MONTHLY ARCHIVES: MAY, 2014
Last week, the RBI Governor Dr Rajan spoke about the need for increasing competition in the banking sector, about licenses on tap, about differentiated banking licenses and payments banks.
The RBI can take more of a chance with new players if they get the license to open only a small bank or to conduct only one segment of banking businessSuch differentiated licenses – licenses with restrictions on the geographical reach or the products offered by a new bank – can generate more organizational variety and efficiencySmall banks tend to be better at catering to local needs, including needs of small and medium businessesA payments bank, which will take deposits and offer payment and remittance services but be constrained to invest all its funds in safe instruments such as government securities, could be very synergistic with other existing servicesFor example, the proposed Post Bank could start as a payment bank, making use of post office outlets to raise deposits and make payments (Speech to Competition Commission, May 20, 2014)
There had been quite a bit of buzz in January when the Mor Committee recommendations had come out, and now finally it is clear, as the new government has taken charge, that the differentiated banking is in the offingAs Financial Service Secretary GS Sandhu told the press yesterday, 29th May, "Hopefully, in next few months RBI will start inviting applications..RBI will take 4-5 months for preparing the new set of guidelines for on-tap and for differentiated banks,"
All eyes on this space now to see how the RBI takes this forward With more payments institutions, more competition will enhance access in the unbanked and under-banked areasThe hope is that entry to this sector is not constrained through high capital requirements, or high compliance costs that are typically associated with regular commercial banks.
PS A blog post on similar lines can be read here in the ET
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Brazil has been at the forefront of innvotive modes to expedite financial inclusion- branchless banking, channeling government transfers through business correspodent agents and lately the regulation allowing non-banks into the payments spaceAt each step there are learnings because inclusion is still a long way away.
A nationally representative survey was conducted by BFA and the Bill & Melinda Gates Foundation to understand what was happening and concluded that agents have played a role in reducing financial exclusion in Brazil, though usage of financial services is still low.
Using data from a national survey in Brazil, we find that Brazil has largely overcome the distance barrier to financial access, and a majority of Brazilians—67% of the population—now pay at least one bill at an agentHowever, only a small proportion of the population use this channel for opening or transacting through a bank account, or for accessing credit: only 12% of banked respondents usually withdraw from their bank account at an agent, 9% usually deposit at an agent, only 6% have accessed a loan through an agent, and 4% have opened an account through this channelHowever, we do find evidence that those using agents are poorer, less educated, more likely to work in the informal sector, and to be women than those using other channelsThus, while only a minority of Brazilians are using agents for financial services other than bill pay, these individuals exhibit characteristics of traditionally underserved populations, suggesting that agents have made a difference for financial inclusion in BrazilNonetheless, the 79% of unbanked households that regularly visit an agent represent a missed opportunity to offer financial services to unbanked Brazilians through this channel,
The details of the analysis can be read here.
These results were then taken forward creating customer segments, to understand the financial needs in greater depthRespondents in a national household survey were split into six client groups based on the channels used for bill pay and for withdrawing or depositing into a bank accountThe segments include the Financially Excluded; Unbanked Bill Payers; Selective Agent Users; Privileged Agent Non-Users; Banked Bill Payers; and Agent Super-UsersThe study found that the Unbanked Bill Payers represent the biggest market opportunity for expanding agent servicesThis segment accounts for nearly a quarter of all respondents and is 57% female, 33% rural, and likely to work in the informal sectorBanked Bill Payers, Selective Users, and Banked Bill Payers also present market opportunitiesThus far, agents have had the biggest impact in making financial services more proximate and meeting the financial needs of the Agent Super-Users: poorer, more urban Brazilians, concentrated in the Northeast
The studies show that while agents offering cash-in and cash-out services for bill pay or person-to-person payments do not necessarily make access to formal savings, credit, and insurance possible for the poor, i.eagent coverage does not always beget transformative access to new financial products, it is possible for clients to make formal payments while still lacking a bank account, as is the case for an estimated 32 million Brazilian households.
Progress in includion will be slow, but will be there, allowing more players into the field will expand the scope for access and the transformation to higher services over time.
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