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This report (“Report”) is a compilation of the views expressed in the series of panel discussions held in 5 cities in India on 'Path to Progress - Through Financial Inclusion'. The opinions and views expressed in the Report are those of the individual panelists and speakers, and do not necessarily reflect the views of CRISIL Limited, its officers or directors. The information provided in the Report is on "as is" and "as available" basis only. While CRISIL has taken reasonable care in compiling the Report, CRISIL does not guarantee the accuracy, adequacy or completeness of the information contained in the Report. CRISIL expressly disclaims warranties of any kind, whether express or implied, including, but not limited to the implied warranties of merchantability, fitness for a particular purpose. The information contained in the Report is general information and is not intended to be an advice or recommendation on any particular matter. The users are advised to apply their own discretion and/or seek professional advice before relying or acting on this Report or any part thereof. By using the Report, the users accept that CRISIL does not accept any liability for any results or consequences of use of the Report or any decisions made based on the Report.

Conclusion

The five panel discussions saw passionate debates and some out-of-the-box thinking on how financial inclusion can become viable in a country with a huge rural population that lies beyond the banking horizon, and hence, does not have access to financial products. The biggest challenge, the panelists felt, was to win the trust of the people in the hinterland, and help them gain financial security by bringing them into the financial mainstream.

The trust of the population in the hinterland cannot be won overnight; it will happen gradually as organised finance makes its way deep into rural India, becoming visible and substituting the local moneylender as a villager's default choice for all his financial needs. This will happen when the Banking Correspondent (BC) model is fully optimised. The need of the hour is for BCs to widen their bouquet and have products which are simple and easy-to-understand (such as insurance). These financial products must be taken to the doorsteps of the financially excluded.

In addition, the focus must shift from only opening no-frills bank accounts to making the end-users realise the importance and benefits of using them for transactions and savings. This will also make financial inclusion a viable endeavour for private banks, which have a huge role to play in making this mission a success. The use of affordable technology will also help power this change. Technology has to come in at multiple levels and ensure that customer data remains secure and is not misused or duplicated, and that transactions are made as quick and effortless as possible. This is important since many of the underprivileged are daily wage earners who cannot take a day off work to buy or use financial products.

All stakeholders realise the potential that lies at the bottom of the pyramid. The 'Path to Progress - Through Financial Inclusion' was an initiative that aimed at bringing together influential thought leaders who have the power to usher in a 'financial inclusion' revolution.

The aim was to devise ways to take the benefits of organised finance to the doorsteps of those who require it the most, and at the same time, opening up a vast opportunity for business for the country's financial institutions. A combination of these two will have a galvanising effect on the economy.

18

Path to Progress - Through Financial Inclusion

A Report On Financial Inclusion, Based On Five Panel Discussions Held Across India

A Bloomberg TV India InitiativeSponsor: FINO PayTech

Knowledge Partner: CRISIL

April 2013

3

17

Panelists:

n Arvind Kumar Choudhary, CEO-cum-State Mission Director, Bihar Rural Livelihood Promotion Society

n Birendra Mohanty, Vice president, Financial Inclusion Solution Group, ICICI Lombard General Insurance

n Chandrakant Mishra, Executive Vice President, Religare Health Insurance n DV Deshpande, CGM, NABARD, Bihar regional officen KK Mishra, CEO, Tata AIG General Insurancen PK Jena, Regional head, RBI n Rishi Gupta, Chief Financial Officer, FINO PayTechn Vidya Mahambare, Director and Principal Economist, CRISIL

Preface

Executive summary 7

Hyderabad: Deepening rural penetration holds the key 8

New Delhi: Technology will be a catalyst 10

Lucknow: Bottom of the pyramid becoming attractive 12

Raipur: Giving dole is not the solution 14

Patna: Seeing challenges as opportunities 16

Conclusion 18

Profile of Partners 19

5

4

16

Patna: Seeing challenges as opportunities

Over half of Bihar's population is below the poverty line. This makes the challenge of financial inclusion in the state which also has the lowest per capita GDP in India a significant one. The numbers themselves tell the story. Of the approximately 1.9 crore households in Bihar, only 44 per cent have access to banking services, against 60 per cent at the national level. There are about 45,000 villages under the revenue ambit, while the smaller habitations number over a lakh. And to serve the entire population of 10 crore people, there are just 5,000 bank branches.

The problems faced by financial institutions and government authorities in Bihar are manifold: a large financially illiterate population, mistrust of financial services companies caused to some extent by misselling of products and low Business Correspondent (BC) penetration, to name a few. However, the panelists were positive that things are gradually changing. Proactive policymaking in favour of priority sector lending, building industry and job creation are turning the tide in the state and if financial institutions take inclusion up as an opportunity, there could be a big revolution in Bihar, which would boost the overall Indian economy.

What is needed now is to see the bottom of pyramid as a huge opportunity. As the poor go up the income chain, they will seek financial products and this will create a huge demand in the economy. Over time, their consumption of financial services whether saving or credit or remittances or insurance goes up. So, it opens up a vast opportunity for business. Financial institutions that invest in serving this market eventually reap the benefits. One example of this is the Rashtriya Swasthya Bima Yojana. Five to ten years ago, most insurance players did not foresee the success it would become. However, today it is one of the largest inclusion activities for most insurance companies in the country.

The Patna panel discussion was very much focused on opportunities and solutions, rather dwelling on the challenges that the state presented. Simplicity, technology and innovation were the main solutions discussed. Products need to be made so simple that they do not need any imagination to understand because there is challenge on both sides the seller and the buyer. Regulators need to ensure that there is no misselling and that action is taken against any unscrupulous firm that does this. And finally, innovative and customised products ensure that people can buy solutions that they really need instead of buying off-the-shelf products.

Quote: “According to Prof. CK Prahalad's 'bottom of the pyramid' concept or the blue ocean strategy concept, the rural financial services market is available to those who can tap it. The challenge is to reach out to them.” DV Deshpande, CGM, NABARD, Bihar regional office

Preface

Financial inclusion is an ongoing agenda in India. The reach of financial services, and the means of

access to such services, remains appalling especially in Eastern, Central and North-Eastern India.

Here are some numbers that tell the story:

n About 55% of the country's population has deposit accounts and only 9% has credit accounts with banks

n India has the most number of households - 145 million - excluded from banking facilities with an average of one bank branch for every 14,000 people

n Around 10% of bank branches in India are in the top 10 cities, and there are 10 districts, mostly in the North East, which have only one bank branch each

n Only a little less than 20% of the population has any kind of life insurance and about 9.6% of the population has non-life insurance coverage.

Even among people who have some kind of access to financial offerings, the lack of financial

awareness emerges as a challenge to opening an account. There are 833 million rural people and

just about 211 million savings accounts. And the number of people who have access to credit is just

36.1 million.

These numbers articulate the need for a concerted, well thought-out strategy which will ensure

access to appropriate financial products and services needed by weaker sections and low income

groups at an affordable cost in a fair and transparent manner by mainstream institutional players. In

emerging economies like ours, financial inclusion is a question of both access to financial products

and knowledge about their fairness and transparency. Financial literacy initiatives for poor people

need to be held in their respective languages, and through the development of community cadres

which can spread financial literacy to others in their communities.

The need of the hour is to weave a kind of value chain, which will create synergies between the

100,000 Banking Correspondents (BCs) present on the ground, millions of self-help groups, NGOs

and fiduciaries for a concerted push for the financial inclusion agenda.

5

14

Raipur: Giving dole is not the solution

The fourth in the series of panel discussions on financial inclusion by Bloomberg and FINO PayTech was held in Raipur, the capital of Chhattisgarh. Chhattisgarh is India's tenth-largest state and known as a producer of electricity and steel. However, it ranks low on key social and economic parameters such as income, education and health. Left wing extremism has further compounded the problem. This has made financial inclusion a challenge in the state, over seventy per cent of whose population resides in rural areas. The panel discussed the various issues of dealing with people in the hinterland, many of whom have never even heard of banks or basic financial concepts. They agreed that, overcoming the trust barrier was one of the first problems and that given adequate time, effort and innovation, the state could make much progress.

There were manifold observations that emerged from the panel discussions. The first was better engagement: financial services providers need to work closer with rural people and find out what they really want. The second was customisation. Poorer sections cannot and will not go for products that are complex, because they don't understand them. The need of the hour is to have innovative models that rely on technology to take low-contribution schemes to them at a cost agreeable to the service provider. The third was that existing schemes and platforms such as Aadhar have scope to be expanded and integrated with other products. However, at the same time, there has to be a push to roll out Aadhar faster in poorer states. Finally, all the government's efforts to include bottom-of-pyramid audiences have to move towards a contribution-based instead of dole-based.

The last one was a point that really struck a chord with the panel. Handouts are unavoidable in a country of staggering inequalities, like India. However, financial inclusion cannot be systematically built by basing it on charity directly or indirectly. It's not that the rural or underprivileged people don't have funds to save or invest. The vast majority of their money resides in mechanisms that the companies don't even reach, such as in gold, land, livestock or other forms of asset that need to be capitalised if one wants to create wealth. This cannot be done by the government alone.

The private sector will need to chip in with flexible, customised and innovative products keeping in mind the bottom of pyramid customer and how he or she can best be integrated into the financial mainstream. At the end of the day, if there is a will to serve the increasingly lucrative rural pie, the returns would be huge.

Quote: “Nobody wants to pay everything for everybody forever. Not even in India; not even for the poor. The bottomline is that if we do not create a systemic mechanism in which contributions are part of the system, the system will fail.” Dr. David M. Dror, Founding Chairman, The Micro Insurance Academy

7

Executive summary

Bloomberg TV India's 'Path to Progress - through Financial Inclusion', a series of panel discussions in

five states, sponsored by FINO PayTech Limited with CRISIL as knowledge partner, was an attempt

to identify a pragmatic approach which will further the cause of financial inclusion. These sessions,

held in Hyderabad (Andhra Pradesh), New Delhi, Lucknow (Uttar Pradesh), Raipur (Chhattisgarh)

and Patna (Bihar), facilitated the key stakeholders like government departments, private

organisations and others involved in the financial inclusion value chain, to deliberate on the

mechanism for empowering those who are financially excluded and arrive at constructive and viable

solutions.

The panel discussions were moderated by Surabhi Upadhyay, Associate Editor, Bloomberg TV India

and brought together experts to tackle the tough questions and forge a credible way forward through

brainstorming sessions. Some of the prominent guests and speakers who attended the sessions

were Montek Singh Ahluwalia, Deputy Chairman, Planning Commission, Government of India, Onno

Ruhl, Country Director, India, World Bank, MV Rao, Director General, National Institute of Rural

Development, KK Mishra, CEO, Tata AIG General Insurance, Anuj Gulati, Managing Director & CEO,

Religare Health Insurance Co. Ltd., Radhakrishnan Nair, Member (F&I), Insurance Regulatory and

Development Authority, Meenakshi Lekhi, Supreme Court lawyer, Manish Khera, CEO, FINO

PayTech and Dharmakirti Joshi, Chief Economist, CRISIL.

Each of these speakers, experts in their respective areas, analysed region-specific challenges,

identified the hurdles and also spoke about the models which are actually working on the ground.

Their recommendations form the essence of this report.

This consolidated report on the five panel discussions brings together the thoughts and

recommendations shared by the speakers. It brings out five key points from these events: from the

importance of deepening rural penetration of financial services, to the role of technology in catalysing

the process, the increasing attractiveness of the bottom-of-the-pyramid consumer, the need to move

towards viable methods of inclusion that are contribution-based and not seen as charity and finally,

converting challenges to opportunities.

By taking their thoughts to a wider audience of thought leaders and influencers, we hope to kindle a

revolution in the way financial inclusion is approached in India. Knowledge is the first step to

transformation and the 'Path to Progress - through Financial Inclusion' series is one such effort to

usher in a new paradigm in mainstream integration of underprivileged Indians.

13

Panelists:

n AK Bansal, Executive Director, Indian Overseas Bankn GR Chintala, CGM of NABARD & Director, Bankers Institute of Rural Development n Manish Khera, CEO, FINO PayTechn Rabi N. Mishra, Regional Director, RBI n Sunil Sinha, Principal Economist, CRISIL n Tamal Bandyopadhyay, Deputy Managing Editor, Mint

8

Hyderabad: Deepening rural penetration holds the key

The Indian government's proposal to launch the Direct Benefits Transfer scheme provided the perfect backdrop to the first session of the Bloomberg 'Path to Progress - Through Financial Inclusion' in Hyderabad. During the deliberations, five broad topics emerged. These were: the extent of the financial inclusion challenge in India, the root causes, importance of keeping inclusion initiatives simple, successful models and the future of financial inclusion.

The biggest challenge to financial inclusion arises from poor penetration of financial products in the country. Only about 9% of India's population has access to credit. Rural India has very limited access to financing channels such as bank branches and Banking Correspondents (BC). The country has only one-tenth of BCs (located in rural areas or small towns and provide banking services to the local population) it needs. There is also a huge disparity between urban and non-urban centres in terms of availability of financial services. Around 10% of bank branches are in the top 10 cities. It's clear that banks have not done enough to meet the agenda of financial inclusion. Information and communication technology-driven tools like mobile payment services and G-cash primarily revolve around payments, which is just one part of the overall banking system. A comprehensive solution would be to offer a suite of products loans, payment products, remittance products, insurance.

Gaining the trust of the end-user — rural Indians — and educating them is the starting point for building the foundations of a successful financial inclusion model. Their trust can only be earned by first taking simple products to them which serve their immediate and basic financial needs.Once they get used to them, they feel comfortable with buying more complex financial products.

The banking sector needs the sort of innovations that so far have been seen in the FMCG or renewable energy space in order to penetrate rural markets. Solar-powered devices, sachets are all examples of innovative engineering. Likewise, there has to be a move from physical banking to a cash-neutral economy. The future of financial inclusion lies in the domain of technology which is cost-efficient, universally available and finally, omnipresent.

Quote: “India has over 100,000 BCs. But we need more than 1 million to fulfill the financial inclusion agenda.” B Sambamurthy, Director, IDRBT.

12

Lucknow: Bottom of the pyramid becoming attractive

Uttar Pradesh (UP) has long been a symbol of the 'other half' that part of India which is dealing with manifold problems of development and poverty. However, going by the optimism shown at the third panel discussion, held in the state capital of Lucknow, the financial inclusion initiatives in the state are on track to be completed by 2015-16. The 92,000 villages in UP have been mapped to branches which will soon embark upon defining the kind of banking services that will be offered and set targets. The RBI will closely monitor the progress on a monthly basis.

It costs a bank Rs.150 to open an account and acquire a customer; hence, recouping the amount might be a challenge for the banks. However, banks are working around the issue by setting up ultra-small branches and using the Business Correspondent model, which are helping them become profitable stage by stage. Ultra-small branches; essentially one person going to a village with a laptop; are a real step forward. These steps, the RBI believes will deliver results by 2015-16, thanks to the enthusiasm and co-operation of the rural population, bankers and the government.

To add more muscle to the push for financial inclusion, the RBI has also roped in private sector banks by setting certain targets for them. While there have been concerns about private banks not finding it viable to serve rural customers, RBI believes these initial challenges can be overcome by building a sizeable presence in the Indian hinterland, which will give rich dividends in terms of business, given the rising lucrativeness of the bottom of the pyramid. Building volumes of customers would be the key to ensuring banks and BCs find it viable to serve the increasingly lucrative bottom-of-pyramid market. The consensus was that the time had come for executing the targets set by the RBI in a viable manner. However, for this to happen, banks will have to proactively ensure that the number of transactions goes up. The new rule authorising bank chairmen the autonomy to give licences to set up new branches will help banks open branches in remote areas and start operations quicker, thereby acquiring rural customers. The POS machine, the hand-held device, or micro ATMs are delivery models which will prove to be critical tools to reach out to the hinterland. Another delivery model that has worked is providing banking services to agricultural and daily wage workers even late into the evening, beyond banking hours, through kirana shops and BCs. The panelists felt that the viability of banks’ financial inclusion initiatives will go up manifold if the RBI allows banks to charge higher interest rates. This can be justified by the fact that credit from a bank would still be cheaper compared to borrowing from moneylenders, who charge exorbitant rates.

Quote: “Over the last 6-7 years, the experience of banks has been positive. No BC has run away with their money. They are realising that it's a good business model to follow. So we're seeing that shift. Banks have become comfortable with the model. They are doing products on the model and they are delivering.” Manish Khera, CEO FINO PayTech

9

Keynote speaker:

Guest of honour:

Panelists:

n Radhakrishnan Nair, Member, IRDA

n Guest of honour: Meenakshi Lekhi, Lawyer, Supreme Court of India

n B Sambamurthy, Director, IDRBTn M V Rao, Director General, National Institute of Rural Developmentn Pawan Agrawal, Senior Director, CRISIL Ratingsn Rishi Gupta, Chief Financial Officer, FINO PayTech Limited

11

Keynote speaker:

Guest of honour:

Panelists:

n Vivek Law, Editor, Bloomberg TV India

n Montek Singh Ahluwalia, Deputy Chairman, Planning Commission, Government of India

n Anil Swarup, Additional Secretary and Director General, Labour Welfare Division, Ministry of Labour and Employment, Government of India

n B Prabhakar, Chairman and Managing Director, Andhra Bank n Dharmakirti Joshi, Chief Economist, CRISILn Manish Khera, CEO, FINO PayTechn Onno Ruhl, Country Director, India, World Bank

10

New Delhi: Technology will be a catalyst

A holistic Banking Correspondent (BC) model, with equal focus on both depth and reach, has proved to be game-changer for the financial inclusion agenda in India. In the last six years, BCs have been taking a bouquet of financial products (savings, credit, insurance, etc.) to the doorsteps of those who require them the most. Their concerted efforts have made a big impact by reaching out to approximately 100 million unbanked customers so far: this was the conclusion of the panel discussion held in New Delhi.

These may be impressive figures, but given the sheer size, scale and diversity of the country, fostering a revolution in financial inclusion is a major challenge. To take financial inclusion to the next level, there must be better understanding of the combination of manual intervention (BCs), and technology. Technology can play an important role in the government's push for public welfare initiatives. Large amounts of data are collected as part of the enrolment process for schemes like the Mahatma Gandhi National Rural Employment Guarantee Act (NREGA) and Rashtriya Swasthya Bima Yojana (RSBY). Technology can help the government use this data intelligently and without duplication.

The other challenge for the government will be to produce effective communication modules to reach out to the intended beneficiaries and educate them. The bottomline is clearly viability for both the consumer as well as the practitioner, which can only be ensured by getting into more mature financial products rather than focusing only on opening accounts. The market for such products may still be very small, but there are basic insurance and investment products that the market needs and is willing to pay for. These will not only get more people included but also make it more viable for financial services companies offering these products.

The biggest problem in the entire inclusion challenge was reaching out to the beneficiary through established and trusted institutions, such as the Post Office and existing banking channels. Post Offices have a tremendous potential. If they can be re-engineered to improve their performance and train them to handle large amounts of money, they will be an immensely effective channel.

Quote: “Financial literacy has to go hand in hand with financial inclusion. Even among people who have bank accounts, many are not financially literate. Many consumers, including the relatively well-off ones living in metros, don't know the basics of personal finance and cash management.” Dharmakirti Joshi, Chief Economist, CRISIL

11

Keynote speaker:

Guest of honour:

Panelists:

n Vivek Law, Editor, Bloomberg TV India

n Montek Singh Ahluwalia, Deputy Chairman, Planning Commission, Government of India

n Anil Swarup, Additional Secretary and Director General, Labour Welfare Division, Ministry of Labour and Employment, Government of India

n B Prabhakar, Chairman and Managing Director, Andhra Bank n Dharmakirti Joshi, Chief Economist, CRISILn Manish Khera, CEO, FINO PayTechn Onno Ruhl, Country Director, India, World Bank

10

New Delhi: Technology will be a catalyst

A holistic Banking Correspondent (BC) model, with equal focus on both depth and reach, has proved to be game-changer for the financial inclusion agenda in India. In the last six years, BCs have been taking a bouquet of financial products (savings, credit, insurance, etc.) to the doorsteps of those who require them the most. Their concerted efforts have made a big impact by reaching out to approximately 100 million unbanked customers so far: this was the conclusion of the panel discussion held in New Delhi.

These may be impressive figures, but given the sheer size, scale and diversity of the country, fostering a revolution in financial inclusion is a major challenge. To take financial inclusion to the next level, there must be better understanding of the combination of manual intervention (BCs), and technology. Technology can play an important role in the government's push for public welfare initiatives. Large amounts of data are collected as part of the enrolment process for schemes like the Mahatma Gandhi National Rural Employment Guarantee Act (NREGA) and Rashtriya Swasthya Bima Yojana (RSBY). Technology can help the government use this data intelligently and without duplication.

The other challenge for the government will be to produce effective communication modules to reach out to the intended beneficiaries and educate them. The bottomline is clearly viability for both the consumer as well as the practitioner, which can only be ensured by getting into more mature financial products rather than focusing only on opening accounts. The market for such products may still be very small, but there are basic insurance and investment products that the market needs and is willing to pay for. These will not only get more people included but also make it more viable for financial services companies offering these products.

The biggest problem in the entire inclusion challenge was reaching out to the beneficiary through established and trusted institutions, such as the Post Office and existing banking channels. Post Offices have a tremendous potential. If they can be re-engineered to improve their performance and train them to handle large amounts of money, they will be an immensely effective channel.

Quote: “Financial literacy has to go hand in hand with financial inclusion. Even among people who have bank accounts, many are not financially literate. Many consumers, including the relatively well-off ones living in metros, don't know the basics of personal finance and cash management.” Dharmakirti Joshi, Chief Economist, CRISIL

12

Lucknow: Bottom of the pyramid becoming attractive

Uttar Pradesh (UP) has long been a symbol of the 'other half' that part of India which is dealing with manifold problems of development and poverty. However, going by the optimism shown at the third panel discussion, held in the state capital of Lucknow, the financial inclusion initiatives in the state are on track to be completed by 2015-16. The 92,000 villages in UP have been mapped to branches which will soon embark upon defining the kind of banking services that will be offered and set targets. The RBI will closely monitor the progress on a monthly basis.

It costs a bank Rs.150 to open an account and acquire a customer; hence, recouping the amount might be a challenge for the banks. However, banks are working around the issue by setting up ultra-small branches and using the Business Correspondent model, which are helping them become profitable stage by stage. Ultra-small branches; essentially one person going to a village with a laptop; are a real step forward. These steps, the RBI believes will deliver results by 2015-16, thanks to the enthusiasm and co-operation of the rural population, bankers and the government.

To add more muscle to the push for financial inclusion, the RBI has also roped in private sector banks by setting certain targets for them. While there have been concerns about private banks not finding it viable to serve rural customers, RBI believes these initial challenges can be overcome by building a sizeable presence in the Indian hinterland, which will give rich dividends in terms of business, given the rising lucrativeness of the bottom of the pyramid. Building volumes of customers would be the key to ensuring banks and BCs find it viable to serve the increasingly lucrative bottom-of-pyramid market. The consensus was that the time had come for executing the targets set by the RBI in a viable manner. However, for this to happen, banks will have to proactively ensure that the number of transactions goes up. The new rule authorising bank chairmen the autonomy to give licences to set up new branches will help banks open branches in remote areas and start operations quicker, thereby acquiring rural customers. The POS machine, the hand-held device, or micro ATMs are delivery models which will prove to be critical tools to reach out to the hinterland. Another delivery model that has worked is providing banking services to agricultural and daily wage workers even late into the evening, beyond banking hours, through kirana shops and BCs. The panelists felt that the viability of banks’ financial inclusion initiatives will go up manifold if the RBI allows banks to charge higher interest rates. This can be justified by the fact that credit from a bank would still be cheaper compared to borrowing from moneylenders, who charge exorbitant rates.

Quote: “Over the last 6-7 years, the experience of banks has been positive. No BC has run away with their money. They are realising that it's a good business model to follow. So we're seeing that shift. Banks have become comfortable with the model. They are doing products on the model and they are delivering.” Manish Khera, CEO FINO PayTech

9

Keynote speaker:

Guest of honour:

Panelists:

n Radhakrishnan Nair, Member, IRDA

n Guest of honour: Meenakshi Lekhi, Lawyer, Supreme Court of India

n B Sambamurthy, Director, IDRBTn M V Rao, Director General, National Institute of Rural Developmentn Pawan Agrawal, Senior Director, CRISIL Ratingsn Rishi Gupta, Chief Financial Officer, FINO PayTech Limited

13

Panelists:

n AK Bansal, Executive Director, Indian Overseas Bankn GR Chintala, CGM of NABARD & Director, Bankers Institute of Rural Development n Manish Khera, CEO, FINO PayTechn Rabi N. Mishra, Regional Director, RBI n Sunil Sinha, Principal Economist, CRISIL n Tamal Bandyopadhyay, Deputy Managing Editor, Mint

8

Hyderabad: Deepening rural penetration holds the key

The Indian government's proposal to launch the Direct Benefits Transfer scheme provided the perfect backdrop to the first session of the Bloomberg 'Path to Progress - Through Financial Inclusion' in Hyderabad. During the deliberations, five broad topics emerged. These were: the extent of the financial inclusion challenge in India, the root causes, importance of keeping inclusion initiatives simple, successful models and the future of financial inclusion.

The biggest challenge to financial inclusion arises from poor penetration of financial products in the country. Only about 9% of India's population has access to credit. Rural India has very limited access to financing channels such as bank branches and Banking Correspondents (BC). The country has only one-tenth of BCs (located in rural areas or small towns and provide banking services to the local population) it needs. There is also a huge disparity between urban and non-urban centres in terms of availability of financial services. Around 10% of bank branches are in the top 10 cities. It's clear that banks have not done enough to meet the agenda of financial inclusion. Information and communication technology-driven tools like mobile payment services and G-cash primarily revolve around payments, which is just one part of the overall banking system. A comprehensive solution would be to offer a suite of products loans, payment products, remittance products, insurance.

Gaining the trust of the end-user — rural Indians — and educating them is the starting point for building the foundations of a successful financial inclusion model. Their trust can only be earned by first taking simple products to them which serve their immediate and basic financial needs.Once they get used to them, they feel comfortable with buying more complex financial products.

The banking sector needs the sort of innovations that so far have been seen in the FMCG or renewable energy space in order to penetrate rural markets. Solar-powered devices, sachets are all examples of innovative engineering. Likewise, there has to be a move from physical banking to a cash-neutral economy. The future of financial inclusion lies in the domain of technology which is cost-efficient, universally available and finally, omnipresent.

Quote: “India has over 100,000 BCs. But we need more than 1 million to fulfill the financial inclusion agenda.” B Sambamurthy, Director, IDRBT.

14

Raipur: Giving dole is not the solution

The fourth in the series of panel discussions on financial inclusion by Bloomberg and FINO PayTech was held in Raipur, the capital of Chhattisgarh. Chhattisgarh is India's tenth-largest state and known as a producer of electricity and steel. However, it ranks low on key social and economic parameters such as income, education and health. Left wing extremism has further compounded the problem. This has made financial inclusion a challenge in the state, over seventy per cent of whose population resides in rural areas. The panel discussed the various issues of dealing with people in the hinterland, many of whom have never even heard of banks or basic financial concepts. They agreed that, overcoming the trust barrier was one of the first problems and that given adequate time, effort and innovation, the state could make much progress.

There were manifold observations that emerged from the panel discussions. The first was better engagement: financial services providers need to work closer with rural people and find out what they really want. The second was customisation. Poorer sections cannot and will not go for products that are complex, because they don't understand them. The need of the hour is to have innovative models that rely on technology to take low-contribution schemes to them at a cost agreeable to the service provider. The third was that existing schemes and platforms such as Aadhar have scope to be expanded and integrated with other products. However, at the same time, there has to be a push to roll out Aadhar faster in poorer states. Finally, all the government's efforts to include bottom-of-pyramid audiences have to move towards a contribution-based instead of dole-based.

The last one was a point that really struck a chord with the panel. Handouts are unavoidable in a country of staggering inequalities, like India. However, financial inclusion cannot be systematically built by basing it on charity directly or indirectly. It's not that the rural or underprivileged people don't have funds to save or invest. The vast majority of their money resides in mechanisms that the companies don't even reach, such as in gold, land, livestock or other forms of asset that need to be capitalised if one wants to create wealth. This cannot be done by the government alone.

The private sector will need to chip in with flexible, customised and innovative products keeping in mind the bottom of pyramid customer and how he or she can best be integrated into the financial mainstream. At the end of the day, if there is a will to serve the increasingly lucrative rural pie, the returns would be huge.

Quote: “Nobody wants to pay everything for everybody forever. Not even in India; not even for the poor. The bottomline is that if we do not create a systemic mechanism in which contributions are part of the system, the system will fail.” Dr. David M. Dror, Founding Chairman, The Micro Insurance Academy

7

Executive summary

Bloomberg TV India's 'Path to Progress - through Financial Inclusion', a series of panel discussions in

five states, sponsored by FINO PayTech Limited with CRISIL as knowledge partner, was an attempt

to identify a pragmatic approach which will further the cause of financial inclusion. These sessions,

held in Hyderabad (Andhra Pradesh), New Delhi, Lucknow (Uttar Pradesh), Raipur (Chhattisgarh)

and Patna (Bihar), facilitated the key stakeholders like government departments, private

organisations and others involved in the financial inclusion value chain, to deliberate on the

mechanism for empowering those who are financially excluded and arrive at constructive and viable

solutions.

The panel discussions were moderated by Surabhi Upadhyay, Associate Editor, Bloomberg TV India

and brought together experts to tackle the tough questions and forge a credible way forward through

brainstorming sessions. Some of the prominent guests and speakers who attended the sessions

were Montek Singh Ahluwalia, Deputy Chairman, Planning Commission, Government of India, Onno

Ruhl, Country Director, India, World Bank, MV Rao, Director General, National Institute of Rural

Development, KK Mishra, CEO, Tata AIG General Insurance, Anuj Gulati, Managing Director & CEO,

Religare Health Insurance Co. Ltd., Radhakrishnan Nair, Member (F&I), Insurance Regulatory and

Development Authority, Meenakshi Lekhi, Supreme Court lawyer, Manish Khera, CEO, FINO

PayTech and Dharmakirti Joshi, Chief Economist, CRISIL.

Each of these speakers, experts in their respective areas, analysed region-specific challenges,

identified the hurdles and also spoke about the models which are actually working on the ground.

Their recommendations form the essence of this report.

This consolidated report on the five panel discussions brings together the thoughts and

recommendations shared by the speakers. It brings out five key points from these events: from the

importance of deepening rural penetration of financial services, to the role of technology in catalysing

the process, the increasing attractiveness of the bottom-of-the-pyramid consumer, the need to move

towards viable methods of inclusion that are contribution-based and not seen as charity and finally,

converting challenges to opportunities.

By taking their thoughts to a wider audience of thought leaders and influencers, we hope to kindle a

revolution in the way financial inclusion is approached in India. Knowledge is the first step to

transformation and the 'Path to Progress - through Financial Inclusion' series is one such effort to

usher in a new paradigm in mainstream integration of underprivileged Indians.

15

Panelists:

n Anuj Gulati, Managing Director & CEO, Religare Health Insurance Co. Ltdn David M. Dror, Founding Chairman, The Micro Insurance Academyn Nirmal Chand, General Manager, Reserve Bank of India, Raipurn Rajeev Arora, Chief Technology Officer, FINO PayTechn Rashmi Prasad, Deputy General Manager, State Bank of India and Convener, State Level

Bankers' Committee, Chhattisgarhn Sunil Sinha, Principal Economist, CRISIL

6

16

Patna: Seeing challenges as opportunities

Over half of Bihar's population is below the poverty line. This makes the challenge of financial inclusion in the state which also has the lowest per capita GDP in India a significant one. The numbers themselves tell the story. Of the approximately 1.9 crore households in Bihar, only 44 per cent have access to banking services, against 60 per cent at the national level. There are about 45,000 villages under the revenue ambit, while the smaller habitations number over a lakh. And to serve the entire population of 10 crore people, there are just 5,000 bank branches.

The problems faced by financial institutions and government authorities in Bihar are manifold: a large financially illiterate population, mistrust of financial services companies caused to some extent by misselling of products and low Business Correspondent (BC) penetration, to name a few. However, the panelists were positive that things are gradually changing. Proactive policymaking in favour of priority sector lending, building industry and job creation are turning the tide in the state and if financial institutions take inclusion up as an opportunity, there could be a big revolution in Bihar, which would boost the overall Indian economy.

What is needed now is to see the bottom of pyramid as a huge opportunity. As the poor go up the income chain, they will seek financial products and this will create a huge demand in the economy. Over time, their consumption of financial services whether saving or credit or remittances or insurance goes up. So, it opens up a vast opportunity for business. Financial institutions that invest in serving this market eventually reap the benefits. One example of this is the Rashtriya Swasthya Bima Yojana. Five to ten years ago, most insurance players did not foresee the success it would become. However, today it is one of the largest inclusion activities for most insurance companies in the country.

The Patna panel discussion was very much focused on opportunities and solutions, rather dwelling on the challenges that the state presented. Simplicity, technology and innovation were the main solutions discussed. Products need to be made so simple that they do not need any imagination to understand because there is challenge on both sides the seller and the buyer. Regulators need to ensure that there is no misselling and that action is taken against any unscrupulous firm that does this. And finally, innovative and customised products ensure that people can buy solutions that they really need instead of buying off-the-shelf products.

Quote: “According to Prof. CK Prahalad's 'bottom of the pyramid' concept or the blue ocean strategy concept, the rural financial services market is available to those who can tap it. The challenge is to reach out to them.” DV Deshpande, CGM, NABARD, Bihar regional office

Preface

Financial inclusion is an ongoing agenda in India. The reach of financial services, and the means of

access to such services, remains appalling especially in Eastern, Central and North-Eastern India.

Here are some numbers that tell the story:

n About 55% of the country's population has deposit accounts and only 9% has credit accounts with banks

n India has the most number of households - 145 million - excluded from banking facilities with an average of one bank branch for every 14,000 people

n Around 10% of bank branches in India are in the top 10 cities, and there are 10 districts, mostly in the North East, which have only one bank branch each

n Only a little less than 20% of the population has any kind of life insurance and about 9.6% of the population has non-life insurance coverage.

Even among people who have some kind of access to financial offerings, the lack of financial

awareness emerges as a challenge to opening an account. There are 833 million rural people and

just about 211 million savings accounts. And the number of people who have access to credit is just

36.1 million.

These numbers articulate the need for a concerted, well thought-out strategy which will ensure

access to appropriate financial products and services needed by weaker sections and low income

groups at an affordable cost in a fair and transparent manner by mainstream institutional players. In

emerging economies like ours, financial inclusion is a question of both access to financial products

and knowledge about their fairness and transparency. Financial literacy initiatives for poor people

need to be held in their respective languages, and through the development of community cadres

which can spread financial literacy to others in their communities.

The need of the hour is to weave a kind of value chain, which will create synergies between the

100,000 Banking Correspondents (BCs) present on the ground, millions of self-help groups, NGOs

and fiduciaries for a concerted push for the financial inclusion agenda.

5

17

Panelists:

n Arvind Kumar Choudhary, CEO-cum-State Mission Director, Bihar Rural Livelihood Promotion Society

n Birendra Mohanty, Vice president, Financial Inclusion Solution Group, ICICI Lombard General Insurance

n Chandrakant Mishra, Executive Vice President, Religare Health Insurance n DV Deshpande, CGM, NABARD, Bihar regional officen KK Mishra, CEO, Tata AIG General Insurancen PK Jena, Regional head, RBI n Rishi Gupta, Chief Financial Officer, FINO PayTechn Vidya Mahambare, Director and Principal Economist, CRISIL

Preface

Executive summary 7

Hyderabad: Deepening rural penetration holds the key 8

New Delhi: Technology will be a catalyst 10

Lucknow: Bottom of the pyramid becoming attractive 12

Raipur: Giving dole is not the solution 14

Patna: Seeing challenges as opportunities 16

Conclusion 18

Profile of Partners 19

5

4

Conclusion

The five panel discussions saw passionate debates and some out-of-the-box thinking on how financial inclusion can become viable in a country with a huge rural population that lies beyond the banking horizon, and hence, does not have access to financial products. The biggest challenge, the panelists felt, was to win the trust of the people in the hinterland, and help them gain financial security by bringing them into the financial mainstream.

The trust of the population in the hinterland cannot be won overnight; it will happen gradually as organised finance makes its way deep into rural India, becoming visible and substituting the local moneylender as a villager's default choice for all his financial needs. This will happen when the Banking Correspondent (BC) model is fully optimised. The need of the hour is for BCs to widen their bouquet and have products which are simple and easy-to-understand (such as insurance). These financial products must be taken to the doorsteps of the financially excluded.

In addition, the focus must shift from only opening no-frills bank accounts to making the end-users realise the importance and benefits of using them for transactions and savings. This will also make financial inclusion a viable endeavour for private banks, which have a huge role to play in making this mission a success. The use of affordable technology will also help power this change. Technology has to come in at multiple levels and ensure that customer data remains secure and is not misused or duplicated, and that transactions are made as quick and effortless as possible. This is important since many of the underprivileged are daily wage earners who cannot take a day off work to buy or use financial products.

All stakeholders realise the potential that lies at the bottom of the pyramid. The 'Path to Progress - Through Financial Inclusion' was an initiative that aimed at bringing together influential thought leaders who have the power to usher in a 'financial inclusion' revolution.

The aim was to devise ways to take the benefits of organised finance to the doorsteps of those who require it the most, and at the same time, opening up a vast opportunity for business for the country's financial institutions. A combination of these two will have a galvanising effect on the economy.

18

Path to Progress - Through Financial Inclusion

A Report On Financial Inclusion, Based On Five Panel Discussions Held Across India

A Bloomberg TV India InitiativeSponsor: FINO PayTech

Knowledge Partner: CRISIL

April 2013

3

About FINO PayTech Limited

About Bloomberg TV India

About CRISIL Limited

FINO PayTech Limited has emerged as a leading inventor, innovator and implementer of integrated technology solutions for institutions like banks, microfinance institutions, government entities, insurance companies to enable financial inclusion environment for the micro customers. FINO PayTech is a business and banking technology platform combined with extensive services delivery channel and is the market leader in delivering products and services to first and last mile. It has a comprehensive product suite ranging from savings bank accounts, loan products, recurring deposits, remittances, insurance products, government disbursements, etc. FINO PayTech is a market leader which currently has over 60 million customers, 45000 transaction points, across 460 districts and 26 states.

Bloomberg TV India, the nation's premier business news channel with unique access to newsmakers and research-based data, illuminates stories that affect companies and industries. Bloomberg TV India provides an immediate perspective on critical business news as it happens, from where it happens. Backed by an enviable squad of Indian journalists, a global network of 150 bureaus and 2500 professionals, we deliver action-based insights to our viewers.

CRISIL is a global analytical company providing ratings, research, and risk and policy advisory services. We are India's leading ratings agency. We are also the foremost provider of high-end research to the world's largest banks and leading corporations. With sustainable competitive advantage arising from our strong brand, unmatched credibility, market leadership across businesses, and large customer base, we deliver analysis, opinions, and solutions that make markets function better. Our defining trait is our ability to convert data and information into expert judgements and forecasts across a wide range of domains, with deep expertise and complete objectivity. At the core of our credibility, built up assiduously over the years, are our values: Integrity, Independence, Analytical Rigour, Commitment and Innovation.

CRISIL's majority shareholder is Standard and Poor's(S&P). Standard & Poor's, a part of The McGraw-Hill Companies, is the world's foremost provider of credit ratings.

192

Bloomberg TV

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FINO PayTech Limited

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This report (“Report”) is a compilation of the views expressed in the series of panel discussions held in 5 cities in India on 'Path to Progress - Through Financial Inclusion'. The opinions and views expressed in the Report are those of the individual panelists and speakers, and do not necessarily reflect the views of CRISIL Limited, its officers or directors. The information provided in the Report is on "as is" and "as available" basis only. While CRISIL has taken reasonable care in compiling the Report, CRISIL does not guarantee the accuracy, adequacy or completeness of the information contained in the Report. CRISIL expressly disclaims warranties of any kind, whether express or implied, including, but not limited to the implied warranties of merchantability, fitness for a particular purpose. The information contained in the Report is general information and is not intended to be an advice or recommendation on any particular matter. The users are advised to apply their own discretion and/or seek professional advice before relying or acting on this Report or any part thereof. By using the Report, the users accept that CRISIL does not accept any liability for any results or consequences of use of the Report or any decisions made based on the Report.