A banking conclave was organised recently by the Free Press Journal and moneycontrol.com, at the MIT World Peace University campus in Pune. It was divided into two panel discussions— the future of banking and the future of microfinance and e-payments, both extremely relevant themes for the sector. Panelists across both panels included a veritable cross-section of experienced heads – Venkatesh Hariharan, Director, iSpirit; Sachin Seth, Partner, EY India; Mukul Varshney, Director, John Deere; Vineet Dhar, Head Retail, ICICI Bank; L N Deshmukh, ex-GM, Bank of Maharashtra; Veena Mankar, Director, IDFC; Sudipta Roy, Head Cards, Payments and Personal loans, ICICI Bank; Vikrant Ponkshe, ex-MD and CEO, Cosmos Bank; Manoj Nambiar, MD, Arohan; and Naveen Kumar, Associate Professor, NIBM. The keynote address was given by former RBI executive director, Amarendra Sahoo. Both panels were moderated by R N Bhaskar with editorial support from Pankaj Joshi.
Technology and the e-payments evolution
Sudipta Roy: The first large scale move towards electronic payments was by Dee Hock, the legendary CEO of Visa. He put together a team in 1979 to build the first electronic terminal and authorisation system together with IBM. Till early 2000s, the majority of ePayments innovation was driven by Visa and MasterCard. Then came the internet and you had new payment companies like Paypal redefining electronic payments and creating the concept of an e-wallet.
Meanwhile China, took the step of building their own domestic electronic payments company China Union Pay (CUP) in 2002 to facilitate electronic payments within China. They built an admirable domestic switching network and now they have gone international. Today CUP is accepted in over 150 nations with over two billion cards in circulation. The next wave of ePayments in China came via AliPay and WeChat (Alibaba and TenCent) pay wallets, which processed more than USD 3 trillion. Today China is probably the most advanced payments ecosystem in the world— be it cards or e-wallets.
Venkatesh Hariharan: Ispirit works with leading banks to leverage technological capabilities. Our Aadhaar participation has been well-acknowledged and we are today called for advisory services on different government projects.
In four-five years, India will have one of the most modern banking ecosystems. Be it Aadhaar or UPI, worldwide banking organisations and personnel are impressed by the vision and tremendous change coming in. Aadhaar is the only government-owned platform worldwide with a billion users and the quickest to the one billion mark, compared to Google and others. It shows that, when our government sets its mind, it can work miracles.
We have two India. The India II, with a population of 500 million plus— a universe of families with unorganised income sources— driver, kirana shop owner and so on— has huge issues in getting loans, where the UPI is a godsend. UPI enables a transaction history generation and cash flow record, which can be used for lending. From a data poor India, UPI is creating a data rich India. Cash-flow based loans in a data rich environment is a huge transformation that India II has sorely needed. Transaction costs will also be driven down once UPI gets mass acceptance, which is not far away.
Naveen Kumar: Traditionally, technology platform had been an issue. Now advancements are huge and therefore the viability of e-payments, both as a transaction mode and as a business, is massively up.
Sachin Seth: Today, there are five separate providers on a mobile for a cab, a dinner, a flight, a holiday and a movie. This is getting consolidated, an ecosystem is getting created. This is where banks should be present.
Impact on bankers and banks
Seth: Today, payment gateways are getting white labelled, and going forward so can banks. A channel for loans, deposits, transfer and payments—players like Google or WhatsApp could emerge as alternatives to banks, provided they submit to the same levels of regulation and scrutiny. Among banking players, weaker ones would be confined to looking at the back-office and compliance part while others with a better overall grip can use technology (IndiaStack etc) and raise their performance to give a fintech kind of customer experience. Use of data, impact on credit scores— much is set to happen. India has eight million SMEs where 90 per cent have a funding gap, which is now being fulfilled by Non-Banking Financial Companies (NBFCs), one reason why their stock valuations are higher than those of banks.
Vikrant Ponkshe: While opportunities in the micro finance and e-payments space are huge, player sustainability factor is also important. There is a good basis for consolidation, essentially mergers and acquisitions. Banking will survive, but individual banks may or may not.
L N Deshmukh: Branchless banking is a very nascent concept. People here generally prefer to go to a branch, time consideration notwithstanding. The business correspondent model with personal interaction will have specific utility, and can be a catalyst for branchless banking. It must be accepted that private banks have come in the last 20-25 years and taught banking to the nationalised banks, made them change their mindset.
Veena Mankar: Distribution today will be as important as ownership of the product or service. Different access networks are emerging asset banking correspondents for assets, payments, even at the kirana shops, the government seva kendras, telecoms etc. For better product offering and earning sustainability, partnerships will be important for the correspondents— with insurance companies, mutual funds, India Post and so on. However, distribution will still require a physical connect.
Rural/ small finance views
Mukul Varshney: John Deere has a twenty-year manufacturing presence in India, and has an NBFC since five years. NBFCs today serve 78 percent of rural market whereas banks serve 12 percent. NBFCs today offer ease of access, ease of transaction and good governance. Here it is important that NBFCs be exempt from the Moneylenders Act. We have been instrumental in getting the exemption process through in many states.
John Deere keeps transparency a priority. We offer agreements everywhere in local languages. We have the practice of issuing a receipt on the spot, in the local language. Combined with geo-mapping initiated five years back, these helped us register a nine-day turnaround time, the quickest for agricultural loans in rural India today. We have also adjusted repayment schedules for our farmer customers in their bad times. Rural finance is a good business, you have to do the best for your customers.
Manoj Nambiar: India in general is unbanked and represents a great opportunity. Arohan, based out of Kolkata, serves the needs of people across the Eastern, North Eastern and Central parts of the country. We aim to be at the forefront of the financial inclusion movement. Women form 95 per cent of our clientele and we find them disciplined and prudent in their approach. They take loans based on requirement and not on eligibility. They are honour-conscious and would take pains to avoid default, which is what we call social collateral. Our percentage of non-performing asset (NPA) is very low at 0.33 per cent.
Mankar: For the past several governments, financial inclusion has been a priority. This has resulted in the establishment of a digital infrastructure built on Aadhaar with interconnected payment systems and easing up of regulations, licencing specialised institutions such as small finance banks and payment banks. E-payments are the transaction enabler for this new eco system, and therefore critical for efficient distribution to reach financial services to every small household and business in an affordable manner.
Varshney: For credit risk assessment in an unorganised market, we assess a borrower as a unit— family income, other liability, other resources. A monitoring system also has to be developed, and you must think of yourself as not just a lender but an enabler in the borrower’s life. John Deere has NPAs at 0.1 per cent.
Hariharan: With technology and thought evolution, data point availability has increased. Satellite, lat long, GPS location are just examples of new age data which helps decision making as well as monitoring. We are getting to a data-rich ecosystem.
Vineet Dhar: India-II is now as connected as the other India, which is a sea change. Look at the case for housing for all. Subsidies and incentives are playing their part, but the key is the rural and small-town mindset which is about never defaulting. The banker should build on that, then use data co-ordinates and build the lending and monitoring case. And even our take is also that retail NPAs are much lower.
Mankar: Our experience in MFI (microfinance institution) is that women generally make good customers. Earlier, the joint liability group methodology— making a group accountable for each member and thereby enforcing intra-group discipline— was very vital. But now individual operations are growing.
Roy: Among the real pioneers in microfinance was Ela Bhatt of Self Employed Women’s Association (SEWA). However, SEWA could not scale up and the same practices were taken and adopted by Grameen Bank of Bangladesh. Their execution capabilities were proven to be superior.
The microfinance future and need for financial inclusion
Deshmukh: Financial inclusion is needed badly. About 73 per cent of wealth in India is owned by 1 per cent of the population. On the World Economic Forum index of inclusive growth, India is ranked 62, lower than both China and Pakistan. Our GDP of USD 2.3 trillion is in the top five but on a per capita income basis we are 126th.
Against that, under the current Government there is better deposit penetration, better credit and better branch penetration. India has around 26 crore families and in 2011, 11 crore did not have a bank account access. Today, we have 90-95 percent families covered by banks under the Pradhan Mantri Jan Dhan Yojana. A bank account can create a saving and deposit habit, which can generate a credit history. On credit side, we are all aware of the significance of Mudra Yojana. For penetration, the business correspondent model is doing well.
Mankar: The middle class of around 50-60 million households is segmented from A to E. Against that, the micro-business and micro-finance demand stretches over 150 million households/ enterprises, but is segmented into just two parts— the group loan customers and the small and micro businesses. We need micro-segmentation and an expanding array of customisable products, which the digital footprint will facilitate. With micro-finance delivered through digital channels, the customer will build up payment and credit history, using credit for progressive finance, and with substantial time saving. This is the change that is now possible with the eco-system’s inter-operability and digitisation.
Perspective on retail banking
Dhar: In retail banking, most of the innovations have been in the payments space to make that quicker, cheaper and more convenient. Hardly anything has happened on borrowing or investment side. Now banks have started online evaluation and approval for credit applications.
Let us appreciate that today 92 percent of working population is in the SME zone, and 93 percent of companies are in the SME zone. For this zone, today public sector banks, private banks, small finance banks, payment banks, NBFCs—all are converging into a huge opportunity.
Now, data is valuable as future credit history. Data is the new oil. Banks are rich in data but have to use it to create and evaluate footprints.
Mankar: A decade back, micro-finance was dominated by NGOs and MFI arms of NBFCs. Today a variety of players are jostling for meaningful share—small finance banks, NBFCs, correspondents, and even full-service banks. India Post has announced that they will launch operations as a bank by March 2018, upgrading from their current payment bank operations. From the other end, each fintech or banking player has outreach plans.
Dhar: With focus on India-II, companies like Amazon today claims that it has created capabilities to deliver to the last pincode of India, which is remarkable and speaks volumes of how it views India as a market. The opportunity is large and each player can focus on growth through collaboration rather than have a narrow vision of other players as competitors.
Bridging trust issues
Roy: Trust is a function of time. Hence, fintech companies generally partner with a bank, who they know will bring trust and regulatory knowledge to complement their technology edge.
The Reserve Bank of India’s (RBI) recent rules and procedures have put the key burden of proof on the institution, to prove that the individual made a mistake in the transactions. Each institution has to appoint an individual for redressal and have a helpline number and email address published on the website. In case of unsatisfactory response, the individual can approach the banking ombudsman, who is as good as a court, because he is empowered to give a verdict.
Seth: Online threats today are omnipresent. In banking the situation is more complex because money is directly at stake. Banks have always been attractive targets, from robberies by armed criminals earlier to theft being attempted by smarter people in a sophisticated manner. A lot of crime is because of digital illiteracy and lack of awareness on the part of users. Another aspect is the SME mindset. Existential crisis like demonetisation and lower credit access are accepted, but their own mindset also needs to change. Getting over the white and black fixation would catalyse their eligibility. Banks can take steps towards analysing an entire supply chain for financing.
Varshney: Server location, storage, security and access is a key area to help fight against digital crime in the banking system. John Deere has server locations worldwide and no occurrence of fraud till now.
Deshmukh: Despite regular SMS communication and active reminders from the banking system, customers still are careless with their passwords and other such data. Banks have their own plans and processes, but customers must also take care.
The financial literacy slant
Mankar: The customer is vulnerable, act responsibly to design products and delivery mechanisms that are customer-focussed. Also, we have to equip our clients with the tools to understand and use financial products appropriately. MFIs are focused to provide financial literacy, product information, importance of saving etc.
Ponkshe: The Maharashtra government has established an institute at Pune, called the Maharashtra Knowledge Corporation Ltd (MKCL). It conducts courses in financial literacy and the focus is much beyond loans, to savings, cash-flow management and investments as well.
Kumar: Financial literacy evaluation could ideally be a part of the credit score generation process.
Venkatesh Hariharan, Director, iSpirit
In four-five years, India will have one of the most modern banking ecosystems. Be it Aadhaar or UPI, worldwide banking organisations and personnel are impressed by the vision and tremendous change coming in.
Sachin Seth, Partner, EY India
Among banking players, weaker ones would be confined to looking at the back-office and compliance part while others with a better overall grip can use technology and raise their performance to give a fintech kind of customer experience.
Mukul Varshney, Director, John Deere
NBFCs today offer ease of access, ease of transaction and good governance. Here it is important that NBFCs be exempt from the Moneylenders Act. We have been instrumental in getting the exemption process through in many states.
Vineet Dhar, Head Retail, ICICI Bank
India-II is now as connected as the other India, which is a sea change. Look at the case for housing for all. Subsidies and incentives are playing their part, but the key is the rural and small-town mindset which is about never defaulting.
L N Deshmukh, ex-GM, Bank of Maharashtra
Branchless banking is a very nascent concept. People here generally prefer to go to a branch, time consideration notwithstanding. The business correspondent model with personal interaction will have specific utility.
Veena Mankar, Director, IDFC
For better product offering and earning sustainability, partnerships will be important for the correspondents— with insurance companies, mutual funds, India Post and so on. However, distribution will still require a physical connect.
Sudipta Roy, Head Cards, Payments and Personal loans, ICICI Bank
The next wave of ePayments in China came via AliPay and WeChat (Alibaba and TenCent) pay wallets, which processed more than USD 3 trillion. Today China is probably the most advanced payments ecosystem in the world— be it cards or e-wallets.
Vikrant Ponkshe, ex-MD and CEO, Cosmos Bank
While opportunities in the micro finance and e-payments space are huge, player sustainability factor is also important. There is a good basis for consolidation, essentially mergers and acquisitions.
Manoj Nambiar, MD, Arohan
Women form 95 per cent of our clientele and we find them disciplined and prudent in their approach. They take loans based on requirement and not on eligibility. They are honour-conscious and would take pains to avoid default, which is what we call social collateral.
Naveen Kumar, Associate Professor, NIBM
Traditionally, technology platform had been an issue. Now advancements are huge and therefore the viability of e-payments, both as a transaction mode and as a business, is massively up.