overcoming risks in rural banking

Financial Technology Summit

June 7-9, 2012; Goa

Overcoming Risks in Rural Banking

Inderjeet Singh Dang, Head – Products

Dhanlaxmi Bank

As economies

mature, deposit and

credit grow rapidly

Deposit build up in

India will accelerate

Deposit / Credit

growth, a precursor

to Development

Deposits

to

National

Savings

Ratio

Credit to GDP Ratio

-

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

0% 50% 100% 150% 200%

0%

50%

100%

150%

200%

0% 50% 100% 150% 200%

Australia Austria Belgium Canada France Germany Italy Japan Korea, Rep. Netherlands Portugal Singapore

Spain Sweden Switzerland United Kingdom United States

India Indonesia Malaysia Maldives Philippines Sri Lanka Thailand

Argentina Barbados Belize Bolivia Brazil Chile Colombia Costa Rica Dominica Dominican Republic Ecuador El

Salvador Guatemala Guyana Honduras Jamaica Mexico Nicaragua Panama Paraguay Peru St. Lucia St. Vincent and the Grenadines Suriname Trinidad and Tobag

Algeria Angola Bahrain Botswana Cameroon Cape Verde Congo, Rep. Egypt, Arab Rep. Gabon Iran, Islamic Rep.

Israel Jordan Kuwait Lesotho Mauritius Morocco Oman Qatar Saudi Arabia Seychelles South Africa Swaziland Tunisia

Albania Armenia Bulgaria Croatia Czech Republic Estonia Georgia Hungary Kazakhstan Latvia Lithuania

Macedonia, FYR Moldova Poland Romania Russian Federation Slovak Republic Turkey

0%

50%

100%

150%

200%

0% 50% 100% 150% 200%

Australia Austria Belgium Canada France Germany Italy Japan Korea, Rep. Netherlands Portugal Singapore

Spain Sweden Switzerland United Kingdom United States

India Indonesia Malaysia Maldives Philippines Sri Lanka Thailand

Argentina Barbados Belize Bolivia Brazil Chile Colombia Costa Rica Dominica Dominican Republic Ecuador El

Salvador Guatemala Guyana Honduras Jamaica Mexico Nicaragua Panama Paraguay Peru St. Lucia St. Vincent and the Grenadines Suriname Trinidad and Tobag

Algeria Angola Bahrain Botswana Cameroon Cape Verde Congo, Rep. Egypt, Arab Rep. Gabon Iran, Islamic Rep.

Israel Jordan Kuwait Lesotho Mauritius Morocco Oman Qatar Saudi Arabia Seychelles South Africa Swaziland Tunisia

Albania Armenia Bulgaria Croatia Czech Republic Estonia Georgia Hungary Kazakhstan Latvia Lithuania

Macedonia, FYR Moldova Poland Romania Russian Federation Slovak Republic Turkey

0%

50%

100%

150%

200%

0% 50% 100% 150% 200%

Australia Austria Belgium Canada France Germany Italy Japan Korea, Rep. Netherlands Portugal Singapore

Spain Sweden Switzerland United Kingdom United States

India Indonesia Malaysia Maldives Philippines Sri Lanka Thailand

Argentina Barbados Belize Bolivia Brazil Chile Colombia Costa Rica Dominica Dominican Republic Ecuador El

Salvador Guatemala Guyana Honduras Jamaica Mexico Nicaragua Panama Paraguay Peru St. Lucia St. Vincent and the Grenadines Suriname Trinidad and Tobag

Algeria Angola Bahrain Botswana Cameroon Cape Verde Congo, Rep. Egypt, Arab Rep. Gabon Iran, Islamic Rep.

Israel Jordan Kuwait Lesotho Mauritius Morocco Oman Qatar Saudi Arabia Seychelles South Africa Swaziland Tunisia

Albania Armenia Bulgaria Croatia Czech Republic Estonia Georgia Hungary Kazakhstan Latvia Lithuania

Macedonia, FYR Moldova Poland Romania Russian Federation Slovak Republic Turkey

0%

50%

100%

150%

200%

0% 50% 100% 150% 200%

Australia Austria Belgium Canada France Germany Italy Japan Korea, Rep. Netherlands Portugal Singapore

Spain Sweden Switzerland United Kingdom United States

India Indonesia Malaysia Maldives Philippines Sri Lanka Thailand

Argentina Barbados Belize Bolivia Brazil Chile Colombia Costa Rica Dominica Dominican Republic Ecuador El

Salvador Guatemala Guyana Honduras Jamaica Mexico Nicaragua Panama Paraguay Peru St. Lucia St. Vincent and the Grenadines Suriname Trinidad and Tobag

Algeria Angola Bahrain Botswana Cameroon Cape Verde Congo, Rep. Egypt, Arab Rep. Gabon Iran, Islamic Rep.

Israel Jordan Kuwait Lesotho Mauritius Morocco Oman Qatar Saudi Arabia Seychelles South Africa Swaziland Tunisia

Albania Armenia Bulgaria Croatia Czech Republic Estonia Georgia Hungary Kazakhstan Latvia Lithuania

Macedonia, FYR Moldova Poland Romania Russian Federation Slovak Republic Turkey

Upper Mid IncomeLow-Mid Income

Advanced Econ

Low Income

India

Brazil

USA

RussiaSouth

Africa

Malaysia

Source: World Bank

Global Landscape

“Financial Inclusion” not for charity !!

CountriesRelatively young(Median age)

Increasing wealth(Income growth %) % Unbanked

India 7 24.5 41

China 8.3 36.7 70

Brazil 7 27.6 57

USA 1.3 36.6 5-10

Japan 0.2 45.3 5-10

Western

Europe1 -2 39.8 10

1. Western Europe aggregate as defined by EuromonitorNote: Growth rates calculated 2008-2013, scores indexed against global average being 100Source: Euromonitor, 2005 World Development Report, BCG analysis

The opportunity….

A young population more open to technology / innovation

Local Landscape

Understanding the Rural market

Insights

Kenya Field Experiment

Savings Habits

Inclusive Growth

Role of Technology

Risk Elements

Innovation

Building Blocks

The Real Test

Rural Banking

No of Villages: > 6 lacs

Population Covered: ~ 83 crores (68%)

Total unbanked population : 45 crores (World Bank estimates)

*Source: RBI Quarterly Statistics on deposits of SCB, Sep 2011

Local Landscape

Rural SCBs All SCBs*

Annual Growth Rate (deposits) : 19.4% 20.9%

Annual Growth Rate (credit) : 20.9% 21.3%

Rural is growing at par with the OVERALL Growth

Understanding the Rural Market

68% of the population lives in villages

Population Distribution

Cities, 13Towns, 12

Semi-Urban townships, 13

Villages, 83

-10

0

10

20

30

40

50

60

70

80

90

100

Residing Population (crores)

Cities Towns Semi-Urban townships Villages

Rural: better understanding

3%

32%

65%

Villages, by population category

> 5000

1000 - 5000

< 1000

15%

63%

22%

Population residing

> 5000

1000 - 5000

< 1000

57 crore of the Rural population (63%) stays in 1.9 lacs Villages (32%)

Banking Sector to introspect on the “needs” of the customer & relook the service delivery mechanisms !!

Formal Banking Channels: Inclusion ??

47%39%

11%15%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

Share of GDP Share by the No of Offices Share of the Total Deposits Share of theTotal Advances

Rural Economy

Source: McKinsey Global Institute; May 2007

The Future looks promising

Rural will catch up with the present day Urban

Rural - Insights

Field experiment in Rural Kenya

Source: Why don’t the poor save more; Stanford Univ. / UCSC Deptt. of Economics; May 30, 2012

Basic Savings Product

Savings for Health Emergencies

Rotating Savings & Credit Association

(ROSCA)

De

gre

e o

f Co

mm

itme

nt

1

2

3

• Soft Commitment

• Mental Accounting

• Labeling• Non fungible –though physically accessible

• Credit – Induced for Savings• Social – regular deposit compulsion

Field experiment in Rural Kenya: Learnings

1. Take up rate (after 12 months) varied between 66% -97%2. Purpose of Health Emergencies highly valued3. Providing CREDIT & SOCIAL pressure worked4. Sub groups most “taxed” by Social Networks showed

highest propensity to save5. Some form of commitment is needed for people with time-

inconsistent preferences

Simple box with a lock and key - substantially increased investment in preventative health / reduced vulnerability to health shocks

More sophisticated devices with stronger commitment features are better suited for other individuals

Rural Savings habits………customer differentiation

Source: IFC “Deposit Assessment in India”; March 2011

Source: IFC “Deposit Assessment in India”; March 2011

Rural Savings habits………product design inputs

Source: IFC “Deposit Assessment in India”; March 2011

Rural Savings habits………Financial literacy + Customer convenience

Inclusive Growth

The Framework – need to address specifics

Affluent Rural

• Traders / Shopkeepers

• Credit Orientation

Entrepreneural

Poor

• Artisans, Supervisors

• Regular Savings HabitsSelf Employed

Poor

• Daily wage earners

• Compulsive SavingsLabouring Poor

• Illiterate

• Thrive on Trust

Vulnerable Poor

Captive Consumption

Self Sustainable

No Frivolous Consumption

Suitability of product offerings

Accessibility & Convenience

Safe, Secure, Fast & Low cost

FINANCIAL LITERACY

Product

Technology Enablement

Servicing Model

Key Drivers for a Successful Platform

Suitability of product offerings

Accessibility & Convenience

Safe, Secure, Fast & Low cost

FINANCIAL LITERACY

Key Drivers for a Successful Platform

Inclusive Growth

UsabilitySimple & Reliable

Role of Technology

Existing Models In Practice

Smart Card

Door to Door

RetailerMobile Phone

Outreach ModelTechnology Framework

•No telecom network reqd•More remote

areas

•Hardware by Customer•Numeral

Literacy assumed

•Push model•Fixed Cost

•Pull model•Variable Cost

FINO

M-Pesa

EKO

Still usage / penetration is low !!!!

Literacy Issues

Language Constraints

Connectivity Constraints

Low GPRS penetration / Multi-factor

Authentication

Innovation stops after initial

success

Bottom of pyramid

untouched

•Numeric literacy higher

than alpha literacy

•Primary interaction

remains voice

•Interactive Options

•Mobile penetration, 10 times faster

than PC

Usability is the Key

Risk Elements – .Intrinsic / Extrinsic

Overcoming Risks to Growth

Bankers

ROI Objectives

Risk Premium

High

Poor Tracking

Mechanism

Rampant Corruption

Govt Machinery

Middle men

Connivance

Un-empowered Individuals

Overcoming Risks to Growth

Reduce Cost of Operations

Foolproof Delivery

Empower citizens & Eliminate

Middlemen

Innovation

Risks can be controlled through

Innovation – need of the hour

Source: The Fortune at the Bottom of the Pyramid: C K Prahalad

Enterprises need to work towards “Solutions” for the Bottom of the Pyramid (BOP)

Can VOICE Authentication be the Game Changer ????

Successful application:

Unlimited options:

Connectivity is

Productivity

Can be used by anyone: a potent tool

for B2C

Rs 3,00,000 crore Govt. Benefit

Programs

•Speech recognition +

Voice Biometrics MOST SECURE

•Philippines Pension Case

Study

•Culture of entrepreneurship

“Mhealth” “Sales” “Agri” ”Fin Ser”

•Huge impact on GDP;

GrammenPhone Case

MobilityWireless

Video Presence/

Virtual Reality

Te

ch

no

log

y P

latf

orm

’s I

mp

act

Web/Internet

Leveraging Technology

MobilityBroadband

Flexibility

Opportunities

GDP

* Source: Strategy Paper March 2011; Office of Advisor to the Prime Minister

Study of 120 countries has shown that for every 10% increase in braodband adoption; GDP goes up by 1.3% *

Building Blocks

Building Blocks towards Financial Inclusion

Aadhar / UIDAI

No Frills DriveFI – Coverage of villages >

2000 population

Bank Banking De –

Licensing

Electronic Benefit

Transfers

Financial Awareness / Literacy

Campaigns

MicroFin Dev Funds (FIF + FITF)*

Inclusive Growth

NPCI / Tapping Mobility

Regulation + Catalysts for Market Changers

* Financial Inclusion Fund / Financial Inclusion Technology Fund

Convergence of Objectives……………….

Business

Objectives

RBI Objectives

Govt . Objectives

EBT

Rural Customer Objectives

Rs 3 lac croresacross 30 crores

beneficiaries

FI;Secure

Product; Profitability; Technology;

ScalabilityNeeds

Fulfillment;

Trust

From Pyramid to Diamond -The Real Test !!

Source: The Fortune at the Bottom of the Pyramid: C K Prahalad