Banking the Unbanked, by Ashok Vemuri
One more post from Ashok Vemuri from Davos:
"As Davos 2007 heads into the final straight, there are fresh issues popping up every minute that are provoking fierce debates. Yesterday, I attended a session on ‘banking the unbanked’ which generated some interesting discussions about the huge population out there who are currently unbanked - not just in the developing world but in regions where we’d never expect this to be a problem.
"Reasons for the lack of credit available in the less developed part of the world are pretty self explanatory. Poorer people 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. Different regions are responding in different ways however many are reliant on non-government organisations to help with funding.
"What amazed me, however, was to hear that some fifty million people in the United States are also unbanked. This is a startling fact for a country with such a developed economy however it boils down to the same reason – some individuals just represent too high a credit risk.
"A number of financial executives I spoke to agreed that technology could be a great enabler in giving banks a return on their investment and making it a risk worth taking. An effective use of technology can reduce the cost of transactions and there is a great opportunity for large financial institutions to participate in the development of these financial economies creating a tailored range of products and services. Time will tell as to what degree this opportunity is embraced."
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Comments
While discussing the case of the 'unbanked' population, we need to divide this group into two: 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 category, the latter group offers a huge untapped pool of potential customers.
The success of the Bangladesh Gramin 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. 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 will not only be 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, remain informed and educated about the price movements, weather forecasts etc, but it has also ensured that its supply chain remains efficient and responsive. Clearly, through its initiative, ITC has hit the jackpot.
~ Saurabh Sharma, IIM Kozhikode
Posted by: Saurabh Sharma | February 6, 2007 05:39 PM
Talking about Modern Banking Facilities in the Developing World, and specially talking about Indian Banking Scenario, it would be of immense importance that only growing technology-wise would not be the only step that needs to be followed. In India alone, not talking about rural India, but modern cities like Delhi, Mumbai, Bangalore, Pune and others, a large majority of people can be counted as partially unbanked. These people are those who are unable or do not want to utilize the full modern technology support provided by many banks. These technological enhancements seem distant from the common man and consumers of Banking sector. This distance is due to the lack of confidence on technology that leads to fear of transaction using technology that does not require manual intermission. So it is necessary that if we are enhancing technology then it should be our responsibility to propagate the message to the commons that it is fear-free.
Posted by: Palak Mathur | February 21, 2007 12:59 PM
Banking the unbanked is a very interesting and relevant topic. In the coming years, Banks will have to increasingly focusing on expanding their customer base. Having exhausted all the urban population, the only option would be to reach out for rural base. India seems to have a huge potential for rural banking. Out of 203 million Indian households, three-fourths, or 147 million, are in rural areas and 89 million are farmer households. In this segment, 51.4% have no access to formal or informal sources of credit, while 73% have no access to formal sources of credit. Similar data is not available for non-farm and urban households.
While there is a perception that rural population may have higher % of poor, the profitability of service is quite lucrative. Many of the MFIs are making good profits and are able to sustain. Cost of entry into this zone may appear to be discouraging. However, banks will have to adopt innovative approaches to break this barrier and I am sure that this will be done.
Posted by: Satish Grampurohit | June 17, 2008 01:21 AM