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Digital Financial Inclusion In India – A Long Road To Take-Off?

Posted on October 1, 2015March 20, 2024 by MSC

The history of India’s efforts to achieve digital financial inclusion has been diverse, but largely top-down. These efforts have produced a mixture of RBI regulations and advices for banks, and government policies and directives. Most recently, the RBI provided guidelines for differentiated banks (Payments and Small Finance Banks) specifically designed to deepen outreach and enhance financial inclusion. And in August 2015, the RBI issued provisional payments bank licenses to a fascinating array of 11 very different organisations and consortia.

Source: The Helix Institute of Digital Finance Agent Network Accelerator Survey – India Country Report 2015

However, on occasions, most notably in 2012, the advices and directives have provided conflicting signals, making the road to achieving financial inclusion considerably more fraught than it need have been.

Despite this, the number of agents available in India has continued to grow — in both rural and urban areas. Given India’s sheer size, it is perhaps unsurprising that the number of agent outlets is considerable. Kenya has around 100,000 agent outlets; India (despite its faltering efforts at digital financial inclusion) has nearly six times this number. The annual growth rate of Indian urban and rural agent outlets remains in the range of 50%-60%.

However, questions remain about the levels of churn and dormancy amongst this apparently impressive spread of agents. In early 2012, “The Curious Case of Missing Agents in Rural India” documented how:

only 7% of the villages had transaction ready (MicroSave defines “transaction ready” as a customer being able to walk in and conduct a transaction) agents;
only 4% had agents available to transact every day (because of the high number of mobile or roving agents);
a little over 2% of the appointed agents were doing more than 10 transactions a day; and
less than 4% are earning more than Rs. 2,000 a month; with a median monthly income as low as Rs. 1,500, and quite likely to quit the business soon.

However, two years later, 54% of the agents were “transaction ready” (and this rose to 79% by mid-2015) and were on average earning a gross revenue of Rs. 2,724 (US$42) per month (this rose by 45% to Rs. 3,951 or US$61 per month by mid 2015)¹.

Some of the growth can be attributed to the government’s financial inclusion drive — the Pradhan Mantri Jan-Dhan Yojana (PMJDY) — which directed banks to push transactions through agents. As a result, the fiscal year to March 2015 saw a 45% rise in the number of transactions at agents to 477 million and a 64% increase in the value of transactions at agents to Rs. 859.8 billion (US $13.2 billion). As the government extends digitalisation of its direct benefit transfer schemes — building on the success of “Pahal”, the programme for liquid petroleum gas subsidies — we can expect this growth to further accelerate.

But it will have to accelerate fast if the agent network is not to face further churn and dormancy. Our April/May 2015 survey revealed that 72% of agents started this business less than 18 months ago. Further, at an aggregate level, the proportion of dissatisfied Bank Mitras is almost double (46.1%) of those who are satisfied (23.4%). A closer look at the data shows that a higher proportion of agents, who have been appointed recently (fiscal year to March 2015), belong to the “undecided” category (who are neither satisfied nor dissatisfied), while others who have spent one year or more are mostly dissatisfied.

Previous MicroSave studies ANA 2015 India survey found that 52% of agents report monthly profits below US$18 and 44% report profits below US$11. Clearly, there is a long way to go to address this problem. The government needs to use the potential that its direct benefit transfer schemes offer to significantly increase the agents’ income on a priority basis. MicroSave analysis shows that it can afford to do so. But it cannot afford to see further churn and dormancy in the rural agent networks that are expected to provide the backbone for the nation’s financial inclusion programme.

Low agent profitability is not solely due to the low levels of transactions performed by agents in India, but also because of their high operational expenditure (opex). Part of the high opex seems to be driven by high liquidity management costs, indicating that Indian agents have to travel much further to rebalance than agents in other countries MicroSave has studied. Perhaps as a function of the 2011 Swabhimaan scheme, many agents are in relatively remote villages. This means that they have to travel a median of 6.6 km (journeys taking a median of 26 minutes, nearly twice that of agents in Uganda and Tanzania; and nearly three times that of agents in Kenya) to rebalance. In Pakistan and Bangladesh, a small section of agents have to travel to rebalance; instead agent network managers deliver liquidity to agents’ outlets. Furthermore, Indian agents travel an average of 16 times/month to rebalance. This is more frequent than in any other ANA country (compared to Kenya: 8 times, Tanzania: 6 times and Uganda: 10 times). This may be because Indian banks require their agents to report to branches regularly.

Additionally, more (67%) Indian agents are dedicated to solely performing financial transactions than most other countries. These agents have no other source of income or business over which to spread fixed and semi-variable costs.

This is in contrast to what is perhaps expected by RBI and other architects of India’s digital financial infrastructure, who have typically talked about agents operating out of local stores, thus spreading their opex costs across a range of businesses.

The ANA 2015 India survey showed that only 35% of agents in metro areas were dedicated and thus offering only financial services. Conversely, 70% of rural agents were trying to earn a living from just offering agent banking services. This will remain a challenge while G2P commissions are low and the PMJDY financial inclusion drive remains in start-up mode. Introduction of the JanSuraksha, mass market insurance programme, may help drive some transaction volume, but, until savings account holders start to use the facilities regularly, decent profits will remain a distant dream for these agents. A part of the solution will rest in involving agents in loan origination and collection, something that we highlighted in “Great Business for Banks – So Why Are They Slow To Build Agency Banking?”. Another key component could be through Payments Banks offering creative savings products appropriately tailored for the mass market — and sold and/or serviced through these agents.

The road to financial inclusion in India has been tortuous, fraught and replete with pot holes, but the early signs of more positive future are coming into sight. Let’s hope that the government continues to create an enabling regulatory and policy environment to nurture the green shoots that are emerging.

¹Source MicroSave Surveys of Bank Mitra agents conducted for the Department of Financial Services in September/October 2014 and April/May 2015.

Over The Counter (OTC) Transaction. In Whose Interest Part 3

Posted on September 25, 2015January 19, 2024 by MSC

Dr. Pawan Bakhshi (now of the Bill & Melinda Gates Foundation) and Graham A.N. Wright (Group Managing Director of MSC) discuss the growing prevalence of over the counter (OTC), agent assisted transactions.

Small Finance Banks – Are You Ready? The Opportunities and Challenges

Posted on September 23, 2015March 15, 2024 by MSC

Small Finance Banks reiterate the Reserve Bank of India’s commitment to achieve financial inclusion by supporting the development of institutions that offer innovative ‘high technology, low-cost operations’ driven financial services.

Key highlights of Small Finance Banks Small Finance Banks (SFBs) shall primarily undertake basic banking activities including acceptance of deposits and lending credit to unserved and underserved sections SFBs shall be subject to all prudential norms and regulations applicable to commercial banks, including maintenance of Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) SFBs are required to extend 75% of their Adjusted Net Bank Credit (ANBC) to Priority Sector Lending (PSL) SFBs should ensure that at least 50% of its loan portfolio constitutes loans and advances of up to Rs.25 lakh (USD 37,994).

A quick analysis of the selection process and the institutions that received SFB licenses suggests that the RBI, apart from considering parameters such as financial soundness, proposed business plan, and fit and proper status, also reflected on the ability of the institutions to reach out to unserved and underserved segments. Eight out of the 10 institutions who have been granted provisional licenses are MFIs that have a track record of providing scalable microcredit services. Also, licensee institutions cover a wide geographical spread – Equitas, ESAF, Ujjivan and Janalakshnmi in the south, Disha and Suryodya in the west, RGVN in the east, and Utkarsh in the north. This faith in MFIs also augurs well for the Indian microfinance sector that has seen its share of ups and downs since 2010.

We see tremendous opportunities for NBFC-MFIs transforming into Small Finance Banks. Some of the benefits include: the ability to diversify products and services; access to electronic channels; diversification of funding base; mitigation of political risks; and the opportunity to bring an overall positive impact on the customer’s financial wellbeing.

However, on the basis of our extensive work in Africa and other parts of Asia in transforming MFIs into deposit-taking institutions, we also understand that the road ahead for these financial institutions require: re-structuring of capital to comply with the strict RBI guidelines; mobilising deposits in a highly competitive environment; and re-engineering front- and back-end systems.

Additionally, the SFBs will require comprehensive and efficient change management processes. Institutional transformation will require the induction of new and diversified talent from the banking sector, while the existing sales and operations staff will need to be suitably trained and incentivised to sell new products and attuned to new delivery channels. This mix of new and old has cultural, human resource and business implications for the SFBs, as it would have for any transforming institution. The experience in countries like Indonesia suggests that in the medium term, there might be a staff flight from SFBs to the commercial banks. These are some of the many challenges related to human capital that SFBs have to be wary of, and will therefore need to craft careful recruitment and retention strategies.

With additional scrutiny by the RBI, the SFBs will also require to strengthen their governance structures. A recent MicroSave study examined the governance practices of MFIs in India and found that while the sector has evolved since the 2010 Andhra Pradesh crisis, governance structures and practices are still compliance oriented and very few players have made efforts to set their own standards.

SFBs will also need to approach their technology requirements with a different lens compared to the traditional banks as the former will be serving a customer base that is markedly different from that of a typical commercial bank. Hence, there is a need for cost-effective mobile-based technology deployments that are better suited to reach underserved areas.

Though the task is daunting, we believe that focused efforts by SFBs to carve a niche for themselves will help them cut the clutter and occupy the elusive mind-space of their target customers. Some of these initiatives include: developing customer-centric products that reflect the mental-models and suit the cash flow of the target segment; riding on the agent network infrastructure propelled by the proliferation of PMJDY programme and Payments Banks; creating convenient avenues to trigger customers to save regularly; complementing savings with payments; and most importantly making significant investments to develop and upgrade human capital.

It is indeed an interesting time to be in the financial inclusion market in India. The performance of the Small Finance Banks in the next five years will, in a way, determine the path that the microfinance sector will take. At the same time, the Indian microfinance market has enough to offer to those MFIs who missed the opportunity this time around – particularly in the short-term. MicroSave speculates that many of the transforming MFIs may even have to “down-scale their lending portfolios” as part of their efforts to transform. This could give SKS, Satin and many mid-size NBFC-MFIs that made a conscious choice not to apply for licenses, the opportunity to significantly expand their portfolios and geographical reach.

At MicroSave, we are happy to have provided technical assistance support to eight out of the ten institutions that received the SFB license. With over 17 years of experience in innovating/developing products and channels to serve the mass market, we are prepared to do our bit to drive the sector towards provision of market-led financial services.

MicroSave’s Publications on Small Finance Banks

Agent Networks In India—How Mandates Have Influenced the Landscape

Posted on September 21, 2015December 23, 2023 by MSC

There is a key difference in how the Digital Financial Services (DFS) market in India has evolved when compared to other countries. While in most countries the expansion of DFS along with agent networks has been driven by profit, the growth of DFS in India has essentially been the result of government mandates. The mandates have certainly:

demonstrated India’s commitment to financial inclusion;
propelled the growth of the agent network in geography and scale by pushing banks to participate in DFS thus facilitating physical access to finance; and
focused product offering to account opening.

To understand the landscape of DFS in India, we must first understand these government initiatives that have shaped it. As the landscape continues to develop, it is extremely important that we understand how this prescriptive foundation is likely to influence the character of DFS’ development.

Over the years, the Government of India has facilitated financial access by promoting account opening through various programs such as the Swabhimaan scheme. Launched in 2011, the scheme aimed to bring access to banking facilities to all villages in the country with a population of 2,000 or more by March 2012 with the target to reach 74,000 villages primarily through DFS enabled transaction agents. The PMJDY programme launched in 2014 expanded the previous financial inclusion mandates with the target to open an additional 50,000 agent locations, and as of August 2015, 177 million accounts had been opened under the scheme.

Figure 1 Market Presence of Major Banks in India

**Agent market presence is defined as the proportion of cash-in/cash-out (CICO) agents serving each provider. Numbers here are provided on a till basis not on the outlet level. Hence, if an agent serves three providers, it is counted three times. This method therefore discounts smaller exclusive networks. The seven providers with the highest market presence are presented in this pie chart, with the categories ‘public sector banks’ and ‘other private sector banks’ consisting of a number of banks that have a market presence of less than 4% each.

The Helix Institute’s Agent Network Accelerator (ANA) survey in India, conducted between January and March 2015, interviewed 2,682 agents across 14 states and provides supporting data on the extent to which the DFS market is led by government players. The research on market presence of DFS providers (Figure 1) illustrates that Government owned public sector banks, led by the State Bank of India, account for 79% of all agents surveyed, with an even higher presence in rural areas—88% of rural agents are linked to public sector banks. This is because the government has placed a disproportionately large emphasis on public sector banks to establish agents relative to the private sector banks, so that the big public sector banks such as SBI and BOI have a lot of agents which are concentrated in rural areas, versus the big private sector banks like ICIC and HDFC which have much lower agent market presence and are more focused on urban areas.

The ANA India research shows agents conduct a median of 13 transactions per day, which is the second lowest across all ANA research countries. However, this was primarily driven by account opening under the Government’s PMJDY programme, which was well under way and being promoted during ANA data collection. As a result the programme inflated the number of transactions. In fact, PMJDY alone accounts for 38% of reported transactions and when PMJDY figures are removed from transaction levels, agent daily transaction volumes decrease to a median of 10 a day. Therefore, the government’s account opening programme is propping up the volume of transactions, and without it another driver will have to take its place to drive higher volumes.

Figure 2 Agent Median Daily Transactions and Monthly Profits across ANA Countries

Note: Profitability as shown in the Figure is calculated as earnings – operating expenses for all countries. In the case of India, the fixed monthly component given to agents has also been considered in this calculation. This is different from other ANA countries where commissions earned makes up the total earnings of the agent. The profits reported in India are at an outlet level as opposed to other countries where they are at a provider level.

Hence, the ANA data shows us that the number of agents in India, their reach out into rural areas, and the volumes of transactions they are doing are all largely driven by top-down government policy. The Brookings Institution’s 2015 Financial and Digital Inclusion Report and Scorecard ranks the Indian government number one is the world for the work it has done to extend this access to finance. However, now that this initial infrastructure has been laid, the important question is: will the government have to continue pushing it, or will the private sector now pick-up where the government has left off and provide a business case for agents to continue being agents? Further, the Government and Intermedia data show that about half the accounts opened are not active, meaning that the extension of access that the government drove still has not translated very efficiently into usage of these systems.

New important payments bank legislation has just been approved to allow a set of eleven diverse players to now try their hand at digital financial services. Their task will be to ensure that agents are busy and provide a high level of customer service to Indians seeking digital financial solutions. Our next blog analyses the ANA data to give these payment bank licensees some practical advice as to where they should start if they are to achieve this goal.

State of Business Correspondent Industry in India – The Supply Side Story

Posted on September 18, 2015July 31, 2023 by MSC

This presentation aims to look into the supply side dynamics and present views of business correspondent network managers (BCNMs). BCNMs are responsible for the operational heavy lifting to make financial inclusion a reality. Thus, the paper highlights some of the key concerns of this critical stakeholder in the financial inclusion process, as well as their perspectives and expectations from various other stakeholders in financial inclusion space.

This presentation is based on a survey conducted by MicroSave in 2014, with fourteen leading BCNMs. The survey included gathering information on a variety of key outreach, transaction and activity metrics and a questionnaire to elicit qualitative aspects of BC operations. The questionnaire had four main components – (i) background and services offered, (ii) technology details, (iii) business management, and (iv) commissions and incentives.

Transformation of Microfinance Institutions to Small Finance Banks: Differentiating Men from the Boys!

Posted on September 17, 2015July 31, 2023 by MSC

MFIs transforming into Small Finance Banks will face capital restructuring challenges. SFBs will have to depend on their customers’ deposits, shareholders’ equity along with ‘refinance’ facilities from bulk lenders. In this Note we discuss how SFBs can build a first class retail institution, focussed on low-income clients. It is safe to conclude that transformation of MFIs to SFBs is challenging – particularly since MFIs have only extended credit to date. In order to transform from “credit only” to “deposit mobilising” institutions, they will have to work on many areas. Some of these areas are 1. Brand repositioning 2. Investment in human capital, and 3. Complimenting savings with payments.