Let’s Get the Demand Side Right

There are four elements to the debate about financial inclusion and growth from a capital markets perspective. Anything that is supply-driven and done through policy interventions will not be sustainable. We have seen a series of services turn ineffective despite having an elaborate system. For instance, the postal network can be used for multiple purposes but it is not being used, and we then could end up creating an expansive system that is used sub-optimally.

The second element is that it is not merely about the number of bank accounts but the financial services that are provided. The delivery of financial services has changed drastically. A number of them are now digitally packaged and delivered in urban areas, as physical services are neither financially viable nor convenient. So how can one assume that the same services are unviable and inconvenient in rural areas if they are not so in urban areas?

The third element is the timeframe. If we want to achieve this in a finite time, say in the next 5-10 years, then we need to work out the path backwards. Will we be able to push the existing institutions on a sustainable basis and if not what alternative models exist? In the last few years, warehousing, commodity brokerage, commodity clearing and lending services have reached rural areas. Nearly 300,000 terminals work all across the country, and continue to grow. This rural push was not supported by any policy measures. It was purely demand-driven. While an elaborate policy is in place regarding warehousing, the industry today stands independent of policy, purely driven by demand.

The fourth element is the delivery model. Both banking correspondents and capital markets have not obtained size and scale. Obviously, more needs to be done. The FMCG sector could be taken as an example of a demand that is being serviced irrespective of whether the consumer is located in an urban area or rural area. This shatters the myth of viability of outreach models. Digitisation can help but the challenge to adopt an alternative delivery model remains.

Financial services are overseen by independent regulators, but each service has to conform to its own regulatory norms. So, when you deliver five different services to a remote corner of the country, the costs go up to a level that renders the service delivery unviable.

In this respect, some options are worth exploring. One is to involve the private sector as much as possible in reaching out these services. The other option is to decouple distribution from origin of the product so that it doesn’t matter who is originating insurance, banking, investment and so on. If the distribution industry is independent, then there can be different tiers within that segment. There can be one tier which takes care of all management and there can be another which takes care of logistics. If financial services are bundled, and the private sector has a role in ensuring that service delivery does not get diluted, collections are proper and service levels are desirable, then the last-mile hitch can be resolved.

Another idea can be to run the services through four filters. The first filter is: are all potential norms duly met? The second is: is the policy environment conducive to financial inclusion? If it is not, what do we need to do to decouple this service so that financial inclusion gets plugged into it? The moment we decouple it and say someone has to sustain himself based on the service, we will see that it will be taken seriously as a business activity.

If economic activity is absent, jobs are not created; if new employment is not generated, there is no demand for financial services

The third filter is: how deep is the penetration of financial services? If we don’t give loans, enterprises can’t grow and there is no economic activity in a region. If economic activity is absent, jobs are not created; if new employment is not generated, there is no demand for financial services.

The fourth filter is: how integrated are distribution of financial services and financial inclusion? We have witnessed faster growth but growth needs to translate into financial inclusion. Therefore, the financial services and distribution channel that we create through banking ought to be the backbone or the lifeline around which economic activities take place in India’s villages.

Each village in India has exactly the same pyramid that one sees in an urban area. The very rich don’t need loans; many are willing to give loans at exorbitant interest rates. There is the ‘middle’ populated by educated people, many of them unemployed. If one talented person from this band has easy access to credit, he will possibly start an enterprise, which will be linked to other economic activities (transportation, courier service, mobile phone services, etc) that have reached his rural area. This lending will be different from the micro-credit model pursued so far, which has little wealth creation activity to show for it.