Innovative Partnership Models to Access Rural Markets

Enabling Financial Inclusion

Presentation by Mr Somak Ghosh

President, Corporate Finance & Development

Banking YES BANK Ltd

forBanking in the

HinterlandFebruary 14, 2007

Agenda

Enabling Financial Inclusion to Access Rural

Markets

Financial Inclusion – Challenges & Solutions

Tools for Inclusion

Microfinance

Contract Farming

Enabling Environment for Financial

Inclusion

Enabling Financial Inclusion

Quote from Annual Policy Statement (2005-06) of Hon’ble Governor

of RBI

“there are legitimate concerns in regard to the banking practices that tend to

exclude rather than attract vast sections of population, in particular pensioners,

self-employed and those employed in unorganised sector. While commercial

considerations are no doubt important, the banks have been bestowed with

several privileges, especially seeking public deposits on a highly leveraged basis,

and consequently they should be obliged to provide banking services to all

segments of the population, on equitable basis. Banks to review their existing

practices to align them with the objective of FINANCIAL INCLUSION”

• An Inclusive Financial sector is one that helps people help themselves to increase incomes, acquire capital, manage risk and work their way out of poverty through:– Safe savings

– Appropriately designed loans for poor and low-income households and micro,

small and medium enterprises

– Appropriate insurance and payment services

Gaps in Organised Finance in India

Gaps in Organised Rural Finance Low income households with assets valued up to

INR 200000 depend largely on non institutional agencies for cash borrowings – from 60% to 82% as the asset holding decreases to less than INR 15000

43% of borrowings in Rural India comes from informal sources

70% of that from money lenders

Gaps in Organised Urban Finance In urban India there is growing incidence of

institutional credit in middle income groups – up to 66% in HHs with AHC from INR 100000 to INR 150000

However, self employed HHs (36% of total Urban HHs) depend largely on informal sources of funding

Informal credit in Rural India - Rs. 23600 crores

Conservative Estimate of 40% demand from Low Income HHS depicting Incidence of Borrowing (IOB) = Rs.10,000 crore

Informal credit in Urban India – Rs. 8500 crores

Conservative Estimate of 40% demand from Low Income HHS which have IOB = Rs.3,400 crores

High levels of Unbanked Population Out of 203 Mn HHs in India, 73% are in Rural

Areas, 27% in Urban areas 165 mn HHs have Zero IOB (81% of Total HHs) AOB of HHs in the highest asset class is about

27 times and 17 times that of lowest asset class in Rural & Urban areas respectively

22.4%

18.4%20.8%

15.7% 15.2% 15.3%

0%

5%

10%

15%

20%

25%

Cultivator Non-Cultivator

All Self -Employed

Others All

%age HH reporting IOB RuralUrban

Agenda

Enabling Financial Inclusion to Access Rural

Markets

Financial Inclusion – Challenges & Solutions

Tools for Inclusion

Microfinance

Contract Farming

Enabling Environment for Financial

Inclusion

Challenges of Delivery

Under utilisation of Physical & Banking Infrastructure

High delivery costs, legacy systems, inflexible procedures

Information Asymmetry

No credit history, willful defaulting, unclear Government policies

Challenges of Product Design

Lack of Collateralizable Assets

No ownership documents, illiquid assets, inaccurate valuation

Financial Inclusion - Challenges

Addressing these challenges requires reorientation of mindsets and innovative practices to:

Leverage Existing Banking Infrastructure Mindless investment in branch network without optimal

utilisation will not help solve the problem of financial exclusion

There is a need to:~ ‘Sweat’ existing branch infrastructure~ Extend outreach

Evolve customised products tailored to meet the requirements of low-income clients Microfinance is an efficient tool Inclusive Growth

Leverage Partnerships Leverage Technology

Financial Inclusion – Solutions

The inherent practices and methodologies of microfinance offer Banks an innovative mechanism to foster Inclusive Finance by leveraging their existing strengths

Incorporating Inclusive Finance in to the conventional banking framework requires Banks to: Have broader strategy commitment from Board and senior

management View financial inclusion as a business strategy for growth Understand the Bottom of the Pyramid (BoP) market and develop

products suited to the clientele Develop infrastructure keeping in mind convenience to clients Develop data sets to evolve risk assessment models for proper rating

and pricing Adapt systems and procedures to microfinance operations Use innovative products, services and delivery mechanisms aided by

information technology to help speed up transaction time and reduce costs

Adopt appropriate staff training methodologies

Designing Customised Products

Tools for Inclusion – Microfinance

Globally, many traditional commercial banks have

restructured policy and practice to serve the Bottom of

Pyramid (BoP) market through Microfinance

Banks have successfully used direct intervention in

‘downscaling’ to reach low-income populations by

restructuring organisational frameworks to leverage

existing infrastructure, human resources and relationships

• This entailed creating a separate division within the existing

organisational structure (and not a separate legal entity) : Managed as any other commercial unit

Leverages existing infrastructure and human resources of Bank

Bank bears the risk and return associated with microfinance

• Examples – Bank Rakyat Indonesia (BRI)

YES MICROFINANCE INDIA

Poverty alleviatio

n

Financial inclusion

empowerment

Sustainable livelihoods

Socio-economic

development at

grassroots

Holistic Financial

Solutions to shrink the

Bottom of the Pyramid

Micro-enterprise Development

Services

De-centralized Technology innovations

Direct Credit Programs

Savings / Insurance and other financial

services

Supporting entrepreneurship

Promoting micro-equity funding

models

Gamut of Financial Services to the Bottom of the Pyramid

Tools for Inclusion – Contract Farming

Crop Loans from Banks

Dela

yed

Loan

s

Insu

fficie

nt

Loan

s

No L

oan

s

Corru

ptio

nA

t the b

ran

ch

level

Cu

mb

ers

om

eD

ocu

men

tatio

n/

Pro

cesses

Poor Recov

ery

Money LenderSuicidesTou

gh

Recovery

Pra

ctic

es

Exorb

itan

tIn

tere

st ra

tes

Cro

p lo

ss

Low

re

aliza

tion

s

Com

ple

x c

rop

Insu

ran

ce

Traditional Farm Loans

Problems

Typical Contract Farming

Output Buyer

Input Supplier

Loan

s

Farmer Loan dues

Payment f

or inputs

Traditional Bank

Produce

Sales

Proceed

Agri Inputs

Typical Contract Farming - Risks/Short Comings

Crop Failure/Crop damage

Complex Insurance schemes

Crop Diversion

Market price more than contracted price

Willful

Problems with/without the input supplier

Push sales at the expense of the farmers

Loans may not be used for agri purposes

YES BANK’s Model for Contract Farming

Risk sharing by the output buyer

Out put buyer to supply the inputs as well

Price offered to be contracted price or the market

price whichever is higher

Stringent law enforcement for willful defaults

Output buyer should look at contract farming as a

source of good quality raw material not as source

of cheap raw material.

YES BANK’s Model for Contract Farming

Output Buyer

Input Suppli

er

LOANS

Loans

due/GuaranteePayment

for Inputs

Good Quality Agri Produce

Higher of Contracted Price/Market Price

Crops Suitable for Contract Farming

In the present legal framework CF would work:

With crops where there is no/limited market

outside the contract – e.g.: Gherkins, Jalepenos,

Venilla

Where the output marketing is regulated – e.g.

Tobacco regulated by Tobacco Board

Where the output buyer pays a premium for a

specific quality – e.g. Organic produce

Agenda

Enabling Financial Inclusion to Access Rural

Markets

Financial Inclusion – Challenges & Solutions

Tools for Inclusion

Microfinance

Contract Farming

Enabling Environment for Financial

Inclusion

Enabling Environment for Financial Inclusion

BanksBusiness

Correspondents

Financial Inclusion

ENABLING INFRASTRUCTURE

Leveraging Partnerships: Non-Branch Delivery Channels

Business Facilitator / Correspondent Model

Business Facilitators Institutions/ individual, currently interfacing with poor, to

provide support financial services under well defined terms

These may be NGOs, MFIs, Farmers Clubs, Functional Cooperatives, IT-enabled kiosks, Postal agents, insurance agents and Panchayats among others

Business Correspondents as “Pass Through” Agents All functions of Business Facilitators can be conducted

Other value added services can be carried out:

Disbursal of small value credit

Recovery of Principal / collection of interest

Sale of micro insurance / mutual fund / pension products

Role of Technology

Information Dissemination Technologies

o Information Kiosks

o Call Centers using vernacular toll-free IVR System

Business Processing Technologieso Simputer

o Mobile Phone Banking

o Automated Teller Machines

o Smart Cards

o Personal Digital Assistants

Leveraging Technology: Enhancing reach and convenience through customer choice

Leveraging Technology: Common Platform – Sharing Resources Financial Inclusion initiative by IDRBT

Multi-application smart card system

Store of electronic cash, data repository for essential

information relating to the card holder

Biometric identification, doubling up as an entitlement

identifier/social security card

For government payments like pension, subsidies, utility

payments – healthcare, crop insurance, life insurance

Banks can use for ‘No Frills Account’, prepaid cards for

rural creditCreation of a National Platform on “One Open Standard” will enable Inter-Operability across various National Payments

Networks like NFS etc giving customers reach across the nation. The various service providers and banks will then be able to

plug-in services at an affordable cost.

Leveraging Technology: Sharing information, common standard for evaluation“A loose credit policy lost money. A tight credit policy lostbusiness. Intelligence, judgment and good information - these were what

made the crucial difference”- Lewis Tappan (Founder of Dun & Bradstreet)

Credit Information for… Funded credit facilities Non-funded credit facilities Security/collateral for the credit facilities Antecedents & credit history of borrower

The envisaged role of CRB is to make available… Complete and reliable Credit Information In the form of reports on borrowers, Individuals or businesses From a centralized database As a neutral service provider

Creation of a National Credit Reference Bureau through IDRBT or like organisations Can deliver “Real Time” Credit information to

support Micro Credit decisioning and ratings.

Innovative Solutions: For extending Deposit Products

Dispersed client based with poor access

Limited electricity supply and access

Limited telecom/broadband connectivity

ATMs may not be viable and maintainable in erratic power situations

Cash collection points – customers like to deposit at a fixed location

Banking service – delivery of information , statements, etc

Access to account in nearby cities, towns villages

Challenges

Mobile Branches covering select geographies

Self generated - Diesel , Solar, Battery

Online/Offline and Pseudo online data capture and updation systems. Leverage Mobile networks

Cash dispensing partners e.g. Post offices who can deliver cash like money orders

Cash can be deposited at partners like Post offices/Mobile Branches

Information dissemination through partners, Internet kiosk enabled , Toll Free Call centre in local language

ATM cards for such customers

Mitigation

Innovative Solutions: For extending Loan Products

Loan delivery - Cash is preferred form at Village Level

Loan servicing- Payments collection to suit every form of repayment from daily, to weekly to seasonal

Loan Management and updation of information of payments and collections and sharing update with every borrower at village level

Challenges

Loan can be delivered on Card; customer can avail cash from nearest partner - Post office/ATM/ Cash advance terminal like POS

Enlisting partners like Post offices and Roaming agents who can use offline/ online handheld devices to update loan repayments on the field

Deliver the loan history on a smart chip card. Information on the same can be read off and printed off handheld readers

Mitigation

THANK YOU