The more the merrier

The fundamentals of the Indian economy and its growth story remain unchanged, and one can expect the economy to strengthen and mature significantly over the next decade. This growth will be underpinned by the banking and financial services sector. The financial crisis of 2008 demonstrated the resilience of the Indian banking sector and also showed how robust domestic savings can protect the economy against turmoil in global markets. Extending the reach of the banking sector to underserved markets deepens the savings pool, while also providing essential banking services to more people.

Let me explain. Financial inclusion has been a key policy thrust for the government, and the RBI discussion paper takes it forward by placing a clear emphasis on it. It also outlines the need for new business models to reach the unbanked, supported by higher levels of capital and even encourages unconventional routes of entry such as through Regional Rural Banks (RRBs).

As on March 31, 2009, the Indian banking system had 27 public sector banks, seven new private sector banks, 15 old private sector banks, 31 foreign banks, 86 RRBs and over 1,500 urban cooperative banks. And out of 600,000 habitations in the country, only 30,000 had a commercial bank branch; just 40 per cent of the population had bank accounts. In contrast, in countries such as Belgium, Sweden, France, the United Kingdom and Germany, over 90 per cent of the adult population have bank accounts. In India, 13 per cent of the people had debit cards and only two per cent had credit cards.

The picture is worse in other financial products: for example, the proportion of people having non-life insurance was an abysmal 0.6 per cent. Commercial banks and RRBs have recorded a growth in credit of 18.5 per cent and 16 per cent, respectively, between 2005 and 2009. However, the growth in the number of accounts lagged behind at 5.8 per cent and 5.5 per cent, respectively. The average size of loans is high and has been rising and seems urbanfocused.

In India, one bank branch caters to 16,129 individuals. In the Netherlands, a bank branch caters to 4,807 individuals. In the UK, it is 4,484, in Belgium the number is 2,315, in Germany 1,945, and in France it is just 1,587.

Further, the banking infrastructure in rural India seems challenged, with just about 10 per cent of villages housing a bank branch, and a population per branch of about 26,000, compared to 7,000 in urban India. The urban-rural divide remains rather stark. In a recent report by Diamond Consulting, urban India seems to be overbanked with more than 100 per cent penetration (many urban Indians have more than one bank account), while rural India lags behind with only 21 per cent penetration.

Further, rural India lags behind in both credit and deposit penetration (credit penetration in rural India was four per cent vis--vis urban India at 22 per cent. Deposit penetration in rural India was 21 per cent vis--vis urban India at 123 per cent).

Financial services and banking can draw inspiration and learn important lessons from other sectors. For example, rural India accounts for astounding shares of the total sales of companies such as Samsung (33 per cent), LG (40 per cent), Nokia (30 per cent), Hindustan Unilever (50 per cent) and Procter & Gamble (40 per cent).

Some microfinance institutions are creating financial access for a section of people traditionally ignored by the formal financial sector, and have demonstrated that these low-income categories are increasingly a 'bankable' proposition. Further, rising rural affluence is estimated to add over 150 million to the middle class by 2025, creating a new market for banking services.

So, while challenges will remain, there is a significant opportunity in the making. To meet India's strategic imperative of financial inclusion, serious longterm players committed to the banking industry will need to be engaged. The next generation of banks will need to employ innovative business models, create new paradigms of operations and risk management, deploy robust and scalable technology and engage in strategic partnerships to serve the unbanked. Experience in financial services, significant capital commitment and strong management talent will be important enablers for driving inclusive growth.

The next few years will be critical in transforming financial inclusion from a policy agenda into a reality - it is time we seize this opportunity.

The author is the Chairman & MD of Religare Enterprises