payment and small banks a gateway for financial inclusion

Payment & Small Finance Banks: A gate way for “Financial Inclusion”

Payments & Small Finance Banks – Role in Banking Space


Indian Economy is in the phase of correction posing robust growth trend for the current and years coming by, with sound policy and regulatory initiatives, backed by stable political environment governed by visionary leadership directing the Nation move on the Directed Road Map with “Make in India” and “Swachh Bharath” initiative appealing and attracting Investments both from Domestic and International. Positive business sentiments, Improved Customer confidence to earn and expense, and more over enact of corrective measures for controlled Inflation by the regulatory…are a few Means, to boost and correct the Economic Growth.||rly Jan Dhan a Central initiative targeting every Indian with provide of Savings bank a/c, on its successful grass roots and is a means step forward for Financial Inclusion.

Fact, the real India lives in villages (Rural Economy Mkt.), while it is an emerging Economic Power, life remains largely rooted in these villages. There are nearly three fourth of the country's consumers residing in 6.38 Lac villages, who provides a huge demand base and offers a great opportunity for all marketers both Indian and MNCs’ based on the few characteristic features as experiencing through..

In ref. to banking Industry being the barometer of the economy… with total asset size of Rs 81 trillion (USD 1.34 trillion), is expanding continuously but on a cautious note at moment, basis of the fact that the Industry is plagued by bad loans, the lenders have chosen to go slow in terms of credit. Off take. Fiscal 2014 saw a combination of various external and internal events that kept markets turbulent, interest rates high and investor confidence low, resulting in shrinking investment and GDP growth. How-ever, view this to be on short term and to pose more opportunities of Growth, the days coming by.

Understanding Rural Market, dynamics:

Rural Mkt. is significantly predominant by informal finance sector comprising of Money Lenders, Traders & Land Lords to that of the formal segment comprising Institutional financers.

Informal sector which is legal, but officially unrecorded and unregulated... having its identity in the grass roots based on few characteristics comprising of Caste, Religion, Social, Political and Geographical features, Financial Illiteracy, low cost value transactions, large distance, poor transport, etc...Similarities among the groups, with more identity.

Backward (Deeper geo limits) having less access to Formal Finance Segment / Institutional Credit and hence, they are more dependent on Informal Finance Sector.

Potential opportunity exists for Consumption loans in rural market through formal finance mechanism. How-ever, the segment is marked by seasonal based employment (Specific to Agriculture),the risk of exposure funding in this nature is high and discouraging, unless a mechanism for sustaining regular means of lively hood is in place.

NBFCs’ having their significant identity in particular to Hire purchase, leasing operations, finance to Traders of Agricultural pre and post related activities. In general, out-look of formal finance segment being profitability / viability marked by regulatory requirements to be met by maintaining high reserve ratios, Interest rate ceilings, branch licensing, directed credit etc..Constraints indirectly proving to be a boon to Informal mkt. segment.

• Increase in educational facilities and literacy through IT and Electronic Media

• Increase in rural income due to better monsoon in recent years along with changing buying behavior and consumption pattern basis existence of rich rural consumers having close contacts to urban areas.

• Improving overall Infrastructural facilities, like road, electricity, drinking, sanitation etc.

• Rural development and investment programmes by Government agencies • Prosperity through land reforms and adopting modern agriculture systems. • Increase in Rural population, Remittances and Direct Investments in Rural

areas along flow of foreign goods • Cut throat competition among market peers across all segments and

saturation of Demand in Urban areas.


The extent of transaction cost, rate of interest incurred etc under formal finance being low compared to that of Informal segment. How-ever, these haven't given much importance to differentiate between and expose by bring to the notice of end customer.

Increase use of Technology, Centralized processing and decision procedures, KYC regulations etc..measures adopted by Formal Segment is of higher standards in the current mkt. dynamics. On contrary, Informal finance segments having been further aggressive in funding on SPOT and by penetrate to deeper geo by understand of local flavor with decentralized process and flexible policy procedures and decision making empoweredness, posing a cut throat competition.

With Increased focused and Investments by Govt.of India, in creating Rural Infrastructure, Employment and promote of Literacy rate by bring in of quality educational needs, leading to rise in rural incomes and consumption, made Rural Markets an attractive Investment opportunity.

Example to Understand: Mr. X, representing rural location earns and spend Rs.1000/- on his basic necessities. The utility so derived is of 95-98%, vice-versa…if he being in Urban location and earns and spends a ||r amount, the utility so measured is of 70 - 75% only… as the rest goes as Tax. In Indian ||ence, as termed to be “Agriculture Rich Rural Economy,” with Zero-Tax on Farm Income, creating Potential Savings and by increasing and vesting the buying power in the hands of Individual making him a “Rural Rich”, to that of an Individual with similar buying, termed to be as “Urban Poor,”and this being the Untapped potential Emerging Market segment to differentiate, identity and explore.

Payment & Small Banks: A gate way for Financial Inclusion.

Latest’s Reserve Banks of India (RBI’s) initiative by extend of 11 new licenses in the Payments and Small Bank category, these indeed pose to be of ‘Challenger banks’, as they take on traditional banks with core objective to sustain Financial Inclusion by expand of access to financial services in Emerging Markets comprising of Rural and Semi-urban areas with traditional banking activities by accept deposits and lend to underserved sections of customers, including small business units, small and marginal farmers, micro and small industries, and even entities in the unorganized sector through power of Technology.

Evident and experienced, demand and use of Mobile phone had a greater penetration in India in line with the population growth by 80%, as its usage had tailor-made to the needs of a country with a large semi-literate population that is living on the borders of the poverty line though rn’t capable to handle a computer…but were capable enough to use & operate a mobile phone, and this being a key driving factor for the banks to sustain its objectives in a more tailored fashioned manner.

New technologies, notably Mobile technology has revolutionized retail banking practices in all income brackets, and especially in lower income segments including people living in poverty, by provide of access to basic financial services, such as cashless money transfers, for the first time ever, without having to hold a bank account at all.

Over 70% of Indian population residing in rural markets, they are clearly the ‘battle-ground’ for the current and future, for one to Tap the Untapped Mkt., and to accelerate business growth, as well maintain Leadership position and Healthy Portfolio.

Its evident...Urban Markets are getting saturated as well proving risky and Rural Markets are becoming more viable for any industry to explore, based on the following facts as observed.


Traditional Banks Vs Small & Payment banks (differentiating factor)

Heavy focus on technology and IT infrastructure. Only core banking operations such as risk management, treasury, finance and accounts expected to be in-house

Follow asset light approach with pay per transaction for technology, customer acquisition, collections, transactions, etc.

Technology is the backbone and plays a central role across all functions and processes

Cost efficient technology platform to reduce overall cost of transaction

Focus on all customer segments - Retail, M&SMEs,Corporates;Unbanked population only for fulfilling regulatory obligations

Follows Brick and Mortar ‘Branch’ centric distribution model

Cost to serve unbanked population is traditionally high Offers product variants across entire product range of

accounts, deposits, payments and credit; Credit is the primary product for revenue generation

Financial inclusion and unbanked/under-banked population are the priority target market

Though internet banking services has been encouraged, the RBI does not envisage a Payments Bank to become “virtual” or branchless bank

Cost to serve unbanked population is lower due to technology adoption right from the inception

Focus on only simple accounts, deposit products and transactions; Fee earned from transaction is primary product for revenue generation

Adopt outsourcing of only administration and other non core functions

Follow asset heavy approach by investing in technology, infrastructure, office space, branches, etc.

Technology plays only an enabling role in few functions and processes

Heavy and continual investment in technology and lower ROI due to leverage and legacy issues

Formal Mkt. Segment comprising of regular income from Salaried/Self Employed individuals as source of income

Lower/Inconsistent category customers comprising of daily wage earners, retail traders, street vendors / hawkers, casual workers / labour force etc.

Dependents / Survivalists comprising of people dependent on Govt. Aid / grants comprising of pensions / credits in the form of subsidies, dependent remittances etc.


Banked and technology savvy segment with higher internet penetration

Banked/unbanked/under banked segment with limited access to internet facilities

Customer demographics

Educated and Tech Savvy Less educated with limited knowledge of using technology for availing services

Average age of 30 years Middle and lower income segment High-income segment Mostly reside in rural and semi-urban areas Mostly reside in Metros, Urban and Semi Urban areas.

Challenges faced in using new

payment modes

Slow/limited adoption by the banked, owing to user comfort with internet banking, ATMs/debit cards and card transactions

Low penetration of internet, ATMs, PoS, and other enabling infrastructure

Lack of standardized and easy-to-use payment services Technology inexperience and literacy constraints

Lack of trust in mobile and wallet payments due to security and reliability issues

Lack of awareness about electronic and mobile payments

Existing mobile solutions do not facilitate cash-takeout

Cash continues to be the sole medium for effecting financial transactions

Payments banks potential

propositions

Secure and well encrypted payment platform Access to basic banking services

Standardized services enabled by Mobile Technology

Simple and intuitive payment platform with an option of multilingual interfaces

More number of use-cases to provide compelling reasons to use digital payments, especially in Person-to-Person (P2P) and Person-to-Merchant (P2M) transactions

More often used, especially in Person-to-Government (P2G) and Government-to-Person (G2P) segments

Customized merchant offers based on transaction history – both online and offline

A simple and dedicated domestic remittance platform

Product add-ons such as cash backs, discounts and loyalty programmes

Customer education and handholding to drive adoption and facilitate usage

Rich and visual tool sets for spend management and expense tracking

On boarding of Small Retail Merchants on the mobile payment ecosystem to effect non-cash transactions

New offerings

Digital banking and payment approaches which are smooth, intuitive, functionally rich and support anytime, and any device banking

Route the direct benefit transfer through the mobile ecosystem to improve familiarity and adoption

Strong set of customer incentive pull (loyalty programmes, discounts, cash backs) to drive enrolments and usage

Payment to/from the government on the mobile payment ecosystem (NREGA payments, small savings schemes)

Rich functionality and tools for spend management, etc

Merchant acquisition services for small retail merchants in rural areas on the mobile payment ecosystem

Integration with social media feed that understands and predicts what is needed


Growth Prospects Strategy. A Mean approach:

• Simplified documentation and account opening procedures using the modern technology comprising Bio technology (Fingered print / Voice recognition), UID - AADHAR Integration etc.

• Promote and encourage digital payment transactions instead of Cash, by issue and install of Swipe Cards, Machines and acknowledge with print..in apart to extend of digital reward points (Credit to Savings account) which can be later accumulated and converted to cash rewards / gifts on long run. This in ||r lines of Credit Card business where in banks often encourage to spend more through credit cards and allocate reward points.

• Promote of easy availability of timely and door-step services comprising of secure acceptance and dispensing cash, money transfer facility etc..through set-up of business correspondents in general comprising of Kirana / Pan Shop / Grocessory Small merchants etc.(Customer – Merchant - Bank (CMB)) approach.

• Promote banking business habits through Franchisee mode (Skill Development), by appoint of local youths as their franchisees, as all these were people whose families have resided in the area for several generations and who know most of the people residing in the village and are also known to people in the surrounding areas.

• Promote loans with minimal / no collateral security. Further employ and recruit Local appraisers ( Loan officers ) by take of advantage forms basis being these officers at Small banks can take into account a wide variety of factors in reviewing applications for small business loans, including the 3C’s (Character,Capacity,Capital ) of the borrower and special features of the local market and is a strategy to promote financial inclusion of the rural masses while creating a new breed of local entrepreneurs who could bring financial products and services closer to the villagers.


• Innovate, Design and promote with Tailor-made low cost savings & insurance products which can suit customer’s conditions surrounding rural business comprising ruined crops, bad monsoon seasons, and natural disasters etc which are ever present and largely uncontrollable factors.

• Promote banking facilities by conduct of road shows in regional languages and make use of advantages of Grameen Mela/ Loan Mahotsav etc..along with support of Business Correspondents.

• Impart continuous training on financials products by converting local partners into brand ambassadors, advising locals on financial investments and selling them appropriate financial products in an extremely beneficial factor.

Promote Financial Knowledge / literacy and improve skill sets by

Make people aware how to save and understand the uses of credit Promote awareness of different types of financial products and help them understand terms & conditions

of products Ability to make interest rate calculations Know how to put together a budget and to track income & expenses

So as to bring changes in behavior pattern comprising of

Save more Borrow less Use more financial products and choose cheaper products Shop around for loans and borrow from cheapest lender Follow a budget and track income and expenses

Factors that facilitate scale Partnerships and Networks: Public and Private Partnership (PPP approach) by blend of Education &Technology support along with leverage financial support, Infrastructure, Human Capital by delivery of quality financial education across the country Use of Mass Media & Technology: These being the popular channels for wide dissemination of financial education content and more specifically Radio & TV & Print Media programs offered in the vernacular language to reach multiple end users who are difficult to reach under traditional approach. Further, use of mobile technology by means of SMS / simplified APP applications etc is alternative means to support Financial Education to mass segment. Institutionalization: Financial education should be an integral component of an organization’s regular interaction with its community customers.

Financial Inclusion and Financial Literacy are two sides of the coin as one represents the Demand side -making people aware of what they should demand and Inclusion represents Supply side - providing in the financial market “What People Demand.” Raising financial literacy supports social inclusion and enhances the wellbeing of the community. There is need for financial literacy in both the developed and the developing countries and these banks had greater role to play by take the position of the School / college and promote Financial Education & Innovation aimed at Identified Target Set of Customers, with Twin Objective to sustain comprising of


Summary: Small Finance & Payment banks tend to play an important role in the financial system of Our economy as they complement the role of large banks by specializing in relationship banking and extension of Credit to under-served population. As are aimed to serve Customers in Rural, Semi Urban areas by render of service in Payment as well Deposit and lending to large percentage of the population, while pose little Systemic Risk, their importance to some key sectors and areas of the Economy Warrant RBI’s interest and oversight. Being a technology driven low cost model approach with overall focus on reduction in of transaction cost and by enable to mobilize low cost deposits and meet funding needs, these tend prove to be a foundation stone in the Nation’s Economic growth by promote of Financial Inclusion through Financial Literacy and Service, and by extend of opportunities of Growth, the days coming by.

payment and small banks a gateway for financial inclusion

Economy & Finance