing" that connects financial product manufacturers - banks, insurance companies, mutual funds, etc - to their end-customers, that is, households and businesses. While for most of us who belong to the urban, salaried segment, this access is rendered through bank branches, ATMs and insurance/investment agents, the picture looks very different for the rural agricultural segment and urban informal sector workers. They rely far too often on friends and family and informal sources to meet their financial service needs, because as far as they are concerned, the last mile is broken - the nearest bank branch is too far and there is no reliable process to file an insurance claim. For instance, the All India Debt and Investment Survey (AIDIS) 2014 found that about 19 per cent small farmers rely on non-institutional sources for loans despite the well-documented concerns over the costs of such borrowing. It reveals that more than a third of non-institutional borrowing is at annualised interest rates higher than 30 per cent. The problems with the last mile can be broadly attributed to the high cost of providing the service and human resource challenges. I will briefly describe each of these.
(Photo: Shekhar Ghosh)
My colleagues Deepti George and Anand Sahasranaman looked at the cost structure of rural bank branches. They found that for every loan of Rs 10,000 through a public sector bank rural branch, the cost is Rs 4,150 (41.5 per cent). For a private sector bank rural branch, it is about Rs 3,210 (32.1 per cent). Going across to mutual funds, I learnt from a talk by Mr. Nandan Nilekani recently that the cost of on-boarding a customer is Rs 1,500. Now, imagine a customer whose investible surplus is Rs 10,000 a year. All this represents extremely expensive plumbing that tilts the scale in favour of wealthier customers who have larger account balances and investible surpluses.
For every loan of Rs 10,000 by a public sector bank's rural branch, the cost is Rs 4,140.
As far as human resources are concerned, the challenges are similar to those in other public services such as education and health care - how to get trained, motivated staff to work effectively in rural hinterlands and urban slums? An ambitious branch manager in a bank would, with a few exceptions, always want to work in the Nariman Point branch than a rural branch. Efforts by regional rural banks and a few commercial banks to create a cadre for rural operations have run into implementation challenges.
There is very good news on both these fronts. There have been fundamental breakthroughs on the customer acquisition front. Aadhaar, through its almost universal biometric database, will do away with the need for bankers and mutual funds to do expensive and time-consuming documentation of the customer's proof of identity and proof of address. All the regulators have confirmed that Aadhaar = KYC. Through the shared e-KYC database and the Reserve Bank of India's (RBI's) planned central KYC repository, what used to be a private endeavour of each financial service provider will now become a shared, public utility. This is path-breaking.
In a parallel and equally important development, the RBI has granted in-principle licences to 11 payment banks. If this pans out as expected, in one year or so, India could go from having 125,000 bank branches to over five million lakh access points where customers can transact - at the very least open accounts and deposit & cash, including their welfare payments from the government. With reference to the cost discussion earlier, several payment bank licensees are telecom companies and their cost structures are fundamentally different from those of traditional banks; this will be a crucial enabler of proliferation. Across the board, technology is enabling lower variable transaction costs, which is essential if the financial system is to serve a billion people.
While the last mile for payments can be taken care of by a general purpose merchant along with some technological add-ons, the last mile for credit, insurance and investments will need to have, in addition, a skilled cadre of individuals who can advise the customer on the nature of the product to be bought, given her needs. This is a fundamental difference between payments and other financial services, where a "high-touch" last mile is required to ensure suitability of these products/services for the customer. It is hard to conceive of a farmer walking up to a mobile top-up merchant and discussing the merits of a weekly versus a bullet amortising schedule for her loan payments! The promising development here is the emergence of a number of specialised, regional non-bank finance entities as well as the new small finance banks that started their journey as microfinance institutions, with some of them having non-profit roots. I am involved with a business model called Kshetriya Gramin Financial Services (KGFS), where we deploy locally-hired, highly-trained individuals as "wealth managers" in remote rural markets who are enabled to offer a wide variety of financial products but within a tightly-defined framework of what is suitable for the customer. These new players will have to bring to the table an ability to understand the customer, manage large field forces, and an unstinting commitment to customer protection. While these institutions will also have to grapple with human resource challenges as they scale up, the fact that they are focussed on specific customer segments will help build a consistent identity and customer service philosophy. Another emerging trend that is pertinent here is the separation between manufacturing and distribution. Earlier, the bank or the insurance company was expected to both own the product as well as the distribution through captive channels such as bank branches. Increasingly, newer players will emerge which want to focus exclusively on distribution and customer service. Then there will be others who will specialise in product offering and balance sheet management. This will create room for innovation.
In one year or so, India could go from having 125,000 bank branches to over fi ve million access points where customers can transact.
On product design, I often come across this fallacy of advocating only "simple products" that can be universally sold, particularly for low-income customers. This understates the need for design or for providers taking more responsibility for what they sell. In reality, the customer needs sophisticated financial solutions to deal with lifecycle issues such as retirement and unforeseen risks such as flooding and rainfall failure. We cannot wish away these needs of the customer. We have to find the right balance between good product design, provider responsibility and customer understanding of what she is buying. Laying it all at the doorstep of customer understanding, as is the current approach, will undermine the potential of financial services.
Making my way through a crowded airport earlier this week, my colleague and I discussed how bewildering the place might seem to a first-time plane traveller and wondered if a dedicated counter to assist first-time travellers might make things easier. Dealing with the financial system is, in many ways, equally bewildering. You have to contend with an intimidating maze of documents, processes and people, often in an entirely different language than the one you understand. There has been little effort at service innovation here. In our KGFS work, we have tried to pay attention to this. The branch interiors are designed to be open and welcoming; we are committed to minimising paperwork and, eventually, eliminating it altogether. The wealth managers speak the local language and are trained to be welcoming. These practices hold the key to converting the last-mile access into actual usage.
