The Economic Times, Last Updated: Sep 20, 2010
The country’s urban population is increasing at a faster rate than the total population . By 2030, about 40% of Indians will be living in cities and towns compared to the current proportion of 30%, according to a recent study by McKinsey Global Institute. This will also lead to an increase in the number of urban poor, currently pegged at 80 million by NSSO in a report. It is this large section of the population that lacks access to even the most basic banking services: savings accounts, credit, remittances and payment services, financial advisory services, amongst others.
In order to facilitate financial inclusion in this segment , we need to first understand the reasons and sources of financial exclusion, which are quite distinct from the financial exclusion of rural India. Urban financial exclusion typically results from the inability to access necessary financial services in an appropriate form. Urban financial exclusion is also a result of problems with conditions imposed, pricing, marketing or self-exclusion in response to negative experience, or actual or perceived absence of benefits in betterment of their social or economic conditions. Physical access is not a critical issue for financial exclusion among the urban poor.
Banks and financial institutions running financial inclusion initiatives tend to incur a high cost due to inactive accounts with insufficient or nil balances . However, in the context of the urban poor, extension counters and mobile banking services along with appropriate technologies — biometrics and handheld collection devices — can be lower cost solutions to achieve reach within limited geographical areas with high density of potential clients.
The price here not only includes the cost of service by the service provider, but the cost incurred by the client in availing the service, e.g., loss of wages due to involvement of the client in availing the financial service. It has been observed that the urban consumer is more comfortable in paying electricity bill with late payment once a quarter than paying on a monthly basis as the loss of wages is more than the penalty incurred in case of non-regular payment. Establishing identity: Absence of relevant know your-customer (KYC) documents is perceived as a key reason for financial exclusion given the profile of the urban poor:
Migrants from the same state or other states, living in ghettos and groups (4-5 individuals living in one room) with no independent references, Employed in unorganised sector, frequent job changes and inability and cost implications for the bank to verify addresses in distant villages.
The above are not unsurmountable as there are several government schemes and regulations that have created identities for a large section of the urban underprivileged to satisfy the KYC criterion and the UID project will be a huge step in this direction. Lack of financial literacy or marketing: Insufficient effort at creating financial literacy is an important reason for urban financial exclusion. Efforts at spreading financial literacy by banks and other financial institutions among the urban poor have been limited — and probably restricted to the metros — as this social class is not perceived to be an economically viable banking proposition.
However, a recent study by the Skoch Development Foundation shows that there is a huge need for savings, insurance and remittance products for the urban low-income and weaker sections. Thus, technology and product innovation with a clear profitability objective can — like in the telecom sector—achieve the goal of a mass-based and profitable service through economies of scale.
Self-exclusion :
Self-exclusion by the urban poor is a critical issue. Given the low income levels and absence of meaningful surplus along with uncertainties in income, interest rates on small periodic savings cannot compensate the cost and effort in frequent withdrawals needed for daily or weekly consumption . With daily wage earners either as labourers, household help or small entrepreneurs like tailors, carpenters, cobblers, autorickshaw drivers, handcart vendors, hawkers, plumbers, mechanics, dabbawallahs , etc, time involved in banking activities means time lost on earning livelihood. Hence, doorstep banking on a periodic basis is a key requirement for this segment and anything involving more time from their side has very low marginal utility.
In urban areas, building peer pressure is a difficult task for institutions as well as individuals, and hence, institutions following only the group methodology fail to deliver the services.
However, the urban poor need to be clearly educated about the benefits of compulsory and forced savings and insurance. Insurance premium with no immediate benefit but a protective cover against financial shocks in the form of ill-health or death or accident or loss of productive assets is considered a wasteful expenditure that their incomes can ill-afford . A bank remittance product that saves time, cost —informal channels of money transfer charge large fees — and risk of loss is the first step to get the urban poor and weaker sections introduced to the benefits of banking. This literacy would be a key turning point towards sustainable financial inclusion, especially in the urban poor. These products should be designed considering the credit needs, earning patterns, risk bearing ability and bankability of the individual.
While there are several challenges in achieving urban financial inclusion, two macro-enablers , the Unique Identification Authority of India (UIDAI) and National Payment Corporation of India (NPCI), will take the financial inclusion to the next level.
The UIDAI has two core objectives: to provide a unique ID to every Indian citizen basis biometrics and to authenticate any citizen based on this UID. This mega-project is unparalleled in its scope and scale, and the UID and ancillary developments will usher in massive socio-political changes, especially through successful facilitation of targeted benefit programmes by enabling financial inclusion, and these developments will also radically change how banking is done in the country.
The biggest roadblock in financial inclusion has always been the difficulty in establishing identity. Now, with the UID project establishing recognition on the basis of biometric details — fingerprints, photograph and iris scan — banks will be able to identify customers , thus taking care of KYC issues and use the UID based authentication service to process transactions. Innovative solutions leveraging UID authentication ability can bring about the true last-mile connectivity .
In conjunction with the work being done by the UIDAI, the National Payments Council of India (NPCI) has also been mandated with creating the financial infrastructure on several major projects: other than managing the National Financial Switch (NFS)for domestic ATMs, the NPCI is working on creating a National Automated Clearing House (ACH) system, a switch for mobile-to-mobile payments — called India Pay Mobile Switch — and creating an infrastructure to enable UID-to-UID micropayments.
The vision is to link the UID to a bank account and a mobile number in a central database. Once this mapping is done, a payment can be initiated through any bank or mobile phone-enabled business correspondent , and routed to the beneficiary’s UID or mobile number, and this will be automatically credited to the bank account linked to that UID. The UID-based payments initiative, coupled with the mobile payments switch, is going to be a major enabler for financial inclusion , and has the potential to completely redefine the country’s payments landscape, a representation of which is given in the accompanying graph.
The UID and NPCI infrastructure, supported by bank and associated business correspondent or retailer networks, can help bridge the banked-unbanked divide by enabling channels like micro-ATMs and mobile banking.
This transformation will be further accelerated in urban areas covered by Jawaharlal Nehru National Urban Renewal Mission (JNNURM) as its sub-mission for providing basic facilities for urban poor is creating a complementary infrastructure to facilitate financial inclusion.
Banks will also need to gear up to meet the challenges of managing a significant increase in the number of customers and transactions, while improving service levels across all channels and developing market-based solutions for financial inclusion that address the unique requirements of the bottom-of pyramid market. The immediate effect of these macro-projects will be demonstrated in the urban areas, where banks can leverage their existing infrastructure to enable and closely monitor urban financial inclusion programmes.
-By Rana Kapoor MD and CEO of Yes Bank