Boston Consulting Group?s report, Financial Inclusion: From obligation to opportunity, maps out possible models of financial inclusion in India, a country in which nearly 60% of the population resides in the villages, 95% of which do not have a bank branch. Although only 47% of the population has access to the formal sector via bank accounts, the report sketches out two models ? the ?opportunity paradigm? and the ?enabling paradigm? ?under which inclusion would go up to 65% and 80%, respectively. About 40% of the respondents to the BCG survey did not save with banks and used the informal sector as a source of credit, 65% of which was used for consumption.
The report recommends that the formal sector learn from the informal sector and benchmark themselves in terms of customer service. To benefit from the opportunities that exist in the segment, banks must look to the for-profit business correspondent model to lower the cost of distribution networks via the adoption of technology, through telecom connectivity, for example. Another change in practice would be the adoption of the ?pay-per-use? model, where customers are charged a small fee for every withdrawal.
If financial institutions can set up business correspondent partnerships, the report says choosing the right set of products targeted at the excluded demographic, deploying technology and structuring the business by launching new brands, joint ventures with dedicated inclusion focus, etc, will result in the realisation of R1,500 crore in profit per annum (over a five-year period).
Although the ?opportunity paradigm? would increase penetration levels, there is scope for improvement. Policymakers will play a crucial role in creating an enabling environment through the adoption of what the report terms ?no regret?? moves, which include an an aggressive financial literacy drive and customer awareness programmes, relaxing norms for opening accounts, disbursing MGNREGA and other government payments through Aadhaar-linked bank accounts and creating a financial inclusion index to monitor the quality of service. Taking it a step further, the government could also give a one-time payment to the financial institution for each new customer as well as tax breaks to those carrying out financial inclusion initiatives.
This would not only increase profit by more than double, from R1,500 crore to R3,500 crore, it would also result in a change in the revenue model which would lower interest charges, encourage more people to adopt a mix of financial products and lessen the burden on the marginal customers. This enabling paradigm, a mix of business and policy, would result in the opening of about 175 million new accounts, approximately 80% of households being included and all cities, and large and most small villages being covered. Compared with with the simply business-side changes, which would result in a lower 65% inclusion, the implication is that good business practices need to be supported by a strong policy framework.