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Innovate to Include

M D Mallya is Chairman & Managing Director, Bank of Baroda

With vast geographical spread and faster integration of state-of-the-art technology, the banking system in India is well-entrenched to serve more and more people. A bank’s capability in terms of infrastructure, diverse products, multiple delivery platforms and virtual convenience has transformed the quality and dispensation of services. The phenomenal rise in business levels, number of bank branches, onsite/off-site ATMs, e-banking network more than amply demonstrates the growing capability of banks to serve customers in large numbers. But the biggest challenge is how to prompt common Indians living in the hinterland and urban poor to get connected. More inclusive growth is possible only if more people are encouraged to save with banks. Plough back of savings into the real sector can then be speeded up which eventually can boost the economy.

Financial literacy is still at a nascent stage in the country despite efforts of the banks and the government machinery. Financial literacy is also a function of general literacy levels. Hence as part of corporate social responsibility, more and more corporate entities should also invest in education and financial literacy as a campaign of social amelioration.

My dream is, therefore, to ensure that more and more people get connected to banks to avail of not only basic banking services but also the emerging diverse products. I feel that a missionary zeal is essential for banks to undertake financial inclusion. Banks should target all segments, but focus more on the unbanked areas. Mining the unmined is essential to make the best use of potentiality. The scope for financial inclusion is immense in India. Still, the rural/semi-urban centres need more attention. Let us discuss some of the key points to move forward in this direction

Status of Financial Inclusion in India: 

The status of financial inclusion is generally known in terms of exclusion from the financial system. Broadly, financial exclusion is construed as the inability to access necessary financial services due to problems associated with access, conditions, prices, marketing or self-exclusion. Specific indicators, such as number of bank accounts, number of bank branches, that are generally used as measures of financial inclusion, can provide broad indications about the level of financial inclusion.

The rural sector poses a real challenge given its backwardness and mass illiteracy, as people there are still caught in ancient financial systems that are as exploitative and futile as ever.

Thus, financial inclusion is delivery of banking services at an affordable cost to the vast sections of disadvantaged and low-income groups. Unrestrained access to public goods and services is sine quo non of an open and efficient society. As banking services are in the nature of public good, it is essential that availability of banking and payment services to the entire population without discrimination be ensured. In this connection, I will like to refer to the Arjun Sengupta Report on financing enterprises in the unorganised sector, which pointed out that only 2.4 million out of 58 million units (with investment of less than Rs 25,000) have got credit from commercial banks. There is, thus, enough potentiality to enhance credit dispensation to such units, so as to create new entrepreneurs and generate larger employment opportunities.

The Pace and Progress of Banks

The expansion of the banking system, that started in the post-nationalisation era, picked up pace after the banking sector reforms began. Competition intensified with the entry of new generation private banks, with more branches of foreign banks, enhanced activities of mutual funds, NBFCs and other FIs. The customer-centric initiatives of banks to compete in the market changed the face of banking services. Banks have moved from a sellers’ market to a buyers’ market. Better pricing, more products, more care and concern to serve customers and use of better technology have changed the banking industry landscape.

Taking India’s estimated population of around 1.17 billion, financial inclusion ratio is still at the lower end. Moreover, there are number of people banking with multiple accounts. So, the total number of accounts is not necessarily a correct view. Taking the present status of financial inclusion, the goal of total financial inclusion seems a challenging aspiration. And, we need to work relentlessly towards such aspirations for better economic well-being of the people. More so, because financial inclusion has a direct correlation with economic activity and GDP growth. Accessing financial services enables better leveraging of capital and synergy of finance and enterprise can contribute to economic growth.

Potentiality for Inclusive Growth

There is need to innovate banking products to divert other forms of savings, gold and land and channelise them into the banking system so that such resources can be better deployed for the growth of trade and commerce. There is ample business in waiting which needs to be tapped with aggressive business strategies.

Banks can also take advantage of India’s demographic profile–364 million  (35.3 per cent) population  is below 14 years, and 586 million (56.9 per cent ) population is in the age group of 15-59 years. If financial inclusion is targeted at the right age group with suitable products, the gains can be phenomenal. Already, several banks are developing products that are structured to suit the risk appetite of such people.

Role of Technology in Inclusive Growth

Technology improves the capability of banks to serve more customers with the existing base of employees. The marginal cost of serving increased number of customers keeps going down as the costs of technology are already frozen at some level. Moreover, the quality of customer service and range of products can also be varied/customised without too much burden on costs. The debut of core banking solutions removed the geographical limitations and facilitated 24/7/365 IT-enabled banking accessible anywhere/ anytime. The setting up of onsite/off-site ATMs, e-banking channels, phone banking, mobile banking (to be shortly introduced in some banks), use of smart cards, point of sales terminals in remote places and entry of rechargeable e-purse, etc., has the increased potentiality to spread banking to more number of people.

Better pricing, more products, more care and concern to better serve customers and use of better technology all have changed the banking industry landscape.

These developments are critical enablers. The transaction cost being lowest in e-channels, the incremental rise in number of customers automatically reduces average cost and the additional volume of business does not create pressure on manpower. Therefore, technology-intensive banking is ‘financial inclusion’ friendly and is a great incentive to expand customer base.  Technology has substantially added value to customer service and facilitated product diversification and improved customisation. In such an environment, more consumers will be eager and willing to move towards banks to use technologically-enhanced products. In turn, this will act as a multiplier for more inclusive growth.

Recent Developments to Improve Financial Inclusion

  • Introduction of no-frills /zero balance savings accounts.
  • Simplification in Know Your Customer (KYC) procedures.
  • Allowing use of BCs/BFs models to expand bank reach.
  • Removing usage fee on ATMs for use at other bank ATMs.
  • Allowing banks to set up off-site ATMs without prior approval of RBI.
  • Encouraging beneficiaries under NREGA to receive wages through banks.
  • Introduction of smart card-based government sponsored schemes to popularise savings with a built-in mechanism to open bank accounts.
  • Setting up bio-metric ATMs in rural centres to cater to the needs of illiterate customers.

Way Forward:

Though the process of financial inclusion may seem less cost efficient in the short tenor, it will definitely bring better cost efficiency in the long run. It creates more opportunities to banks for cross selling their other products. Financial inclusion or more inclusive growth is a broader goal to bring more people into the banking fold.

Taking technology as an effective enabler, banks can work for massive expansion of customer base with specific plans for coverage of villages/towns. The help of panchayati raj institutions, block development offices, schools, colleges, vocational institutes, self-help groups, and local self-government machinery can be taken to facilitate people contact programmes. The crux of inclusive growth in banking lies in innovation. The aim should be to make financial inclusion not only an economically viable proposition but also to enable sustainable social development. A larger cause has to be seen in pursuing such goals, moving beyond the contours of short-term viability.

M D Mallya

M D Mallya is Chairman & Managing Director, Bank of Baroda
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