SYMBIOSIS INSTITUTE OF INTERNATIONAL BUSINESS

ANALYSIS OF NEW

FINANCIAL

PRODUCTS FOR

INDIAN RURAL

MARKETS

AMRUTA PATIL 11020242002MBA- AGRIBUSINESS MANAGEMENT 2011-2013

Table of Contents

1. Executive Summary...............................................................................................................3

2. Introduction...............................................................................................................................3

3. Objectives..................................................................................................................................4

4. Literature review.....................................................................................................................5

5. Theoretical framework..........................................................................................................7

5.1 Product innovation..............................................................................................................7

5.2 Service Innovation...............................................................................................................8

5.2.1 Intermediaries...............................................................................................................8

5.2.2 Mobile Banking.............................................................................................................9

5.2.3 Biometric smart cards..............................................................................................10

5.2.4 Indian Postal Service – Utilizing its positioning...............................................11

5.2.5 Bundling of financial & non financial services.................................................11

5.2.6 Customer awareness................................................................................................11

6. Conclusion...............................................................................................................................13

7. Recommendations................................................................................................................13

8. Bibliography............................................................................................................................15

1. Executive Summary

“The future lies with those companies who see the poor as their customers” -

C.K. Prahalad.

Unrestrained access to public goods and services is the sine qua 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 should be the prime objective of the public

policy. In a vast country like India, scaling up access to finance, to meet the

varied financial needs of the poor through innovative products and services

posed quite a challenge.

At this juncture, financial institutions have need to try to reach the poor with new

customized financial products through innovative channels instead of trying to

penetrate the rural markets with financial products designed for urban markets.

In order to suggest a common strategy which can be followed by the financial

institutions, this paper takes a consolidated view of financial products developed

for rural markets across the world. The study is based on secondary data

collected from previous research papers on new financial products from other

developing countries and from websites of institutions offering innovative

financial services.

2. Introduction

According to United Nations (2006), financial sector should provide access to

credit for all ‘bankable’ people and firms, insurance for all ‘insurable’ people and

firms and savings and payments and services for everyone. However in

emerging economies like India, where about 70% of the population lives in

villages, large number of bankable and insurable people are left unbanked and

uninsured thereby depriving them a chance of breaking the shackles of poverty.

This created the need for moving from ‘banking the unbanked’ towards ‘financial

inclusion’ which may consist of innovative financial services for this strata of

society in rural as well as urban regions.

The 2011 census states that about 69% of the population lives in villages, 80

million of the population is below poverty line and number of slum-dwellers in

the urban areas is about 94 million. The poor still heavily relies on the informal

financial institutions because of the ease of transactions and low transactional

costs. To go door-to-door explaining those about the benefits of organized

financial services would require a mammoth manpower and co-ordination skills

of an army general. Financial institutions have been trying to reach the poor with

new customized financial products through innovative channels.

3. Objectives

To study various techniques used in India till date for financial inclusion which

were not so successful, techniques being implemented in other parts of the

world, a few new techniques proposed by economists and the feasibility of their

implementation in India

4. Literature review

One of the prime objectives of bank nationalization (1969 and 1980) was to

inflate the flow of credit to agriculture and small industries, this direction of

lending was termed as ‘priority sector’ lending (Ramachandran and

Swaminathan, 2002 and 2005). Rural banks were setup with the objective of

serving the poor but they concentrated mainly on not-so-poor rural borrowers

and not on the larger chunk of the population which consisted of landless

agricultural labourers or 2 acre farmers who were struggling hard to preserve

their tiny piece of land. State as well as commercial banks in India are still not

well positioned to meet the demands of these emerging markets. This creates

the need for moving from ‘banking the unbanked’ towards ‘financial inclusion’

which may consist of innovative financial services for this strata of society in

rural as well as urban regions.

Also about two decades have passed since microfinance was introduced in India.

However the microfinance services have not been able to move India towards

financial inclusion although microfinance is the first thing that comes up while

talking about financial inclusion. Firstly, though we broadly use the term

microfinance, most MFIs just offer the microcredit facilities and that too only to

those who want to start their own small businesses. Though there are quite a few

success stories of how people came out of poverty with the help of loans offered

by MFIs, there are quite a few drawbacks that need to be worked upon.

MFIs say that they want to solve the problem of non-availability of credit to the

poor but large number of MFIs are concentrated in a comparatively small region

and a large area still remains unreached. There are about 3.4 million SHGs in

India serving 45 million poor. For-profit MFIs like SKS or Spandana serve around

14 million poor. About 800 million poor are still deprived of formal credit

(Business today 2008) and rely on local money lenders who exploit them by

charging mammoth interest as compared to 28% offered by MFIs.

Aneel Karnani (CMR 373, Aug 12007) argues that it is not enough to only focus

on the microentrepreneurs as the MFIs do. According to Karnani, “If you have too

many grocery sellers in a village-most common microfinance activity-fierce

competition ensues and person doesn’t eke out enough of a living to set out of

poverty. Possibility of everyone becoming an entrepreneur is a romantic notion-it

results in an inefficient and fragmented economy.” This suggests that through

financial inclusion, efforts should be made for creating jobs by financing firms

that can employ the marginal poor who do not have potential to become micro

entrepreneurs.

Also ‘The State of Sector Report’ authored by N. Srinivasan, former NABARD

executive reveals that even the microfinance firms are gradually focusing on the

‘wealthier segments of the poor’ instead of below poverty line people.“In five

MFIs out of eight, the proportion of non-poor clients were more than the poor,”

says the report. (Business Today Dec 2008) The reasons behind this are mainly

the high cost of reaching the lower economic strata and low profits involved in

transacting in this stratum.

This leads to a conclusion that the financial sector needs other set of innovative

techniques as a fairy dust that would allow millions to come out of the spell of

exploitative informal lending and savings practices.

5. Theoretical framework

Following are some of the financial inclusion techniques being practiced around

the world and which can be worked upon to implement in India as well.

There are two ways in which financial inclusion can be worked on

1. Product Innovation

2. Service innovation

5.1 Product innovation

There is a need to keep the financial products simple so that they are understood

by the uneducated poor. Also, financial innovation doesn’t mean innovating

techniques of lending money to the poor for starting own business, they should

also be able to avail savings, insurance and pension facilities.

K.C. Chakraborty (RBI Monthly Bulletin, July 2010) proposes following four basic

banking products to be provided by each bank to the poor.

1. A Savings cum overdraft account

2. A Pure Savings Product, ideally a recurring or variable recurring deposit

3. A Remittance Product for EBT and other remittances

4. Entrepreneurial Credit such as GCC, KCC

These products should be available to poor in urban as well as rural areas and for

that it is necessary to devise services to reach the remotest regions in the

country. Other financial products can also be offered by the financial institutions

along apart from the above mentioned products.

In other emerging economies like Jordan, Yemen and Egypt, various innovative

products are now offered for housing, agriculture and consumption apart from

those offered for the microenterprise activities. MFIs in Egypt, Jordan offer credit

life insurance products.

(WPS5610, The World Bank Middle East and North Africa Region Financial and

Private Sector Development Unit, March 2011)

5.2 Service Innovation

Following are some service innovations from around the world which can be

implemented in order to make financial inclusion work in India.

5.2.1 Intermediaries

Physical access seems to be a very big hurdle in providing financial services to

the poor. It is nearly impossible to establish banks in remote areas where lack of

water and electricity are still major issues. Also the costs of hiring and training a

huge workforce for working in these areas will be huge.

This problem can be solved by allowing agents to work in the inaccessible areas.

Banks, insurance companies can carry various transactions through these agents

who work according to pre-decided norms and conditions.

RBI on January 25, 2006 permitted the banks to use services of business

correspondents and business facilitators.(NGOs and SHGs which can perform

tasks like accepting small deposits, spreading awareness about various services

etc). However various operational and supervisory hurdles like irregular

accounting, improper cash handling etc. by BCs are stopping many banks from

implementing this model.

Extensive use of technology in operations and supervision of BCs/BFs will help in

creation of a better framework for functioning in rural areas. In Brazil, the

Business Correspondent model has become an important channel to receive

payments and services from the Government, especially for the poor.

CGAP in 2010 suggested similar framework for branchless banking in other

emerging economies like Yemen. Following are the recommendations for agents

by CGAP.

5.2.2 Mobile Banking

Another technique of branchless banking which can be a huge step towards

financial inclusion is use of mobile banking services. Mobile phones can be used

to deposit money, make payments, check balance or transfer money from one

account to another. Mobile banking has proved to be a huge success in Kenya

(M-PESA) and Philippines (SMART).

M-PESA launched in Kenya in 2007 is probably the first mobile banking service

implemented on a large scale and surprisingly it turned out to be a huge success

given the fact that people are not that techno-savvy in emerging countries like

Kenya. M-PESA is kind of an e-wallet application developed by Vodafone

launched by Safaricom in Kenya. It can be accessed from ordinary mobile phones

once the customer has an M-PESA account. It can be used to perform all the

above mentioned transactions like depositing or transferring money, making

payments etc. Even opening an M-PESA account isn’t much of a tedious process,

the customer just has to register at some M-PESA outlet. M-PESA uses the

distribution network of agents who are already present in the market, which has

enabled it to form a large distribution network in less time.

Only three months after the launch of M-PESA, the service had 400 agents,

compared to 450 bank branches and 600 ATMs in Kenya. (African Economic

Outlook, 2008).

M-PESA is recently being tested in Afghanistan too, where instead of using the

Kenyan SIM toolkit menu on the mobile, the provider is delivering a user

interface model based on voice recognition that is adapted to the low literacy

Enabling Framework recommendations for Agents, the case of Yemen

1. Any legal entity, including MFIs, post office, retail stores, MNO outlets, exchange companies, may be hired by a central bank-licensed institution as an agent to deliver limited financial services2. Agents may provide most banking services, including bill payments, transfers, deposits, withdrawals, disbursement or repayment of loans, and national wires.3. The financial institution should remain fully liable for services provided through agents4. Agents and banks would need to pre-agree customer fees, and communicate those to customers5. Agents may offer services on behalf of multiple banks, as long as the agent has a separate agreement with each bank.6. Agents could also be required to implement „know your customer‟ requirements, although potentially with lower level requirements for low volume transactions.

Source: CGAP, 2010

levels in the country. (Agricultural Economics Research Review Vol. 23

(Conference Number) 2010)

SMART mobile banking platform tells us another success story of use of mobiles

as a branch-less banking platform. SMART too offers similar services like M-PESA

in affiliation with its partner banks and financial institutions.

In India, where the penetration of telecom companies is much higher than what

the financial institutions can do either on their own i.e by setting branches or by

hiring agents. Also knowledge regarding transfer of money through airtime

seems to be easier to impart to the customers rather than explaining them the

banking operations.

In regions where banks are apprehensive about working through Business

correspondents and Business facilitators due to issues like irregular accounting,

improper cash handling and safety, mobile phones can be used by the BCs/BFs

to carry out the transactions with ease.

FINO, India’s largest business correspondent, with operations in 24 states and

386 districts, has recently introduced a mobile payment service on a pilot basis.

“It is called m-Rupya. We are testing this model on a pilot basis, with 20,000

customers. We will launch this service by the end of the next quarter,” Manish

Khera, chief executive officer, FINO. (Business Standard, 10th August 2011)

Another example where mobile phones are being tried as an option to render

financial services to the poor is of YES Bank. Under the National Agricultural

Innovation Project, YES Bank is trying to develop a model on mobile based

platform to provide crop insurance to farmers. The model is being developed

such that farmers can carry out the transactions with the use of very simple

handsets which have by now made their way to the Indian villages. (Agricultural

Economics Research Review Vol. 23 (Conference Number) 2010)

However the major hurdle in implementing this technique in India can be the

presence of numerous telecom service providers unlike Kenya or Philippines

where Safaricom or SMART were the key players. Therefore banks will have to

work towards providing access for the services they offer through the entire

telecom network at minimal transaction costs.

5.2.3 Biometric smart cards

Landless agricultural labourers, rural migrants, construction workers etc. have no

identity proofs, address proofs which makes them unbankable. The introduction

of biometric smart cards which can use fingerprints for identification can turn out

to be a blessing for such people who will then be able to access the formal

banking system. Further use of mobile based banking will help the people on the

move carry out their transactions from anywhere instead of visiting the service

provider.

5.2.4 Indian Postal Service – Utilizing its positioning

Indian Postal Service, which already offers some savings schemes such as

monthly income scheme, Kisan Vikas Patras etc., can be utilized for provision of

various innovative financial services in remote areas. The positioning of post

offices i.e. their reach and convenient distribution network will reduce the costs

of setting up of a new distribution network. Plus the postman being a local

person can gain the trust of the villagers and encourage them to take benefits of

the services offered. Mobile based services can also be introduced through the

project.

(For example, the Yemen Post Office and Yemen Mobile plan to launch a mobile

banking service, extending access through and beyond the current 300 post

office locations. The Yemen Post Office provides savings to 403,000 clients and

current accounts to 85,000, and has a significant volume of transfers that would

underpin the viability of a mobile banking service, including domestic money

transfers, government salary disbursements, retiree pensions, and social welfare

fund payments. (CGAP, 2010))

5.2.5 Bundling of financial & non financial services

For farmers, bundling of various financial services and non-financial services may

be useful since they get everything at one go and the risk is managed by the

financial and non-financial institutions jointly thereby reducing individual risks.

For example the DRUMNET project in Africa follows the clubbing of financial

services like credit offered for plantation, crop insurance with services provided

by non-financial sector like provision of fertilizers suitable for the crop through

credit made available by financial institution. Thus clubbing of various services in

supply chain will help in lowering of risks for the financial institutions which will

increase private sector participation and lead to easy provision of services to the

farmers. (IFPRI July 2010)

5.2.6 Customer awareness

Just provision of innovative financial services would never be enough because

majority of the target population is uneducated and new to the formal system of

lending and savings. In order to make sure that the customers can efficiently

utilize what is being provided to them and manage their finances effectively

without any fear of exploitation, it is necessary to create awareness among the

customers. Also the customers should be able to choose the right service for

them from amongst the plethora of offers that companies put in front of them.

Usually Government comes up with the customer education campaigns through

mass media – Television, radio, printed media etc. in order to protect the

customer rights. RBI along with Disha Financial Counselling launched the comic

book ‘Raju & the Money Tree’ to educate rural people about the basics of

banking.

Financial education, these days, is beginning to get the importance it deserves.

Many financial institutions are focusing on capacity building of their customers.

This also helps in building a positive brand image for the company.

Training and consulting also has been started by some of the firms where the

customers are given training on how to manage their business profitably and

make complete use of available financial services.

HSBC, for example, have tied up with SEWA(self Employed Women’s Association)

to establish RUDI Managers’ School where managerial and leadership skills, and

information about financial transactions are taught to the SEWA members. HSBC

also runs an HSBC Manndeshi Business School for Rural Women in collaboration

with a local bank and a local NGO in order to impart business training to rural

women and girls who are more likely to avail financial services in the future.

6. Conclusion

Financial Inclusion has failed in the past due to following reasons :

a) Lack of advances in technology,

b) Lack of proper delivery system for banks

c) Lack of innovative ideas for financial inclusion

d) Poor coverage and reach in the market

However the scenario has changed now with the advent of technology, new

reach and coverage formulae and non-conventional delivery mechanisms being

suggested by Economists and implemented in other Emerging Economies.

7. Recommendations

1. In order to achieve financial inclusion, new banking systems are needed

which are beneficial to the poor and yet are commercially sustainable.

2. Financial inclusion can be achieved by co-operation of private sector and

the civil society to the various inclusion policies of the Government.

3. Private sector can play a vital role in financial inclusion while also keeping

its commercial goals intact.

4. Commercial banks should be brought in to work with diversified portfolios

in the rural sector with the help of various business correspondents from

MFIs to local shopkeepers.

5. At the same time, Banks’ risk management and regulatory systems should

keep up in pace with the innovations. This seems difficult with individual

MFIs working in the rural sectors where if the customers default, MFIs are

more prone to severe losses and might move away from providing credit

to the BOP markets and towards wealthier sections of poor where they can

make better profits. To solve this, the bank-microfinance provider linkages

model seems more feasible since banks are able to raise funds from

deposits unlike MFIs and can invest excess funds in these MFIs.

6. Regulatory measures to keep a watch on the Business Correspondents

should be formulated with the help of technological advances to ensure

that the poor are not being exploited and at the same time, accounting

and cash handling of Banks is done correctly.

7. Mobile based banking modules seem to be a very cost and time effective

reform in the banking sector which will smoothen the poor’s access to

formal financial services.

8. Though the UIDAI project will ensure that everybody receives an identity

proof apart from their conventional identity proofs like driving license, pan

card etc, till then biometric smart cards which make use of fingerprint

scanner can serve the problems of the migrants.

9. Consumer awareness is the area which requires putting in huge efforts

since educating millions of people about financial services available to

them and how they can avail benefits from them is a mammoth task.

10.Proper attention should also be given to branding of products and services

in order to ascertain the customers that their money would be safe and

their interests are being protected. They should also feel welcome to the

formal banking system which has kept them at bay for years.

8. Bibliography

Pearce 2011, “Financial Inclusion in the Middle East and North Africa” The World Bank

Middle East and North Africa Region Financial and Private Sector Development Unit

March 2011

“Business Correspondents and Facilitators - Pathway to Financial Inclusion?” RBI/ 2008-

2009 /141 DBOD. No. BL.BC. 35 /22.01.009/2008-2009

Karnani 2007, “The mirage of marketing at the Bottom of the Pyramid: How private

sector can alleviate poverty”, California Management Review, Vol 49, No 4, pp 90-111

“A Hundred Small Steps- Report of the Committee on Financial Sector Reforms” Planning

Commission, Government of India, 2009

Chakrabarty “Financial Deepening by putting Financial Inclusion Campaign into Mission

Mode” RBI Monthly Bulletin July 2010

Gokarn “People, Jobs and Productivity: The ‘Simple’ Dynamics of Inclusive Growth” RBI

Monthly Bulletin July 2010

“First Steps in Agricultural Finance” History Of The Reserve Bank Of India

Thorat “Financial Regulation and Financial Inclusion - Working Together or at Cross-

purposes” RBI Monthly Bulletin July 2010

Subbarao “Financial Education: Worthy and Worthwhile” RBI Monthly Bulletin July 2010

“Charting New Vistas” ” History Of The Reserve Bank Of India

Goyal 2008, “Financial Inclusion in the Northeastern Region of India with Special

Reference to Assam”

Roshaneh Zafar 2011, “The Miracle of Financial Inclusion” Stanford Social Innovation

Review

Swamy P M Financial Inclusion in India: An Evaluation of the Coverage, Progress and

Trends

Kloeppinger-Tod & Sharma 2010 “Innovations in Rural and Agriculture Finance” IFPRI

S C Bihari 2011, “Growth Through Financial Inclusion In India” Journal Of International

Business Ethics Vol.4 No.1 2011

Ignacio Mas 2010, “Savings for the Poor-Banking on mobile phones” World Economics •

Vol. 11 • No. 4

“Orissa Vision Document” Women & Child Development Department, Government of

Orissa

Rajiv Rao “Poverty’s New Saviour” Business Today Dec 14, 2008

Marar, Iyer & Brahme 2009, “HSBC Brings a Business Model of Banking to the Doorsteps

of the Poor”

Shetty & Veerashekharappa 2009 “The Microfinance Promise in Financial Inclusion:

Evidence from India”

Anhalagan 2011, “Effectiveness Of Marketing And Research Costs Of Financial Innovation

Through Technology” Revista de Management si Inginerie Economică, Vol. 10, Nr. 1,

2011

Hughes & Haworth 2011, “Decent Work and Poverty Reduction Strategies” industrial

relations – 66-1, 2011

Kumar & Gupta 2009, “Branchless Banking and Financial Inclusion” Silicon India

Pomeroy(Chair-Financial Inclusion Task Force) 2009, “Raising Interest Rates”

Regeneration and Renewal

Pokhriyal and Ghildiyal 2010, “Progress of Microfmance and Financial Inclusion - A Critical

Analysis of SHG-Bank Linkage Program in India”

Ramachandran V K and Swaminathan Madhura (Eds.) 2002, “Financial Liberalization and

Rural Credit in India” Tulika Books, New Delhi