What can MFIs that transform into banks bring to the financial inclusion table?
With the new Government coming into power, it is hoped that there is impetus for widespread entrepreneurship in the country. An important enabler for this is greater financial inclusion. In this regard, the recent initiative by the RBI in giving an in- principle-banking licence to Bandhan, a leading Micro Finance Institution, augurs well. Despite financial inclusion having been a policy goal since independence, according to a 2011 World Bank study in India, only 35 percent of individuals above the age of 15 years are reported to have a bank account at a formal financial institution. This makes the case for expanding the range of channels through which individuals can open accounts very compelling.
It is however very important that the new channels develop their own models in order to truly cater to the unbanked. If they try to replicate existing models, they would only end up diverting some customers of existing channels and will be unable to tap the large pool of financially excluded individuals in the country.
The Nachiket Mor Committee on financial inclusion, which submitted its report in December 2013, articulated a well thought out vision and an ambitious set of targets for achieving universal financial inclusion in the country. The report specifically advocates for development of multiple channels and institutional types so as to meet the needs of the large and heterogeneous populace. MFI turned banks should represent a new distinct channel and not try to become clones of existing channels such as rural branches of commercial banks or regional rural banks.
While the roadmap drawn up by the Mor committee, its focus on access to micro savings and its proposal to put the onus for suitability of products on financial service providers drew appreciation; there were concerns that not enough attention was given by the committee to the demand side and to the last mile provision of financial services. This is a valid criticism as simply making available financial services is not a sufficient condition for financial inclusion. The literature on financial inclusion points to the existence of both supply side and demand side barriers. While the committee recommendations address the supply side barriers such as distance to the provider and availability of suitable products, the demand side barriers, which include factors such as lack of financial literacy, lack of motivation and psychological and cultural barriers are not addressed.
It is in addressing these demand side barriers that MFI turned banks such as Bandhan have great potential. For example, the Mor committee suggests that when a resident receives an Aadhaar number, the Unique Identification Authority of India (UIDAI) initiate a request to open a bank account. The committee opines that such a procedure will reduce the chances of banks turning down requests to open bank accounts from low income households, a problem reported earlier with regard to “no frills accounts”. By establishing an electronic automatic process, it can be hoped that there is less leeway for banks to refuse opening of bank accounts.
However, there could be practical difficulties while implementing this suggestion. When a resident receives an Aadhaar number, it is not enough if she or he is asked to choose a bank in which an account can be opened. It is important at that stage to communicate to the individual how she or he can use the bank account and the benefits that could result from it.
If this communication does not take place in a timely and effective manner, the result could be paper accounts that become dormant over time. A similar problem was reported by field studies in the case of no frills accounts that were opened by banks in order to meet financial inclusion targets. Hence the communication aspect is crucial and needs to be handled creatively. MFI turned banks are well placed to make this communication effectively and should be proactive in doing so.
Similarly, while introducing the right to suitable products is laudable, it may exist only on paper unless low-income individuals and small enterprises are aware of this right and how they can seek redress under it. Here again, MFI turned banks can take special efforts to inform the new consumers of banking services of their rights and the redress mechanisms available to them. Empowering these customers and making them more confident in their dealings with the bank staff is important because if customers feel that they are bring short changed, they may prefer financial exclusion.
MFI turned banks should retain the traditional characteristics of the MFI model such as gearing their operations around customer needs and customer convenience. It will be preferable if they refrain from hiring ex-commercial bankers so that they do not get any readymade models but are forced to develop their own ones. Even the training programs imparted to their own officers should be carefully put together so that outside models and methods of operation are not blindly adopted. It is imperative that the MFI Bank retains its MFI culture and does not import the typical commercial bank culture.
The other important contribution that MFI banks can make is with regard to filling in the missing middle. Currently MFI customers who outgrow MFIs are not welcomed by commercial banks. MFI banks can provide a seamless graduation mechanism for their MFI customers.
Financial inclusion ultimately implies making available a continuum of financial services that cater to various needs and MFI banks should focus on filling in the gaps currently existing by developing their own unique model of financial service access.
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