Innovative Partnership Models to Access Rural Markets Enabling Financial Inclusion

1. Innovative Partnership Models to Access Rural Markets Enabling Financial Inclusion Presentation by Mr Somak Ghosh President, Corporate Finance & Development Banking YES BANK Ltd for Banking in the Hinterland February 14, 2007

2. Enabling Financial Inclusion to Access Rural Markets Financial Inclusion – Challenges & Solutions Tools for Inclusion Microfinance Contract Farming Enabling Environment for Financial Inclusion Agenda

3. Enabling Financial Inclusion Quote from Annual Policy Statement (2005-06) of Hon’ble Governor of RBI “there are legitimate concerns in regard to the banking practices that tend to exclude rather than attract vast sections of population, in particular pensioners, self-employed and those employed in unorganised sector. While commercial considerations are no doubt important, the banks have been bestowed with several privileges, especially seeking public deposits on a highly leveraged basis, and consequently they should be obliged to provide banking services to all segments of the population, on equitable basis. Banks to review their existing practices to align them with the objective of FINANCIAL INCLUSION” • An Inclusive Financial sector is one that helps people help themselves to increase incomes, acquire capital, manage risk and work their way out of poverty through: • Safe savings • Appropriately designed loans for poor and low-income households and micro, small and medium enterprises • Appropriate insurance and payment services

4. %age HH reporting IOB Rural Urban 22.4% 25% 20.8% 18.4% 20% 15.7% 15.3% 15.2% 15% 10% 5% 0% Cultivator Non- All Self - Others All Cultivator Employed Gaps in Organised Finance in India High levels of Unbanked Population • Out of 203 Mn HHs in India, 73% are in Rural Areas, 27% in Urban areas • 165 mn HHs have Zero IOB (81% of Total HHs) • AOB of HHs in the highest asset class is about 27 times and 17 times that of lowest asset class in Rural & Urban areas respectively Gaps in Organised Rural Finance • Low income households with assets valued up to INR 200000 depend largely on non institutional agencies for cash borrowings – from 60% to 82% as the asset holding decreases to less than INR 15000 • 43% of borrowings in Rural India comes from informal sources • 70% of that from money lenders Gaps in Organised Urban Finance • In urban India there is growing incidence of institutional credit in middle income groups – up to 66% in HHs with AHC from INR 100000 to INR 150000 • However, self employed HHs (36% of total Urban HHs) depend largely on informal sources of funding • Informal credit in Rural India - Rs. 23600 crores • Conservative Estimate of 40% demand from Low Income HHS depicting Incidence of Borrowing (IOB) = Rs.10,000 crore • Informal credit in Urban India – Rs. 8500 crores • Conservative Estimate of 40% demand from Low Income HHS which have IOB = Rs.3,400 crores

5. Enabling Financial Inclusion to Access Rural Markets Financial Inclusion – Challenges & Solutions Tools for Inclusion Microfinance Contract Farming Enabling Environment for Financial Inclusion Agenda

6. Challenges of Delivery Under utilisation of Physical & Banking Infrastructure High delivery costs, legacy systems, inflexible procedures Information Asymmetry No credit history, willful defaulting, unclear Government policies Challenges of Product Design Lack of Collateralizable Assets No ownership documents, illiquid assets, inaccurate valuation Financial Inclusion - Challenges

7. Financial Inclusion – Solutions • Addressing these challenges requires reorientation of mindsets and innovative practices to: • Leverage Existing Banking Infrastructure • Mindless investment in branch network without optimal utilisation will not help solve the problem of financial exclusion • There is a need to: • ‘Sweat’ existing branch infrastructure • Extend outreach • Evolve customised products tailored to meet the requirements of low-income clients • Microfinance is an efficient tool Inclusive Growth • Leverage Partnerships • Leverage Technology

8. Designing Customised Products • The inherent practices and methodologies of microfinance offer Banks an innovative mechanism to foster Inclusive Finance by leveraging their existing strengths • Incorporating Inclusive Finance in to the conventional banking framework requires Banks to: • Have broader strategy commitment from Board and senior management • View financial inclusion as a business strategy for growth • Understand the Bottom of the Pyramid (BoP) market and develop products suited to the clientele • Develop infrastructure keeping in mind convenience to clients • Develop data sets to evolve risk assessment models for proper rating and pricing • Adapt systems and procedures to microfinance operations • Use innovative products, services and delivery mechanisms aided by information technology to help speed up transaction time and reduce costs • Adopt appropriate staff training methodologies

9. Globally, many traditional commercial banks have restructured policy and practice to serve the Bottom of Pyramid (BoP) market through Microfinance Banks have successfully used direct intervention in ‘downscaling’ to reach low-income populations by restructuring organisational frameworks to leverage existing infrastructure, human resources and relationships This entailed creating a separate division within the existing organisational structure (and not a separate legal entity) : Managed as any other commercial unit Leverages existing infrastructure and human resources of Bank Bank bears the risk and return associated with microfinance Examples – Bank Rakyat Indonesia (BRI) Tools for Inclusion – Microfinance

10. YES MICROFINANCE INDIA Socio-economic development at grassroots Poverty alleviation Direct Credit Programs Micro-enterprise Development Services De-centralized Technology innovations Holistic Financial Solutions to shrink the Bottom of the Pyramid Savings / Insurance and other financial services Financial inclusion empowerment Supporting entrepreneurship Promoting micro-equity funding models Sustainable livelihoods Gamut of Financial Services to the Bottom of the Pyramid

11. Delayed Loans Insufficient Loans No Loans Corruption At the branch level Cumbersome Documentation/ Processes Poor Recovery Crop Loans from Banks Suicides Money Lender Tough Recovery Practices Complex crop Insurance Crop loss Low realizations Exorbitant Interest rates Tools for Inclusion – Contract Farming Traditional Farm Loans Problems

12. Typical Contract Farming Farmer Loan dues Traditional Bank Payment for inputs Loans Input Supplier Agri Inputs Produce Output Buyer Sales Proceed

13. Crop Failure/Crop damage Complex Insurance schemes Crop Diversion Market price more than contracted price Willful Problems with/without the input supplier Push sales at the expense of the farmers Loans may not be used for agri purposes Typical Contract Farming - Risks/Short Comings

14. Risk sharing by the output buyer Out put buyer to supply the inputs as well Price offered to be contracted price or the market price whichever is higher Stringent law enforcement for willful defaults Output buyer should look at contract farming as a source of good quality raw material not as source of cheap raw material. YES BANK’s Model for Contract Farming

15. YES BANK’s Model for Contract Farming Loans due/Guarantee LOANS Payment for Inputs Output Buyer Good Quality Agri Produce Higher of Contracted Price/Market Price Input Supplier

16. In the present legal framework CF would work: With crops where there is no/limited market outside the contract – e.g.: Gherkins, Jalepenos, Venilla Where the output marketing is regulated – e.g. Tobacco regulated by Tobacco Board Where the output buyer pays a premium for a specific quality – e.g. Organic produce Crops Suitable for Contract Farming

17. Enabling Financial Inclusion to Access Rural Markets Financial Inclusion – Challenges & Solutions Tools for Inclusion Microfinance Contract Farming Enabling Environment for Financial Inclusion Agenda

18. Enabling Environment for Financial Inclusion ENABLING INFRASTRUCTURE Technology Financial Inclusion Business Correspondents Banks Product

19. Business Facilitator / Correspondent Model Business Facilitators Institutions/ individual, currently interfacing with poor, to provide support financial services under well defined terms These may be NGOs, MFIs, Farmers Clubs, Functional Cooperatives, IT-enabled kiosks, Postal agents, insurance agents and Panchayats among others Business Correspondents as “Pass Through” Agents All functions of Business Facilitators can be conducted Other value added services can be carried out: Disbursal of small value credit Recovery of Principal / collection of interest Sale of micro insurance / mutual fund / pension products Leveraging Partnerships: Non-Branch Delivery Channels

20. Role of Technology Information Dissemination Technologies Information Kiosks Call Centers using vernacular toll-free IVR System Business Processing Technologies Simputer Mobile Phone Banking Automated Teller Machines Smart Cards Personal Digital Assistants Leveraging Technology: Enhancing reach and convenience through customer choice

21. Financial Inclusion initiative by IDRBT Multi-application smart card system Store of electronic cash, data repository for essential information relating to the card holder Biometric identification, doubling up as an entitlement identifier/social security card For government payments like pension, subsidies, utility payments – healthcare, crop insurance, life insurance Banks can use for ‘No Frills Account’, prepaid cards for rural credit Leveraging Technology: Common Platform – Sharing Resources Creation of a National Platform on “One Open Standard” will enable Inter-Operability across various National Payments Networks like NFS etc giving customers reach across the nation. The various service providers and banks will then be able to plug-in services at an affordable cost.

22. “A loose credit policy lost money. A tight credit policy lost business. Intelligence, judgment and good information - these were what made the crucial difference” - Lewis Tappan (Founder of Dun & Bradstreet) Credit Information for… Funded credit facilities Non-funded credit facilities Security/collateral for the credit facilities Antecedents & credit history of borrower The envisaged role of CRB is to make available… Complete and reliable Credit Information In the form of reports on borrowers, Individuals or businesses From a centralized database As a neutral service provider Leveraging Technology: Sharing information, common standard for evaluation Creation of a National Credit Reference Bureau through IDRBT or like organisations Can deliver “Real Time” Credit information to support Micro Credit decisioning and ratings.

23. Challenges Mitigation • Mobile Branches covering select geographies • Self generated - Diesel , Solar, Battery • Online/Offline and Pseudo online data capture and updation systems. Leverage Mobile networks • Cash dispensing partners e.g. Post offices who can deliver cash like money orders • Cash can be deposited at partners like Post offices/Mobile Branches • Information dissemination through partners, Internet kiosk enabled , Toll Free Call centre in local language • ATM cards for such customers • Dispersed client based with poor access • Limited electricity supply and access • Limited telecom/broadband connectivity • ATMs may not be viable and maintainable in erratic power situations • Cash collection points – customers like to deposit at a fixed location • Banking service – delivery of information , statements, etc • Access to account in nearby cities, towns villages Innovative Solutions: For extending Deposit Products

24. Challenges Mitigation • Loan can be delivered on Card; customer can avail cash from nearest partner - Post office/ATM/ Cash advance terminal like POS • Enlisting partners like Post offices and Roaming agents who can use offline/ online handheld devices to update loan repayments on the field • Deliver the loan history on a smart chip card. Information on the same can be read off and printed off handheld readers • Loan delivery - Cash is preferred form at Village Level • Loan servicing- Payments collection to suit every form of repayment from daily, to weekly to seasonal • Loan Management and updation of information of payments and collections and sharing update with every borrower at village level Innovative Solutions: For extending Loan Products

25. THANK YOU