Extending the reach of banking services

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The Indian banking industry, on the back of robust economic growth, has undergone a sea change. From the days of the common man’s excessive reliance on money lenders and loan sharks, the banking system in India has come a long way. Besides a huge network of more than 70,000 branches across the country, banks are using a number of alternative channels (such as telebanking, internet banking, doorstep banking, etc) to reach out to the people. Banks are investing more into risky and complex financial assets rather than the practice of ‘lazy banking’ followed earlier. Banks are fast transforming themselves into a one-stop shop for a range of financial offerings, such as insurance, mutual funds, securities brokerage services, wealth management, etc, compared to plain vanilla deposits and loan products in the past. Liberalisation of the banking sector has infused the much-needed dose of competition among various players.

Despite this progress made by the banking sector, it needs to catch up on a number of fronts, especially on the penetration of banking offerings. Only 59% of the nearly 90 million farm households in India have bank accounts. Only 51% have access to formal credit. The credit-GDP ratio (from 44.5% in 1980s to 56.8% in early 2000 and to around 67% in 2006-07), is still substantially lower than many developed and emerging countries. (The ratio stands at more than 100% for Hong Kong, Singapore, Taiwan, and China). Retail loans-GDP ratio stands at around 17% in 2006-07, which is one of the lowest among Asian countries. The home loan market is highly under-penetrated, with a home loan-GDP ratio of around 8% in 2006-07, as compared to 50% for some developed economies.

Studies conducted by international consulting firms indicate that the supply of micro-credit in India is only Rs 6,000 crore, as against an estimated demand several times that amount. The banking sector is still not able to meet the growing requirements in areas such as financing small and medium enterprise (SME), infrastructure financing, and financing big M&As.

Domestic and foreign banks have responded well to address the issue of under-penetration of banking offerings. However, significant development made by banks would lose its relevance until it contributes to raise the overall standard of living for the entire society. Moreover, considering the significance of the banking sector in an economy, it is all the more important for all stakeholders in the sector (banks, customers, and regulators) to contribute to the overall well being of society. While increasing their reach, banks should ensure the benefits of wider network and technology also reach their customers. Customers too shouldn’t misuse banking services. Regulators need to provide and implement a legal framework to banks and customers to perform the above. This column attempts to highlight some of the significant aspects of Indian banking as it tries to cater to the aam aadmi.

Financial inclusion: Although upper and middle classes in urban areas have access to banking services through multiple technology platforms, much of the rural populace does not have access to basic banking services. The aam aadmi actually have huge potential to become valuable banking customers. This large un-banked or under-banked segment is not averse to formal banking. The inability to access financing from formal channels have pushed the aam aadmi to access financing from the informal sector, often at usurious rates and on exploitative terms.

There is a compelling need to use technology to cater to various financial services requirements of the rural people. Banks could play a vital role in providing cost effective banking products and services to the people in un-banked areas. They could give solutions in providing simple and flexible banking products and services to these areas.

Collaboration among various types of players in the banking sector to leverage the strengths of one another, could pave the way for profitable banking opportunities in un-banked areas. Local organisations such as self help groups (SHGs), regional rural banks (RRBs), and co-operative banks are better positioned to reach out to the end-customer, understand their requirements, and service them.

But they lack in using the latest technology to acquire, retain, and service customers, skilled employees, adequate capital, and more importantly, a sharp focus on the need for financial inclusion. Private sector banks have the latest technology to provide low-cost banking products and services, skilled manpower, adequate capital, and a compelling need to diversify to untapped markets but do not possess the reach to these areas. These complementary strengths need to be wedded together to tap the vast bankable markets in un-banked areas.

Truth in lending: Transparency in dealing with customers is the foremost guiding principle. Transactions with easily understandable and transparent terms and conditions instill trust in customers. Customers and bankers expect complete transparency in transactions. It assumes even more importance as a major portion of banks’ customers either have limited or no knowledge of financial products, especially the more complex ones. Banks, as seen in many cases, are not being fully transparent and lucid in communicating the truth about their offerings to their customers. This could be either with the overt reliance on the principle of ‘caveat emptor’ (without paying much attention to the long-term implication) or inadvertently, as bank employees are not well-trained to communicate clearly to customers.

On the other hand, customers should also be more literate around various financial offerings. They should interrogate and understand financial offerings well before purchasing them. In this direction, many banks have started educating the public through various means such as advertisements and education camps, on the effective usage of various financial offerings. The Reserve Bank of India (RBI) also provides basic information to customers regarding various banking services. It has directed commercial banks to display the most important terms and conditions for all their offerings prominently on the homepage of their websites. Hence, steps are being taken at all levels to minimise the risk of miscommunication.

Fairness in lending: Today’s competitive business environment is characterised by pressure to increase market share and maximise profits. One of the prime concerns in today’s scenario is—in some ways—excessive lending by banks. Banks are using all avenues to hard-sell their offerings, such as credit cards, loans, security brokerage services, financial instruments, etc, without necessarily evaluating the appro- priateness of such products for its users. Firstly, it may lead to irritate an educated customer, who may not need the product at all, and hence could result in impacting the bank’s reputation and brand value. Secondly, it might lure an unsuspecting customer to purchase the product (due to the rewards attached to the offering) even if that product does not suit the customer’s requirements and hence, may become a cause of concern both for the bank and the customer in the future. Incase of corporate banking, where the switching cost for customers is high, cross selling of products is very common. In many cases there is inadequate assessment of the need and suitability of the product for the customer before it is sold.

The significance of the proper due diligence of a borrower is clearly underlined in the success of micro-finance in India. In micro-finance, small loans are extended only after proper identification of target customers, complete verification of their financial health, and understanding the purpose and suitability of the offering for the customer. Even though the interest rates on such loans are usually more than 30%, the recovery rate has been around 97-98%. Therefore, it shows that proper systems for credit disbursal can yield handsome returns.

Another concern is for those bankable people who do not have proper credentials to support their financial capabilities. Hence, it becomes the responsibility of borrowers to completely disclose their assets when borrowing. Another key concern in extending financial products responsibly in India is the lack of an institutional mechanism to keep track of the credit history of borrowers (individuals as well as corporates). It is observed that defaulting borrowers have taken loans from more than one lender and a large portion of borrower’s default on multiple loans at the same time. However, a beginning has been made with the establishment of credit bureaus. RBI has also been active in ensuring responsible lending by banks. It has devised and implemented Know Your Customer (KYC) norms. It has also penalised a few banks flouting KYC norms.

Rethinking the recovery process: Loan recovery is necessitated by loan defaults. Banks are not for charity, so both parties-lenders and borrowers-need to be aware and responsible before entering into an arrangement. Banks have been provided various direct channels, such as Lok Adalats, Debt Recovery Tribunals (DRTs), Securitization Act, and Asset Reconstruction Companies (ARCs) for lawful recovery of non-performing assets (NPAs). However, the time and cost involved during the process make these channels less attractive. Hence, most banks take the services of debt recovery agents (DRAs) to collect their dues on the loans.

In the last 4-5 years, banks’ practices to recover loans have become more visible than before. Social repercussions of irresponsible lending are beginning to reflect in the society. The most shocking incident has been of indebted customers who have committed suicide due to their inability to pay back their loans. Besides this, there have been a number of cases involving individuals who were lent irresponsibly and later, were not able to pay back. These cases are a direct result of a combination of a variety of factors, such as irresponsible lending, lack of credit information, lack of financial education on the part of borrowers, lack of appropriate legal or regulatory mechanism for loan recovery, etc.

Another means of loan recovery is through DRAs, which has attracted a lot of criticism in recent times. In many cases, DRAs have been found guilty of violating the procedure laid down in the law and by the RBI. Banks were also unable to ensure that DRAs work within these guidelines. Defaulting customers are being driven to extreme steps caused due to the threatening and menacing behaviour of recovery agents.

It is the responsibility of banks to make sure that the DRAs follow proper steps to recover dues without causing any type of violence, social unrest, and humiliation. Also, banks need put in place a system to identify ‘willful defaulters’ and ‘situational defaulters’ (defaulters due to unforeseen circumstances such as sudden health expenditure, job loss or death, or a major loss in business, etc) and have separate mechanisms for effective recovery of loans. Borrowers need to be proactive in reaching out to the bank and discussing their problems. Many banks have opened counselling centres for borrowers. These centres help ‘situational defaulters’ to overcome their financial problems. In these centres, banks devise suitable repayment schedules.

Customer service: Customer service forms an integral part of banks’ offerings. Banks need to provide a well-laid and strictly implemented complaint redressal mechanism to all its customers. It has been observed that banks have not been able to put in place an effective mechanism for all its customers. While educated consumers in urban areas have a variety of channels (branches, internet, telephone, etc) to get their complaints resolved, less educated and less aware customers in rural and semi-urban areas have not been educated on the complaint redressal mechanism. It is essential for banks to strengthen their complaints redressal system in rural and semi-urban areas so as to retain these people in the organised financial services sector and hence truly achieve the objective of financial inclusion.

Corporate houses and banks have started working as partners rather than having a client-vendor relationship. The growing need of banks in most transactions and advancement in technology is encouraging more and more investor classes to make use of banking products. This is forcing banks to become competitive and offer customised products.