Exploiting the poor- do they have a choice?

Posted on April 25, 2013 by Sumita Kale

In a report tabled in the Parliament, the Standing Committee on Finance laid stress on expanding the brick and mortar branches for financial inclusionThis emphasis is completely out of sync with latest trends in financial inclusion, where worldwide the brick and mortar branch framework has been given up in favour of BC model, mobile banking, more participation of non-banks with strict risk regulation etc The Committee have been emphasising that no other model can substitute brick & mortar branches in achieving the goal of financial inclusion, it added It is this emphasis that is costing the country dearly,not just in making the whole proposition of financial inclusion more expensive for banks, but by lost opportunities in not expanding rapidly.

The same panel states that  the Ministry may review the Business Correspondent (BC) or Business Facilitator (BF) model for better results in the interim, while ensuring that it should not become an instrument of exploitation of the rural poor  Ironic that this report should come out now when the headlines are grabbed by the Saradha Chit Fund scam in West Bengal. How do such companies proliferate? Two opinion pieces by T K Arun (Economic Times) and Monika Halan (Mint) highlight how the RBI's regulatory model needs to be revamped to allow easier access to financial services by the poor, so that they are not left to be exploited by dubious companies.

T K Arun says, Blame not just greed and financial illiteracy, blame also India's stunted formal finance, and that keeps out the unwashed massesHow does the RBI become Accused No1? By being so stingy on bank licencesBy being obtuse on the use of technology, by still dreaming that physical branches lay the path to financial inclusion, by refusing to recognise the ecosystem that mobile phones represent is ideal for mass electronic bankingThat the prepaid SIM is a portable electronic vault that can be remotely credited and debited is less important than the network of authorised vendors of phone companies that can easily be moulded into a network of those authorised to sanction loans and collect repayment. The Aadhaar system offers a sound route to universal banking coverageProvided the RBI finds the courage to innovate policy based on advances in technology

Halan says, Clearly, there is money at the bottom of the pyramid and there is no dearth of enterprise in IndiaSo why do we see so much under-the-surface activity in businesses that mimic banks? Could it be because existing regulation is a lot about preserving the business models of existing banks? What else would explain the reluctance to allow non-bank linked e-payment systems into the country, using the bogey of safety of depositor money? Why is separation of client funds such a tough idea for the RBI to understand—the mutual fund industry has used it successfully for more than 15 years now without a single instance of somebody decamping with investors’ moneyUnfortunately, what we’ll get is a knee-jerk reaction that shuts off chit funds and other forms of non-bank finance, further pushing people into the clutches of illegal operators

It is time to move on to newer systems and models, accept a more open environment with  lighter but tighter supervisionThis can be doneThe sooner we get around to debating this with an open mind, the sooner we can leave behind older modes and the sooner the poor will get a choice of whom to invest with.


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Customer oriented inclusion

Posted on April 23, 2013 by Sumita Kale

Meaningful financial inclusion calls for understanding the needs of the customer, and not going in for a top-down approach.

Tilman Ehrbeck puts this point through well in his blog post, calling for the starting point to be from demand-side insights rather than supply-side considerations:

Half of all working-age adults globally lack access to formal financial servicesAnd contrary to popular belief, these people are often entrepreneurs in the informal economy -- by necessity, not by choiceUnbanked people don’t live financially simple lives; they have a strong need for income-generating opportunities, the ability to build assets, and tools to mitigate risks and smooth consumption in the face of emergencyBy listening to what these people really need, we can dramatically fast-track innovation in financial services to reach more people with a greater range of products at affordable prices to help them improve their lives.

Dr Subir Gokarn, then Deputy Governor RBI, had given a similar approach in a speech in 2001, 'Financial inclusion: A Customer Centric View':

Who the potential consumers are, what motivates and drives their decisions, what constraints and risks they face and so on are all fundamental questions, the answers to which are the starting points of strategy formulation In other words, the better the understanding banks and other financial service providers have about the potential consumers of their inclusion-oriented products and services, the more likely their strategies are to succeed in a way that benefits both consumers and producers.

Under India's bank-led model for financial inclusion, banks need to get this message and work to tailor their products to customer needs, the business case will then flow automatically.

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