Banking the Unbanked

"Banking the unbanked" is the topic that I first heard during Davos 2007 media reports. There are hundreds of reasons for large part of population in many countries - developed, developing and underdeveloped - to stay outside the realms of banking. The reasons vary from logistics to cost of transactions, lack of financial literacy and products that meet the requirements of the unbanked people. The major reasons for the lack of credit available in the less developed part of the world are pretty self-explanatory. Most of the unbanked population is poor, they represent a higher risk and lower return on investment for banks and financial institutions, and as a result, they’re reluctant to get involved in these regions.

While discussing this case, we need to divide the unbanked population into two groups: one who are high risk individuals and hence no one is interested in offering financial service to them and second those who are beyond the reach of current financial framework. While it may be difficult to change the credit worthiness of the former group, the latter group offers a huge untapped pool of potential customers. The latter group will include the small farmers who need credit readily so that they may buy seeds, fertilizers, and take care of their animals.

The success of the Bangladesh Grameen Bank has proved that microfinance - the availability of banking and financing opportunity at the bottom of the pyramid - is not just a showcase project but an operationally feasible and financially viable initiative. However, we know that MFI in India have been involved in various scams and are not as successful as Grameen Bank in Bangladesh. The need is to embark upon similar initiatives in societies like India where a large part of rural population is still untouched by modern banking industry.

The role of technology in such initiatives is not only important but critical for their success. Take the example of ITC’s eChaupal initiative. Through the use of IT it has empowered the farmers in rural India. Not only has it ensured that the farmers, who are the most important link in the supply chain of its food business, stay informed and educated about the price movements, weather forecasts etc, but it has also ensured that its supply chain remains efficient and responsive. We need to stay vigilant and learn from these initiatives and take a plunge into more such areas.

What other models can we think of? There was a paper on E-currency presented by one of my friend as his MBA thesis. It can not only help in banking the unbanked but also can cater to the aim of good governance. The mobile phones density is increasing by each passing day and the mobile-banking model (E-currency model) is one big idea that can really be helpful in achieving the said goals.

Having said this, we also need to educate people. Financial literacy in India is very low.  There was a maid who used to work in our house in Agra. One day she told us that she had taken a loan of 10000 from a local money-lender at an interest of 10% per month. Yes 10% per month!! My father immediately sent her back with Rs.10000 to pay the money-lender back. She would have never been able to pay back the money had she taken the loan. This is a true story.

Even the educated people do not much about Finance and Banking aspects. Even I am fearful of Capital Markets and related things. So, it is necessary that we should take initiatives to educate people about finance and banking so that the people may take educated decisions than going with the wind.

To summarize, what Financial institutions need is to consider the following points:-

1. Flexibility in savings and repayment schedules for want of a steady income

2. Ease of access and creating an environment of fearlessness

3. Simplicity and speed in processing

4. The loan should be available in small sizes as many people who fall in this category need micro-finances. Also, availability of zero-balance or low balance products is essential if these people need to be targeted and helped.

5. Basic financial education that will help many people to escape the traps of local Shylock-types moneylenders and make these people approach financial institutions.

The role of technology in this case can be immensely helpful.