Solving credit extensibility for a fully inclusive financial sector
Universal Financial Access (UFA) by 2020 is the goal set by the World Bank Group- the World Bank and IFC, which means that by 2020, adults worldwide will have access to a bank account to carry out payment transactions and treasure money through the means of digital transactions. This goal is not an end in itself, rather a beginning of what is widely talked about these days, called Financial Inclusion.Financial Inclusion starts with everyone having a bank account, but culminates when in an ecosystem or society, people freely use financial instruments or products or services. This will enable people to lead a better life- manage cash flow, overcome income glitches and invest in higher gains in business, health, skillset and other lifestyle-related undertakings. All of this cannot be achieved if people do not have easy access to credit. Some jarring statistics around the credit scenario in India indicate that about 19% of small farmers till date rely on non-institutional sources for credit, despite being aware of the risks and exorbitant interest rates of those sources (Source: 2014 study by AIDIS- All India Debt and Investment Survey). A situation like this, where on one hand, Indian Banks are always looking for new customers to extend credit and on the other hand, people in need of credit are resorting to unaffordable and non-institutional forms, highlights a void in the system that needs immediate attention. This gap between credit providers and borrowers is a multi-faceted problem and is creating barriers to realizing financial inclusion in the country.
The high cost of providing financial services
The cost structure of banks in India needs innovative technological solutions like digital lending, e-wallets,UPI payments etc. Currently, the cost of a loan is 41.5% for a public sector rural branch and 32.1% for a private sector bank rural branch. This cost includes the cost of onboarding a customer, processing, resources needed etc. Technologies like digital lending have the potential to reform this and reduce the operating costs of providing banking services. Aadhar and payment banks have already started taking shape to reduce laborious documentation, variable transaction costs associated with payments, but there is yet to be a solution for credit and other “high-touch” elements of financial inclusion.
The only way to prove creditworthiness of an individual is through transaction history. The absence of this for rural people is the root cause of credit deprivation. For instance, one who pays utility bills regularly is liable to get credit from the bank, but the data for all this is lying in disjointed systems and there is no unique identifier. With Aadhar, a part of this problem will be solved with data being available digitally and all transactions of an individual could be tracked against a unique number. But, the other part of the problem is the need to push these digital transactions on to a platform for banks to access it. Once the data comes in a single platform, innovative algorithms and solutions could optimize loan origination and management process.
Last mile of credit
Kshetriya Gramin Financial Services (KGFS) where locals are highly trained to become wealth managers in rural areas have started to address this problem. Credit extension to the rural is possible through a wide network of trained agents. But for a solution like this to be scalable, it has to be self-sufficient and self-serviceable. A simple to use platform to make this successful is the need of the hour; wherein training, onboarding, incentivization, management and penalties are automated for agents.
Banking services have to be consistent and reliable. This is only possible when banks have good risk detection/ defaulter identification engine. Investigation of each and every case will be difficult and the focus has to be on developing risk management solutions.Conclusion
Technology blended with a right business model and policy is the key to extending affordable and feasible access to finance for a population as huge as ours. An evolving consumer has growing financial needs due to changing landscape. Insurance/ calamity needs, asks for high yielding investments etc. are questions of the consumer of today. Banks need to wear the hat of a consumer while designing solutions for financial inclusion. Customer centricity and onus taken up by a finance provider will decide the success or failure of a solution.
The question we need to ask, every time a model or a solution is proposed is- Does it aptly fit the requirements of a fully inclusive finance sector?