Subir Gokarn: Financial inclusion - a consumer centric view
Speech by Dr Subir Gokarn, Deputy Governor of the Reserve Bank of India, at the
VIth V Narayanan Memorial Lecture, Kumbakonam, 21 March 2011.
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Inputs from Pallavi Chavan, Bhupal Singh and Muneesh Kapur are gratefully acknowledged.
I. Introduction
It is a great pleasure for me to be delivering the VIth V. Narayanan Memorial Lecture. I never
had the opportunity to meet Mr. Narayanan, but, from what I have heard and read about him,
he was clearly a person dedicated to the mission of expanding the reach of and access to
banking services in a way which benefitted both the customer and the service provider. As
you may know, the financial inclusion agenda has assumed top priority in the Reserve Bank
of India's current scheme of things and the Bank is actively engaging with the financial sector
to ensure that the objective of establishing a banking presence in all villages with a
population of over 2000 people is achieved. More importantly, it needs to be achieved in a
commercially viable way; banks and other service providers must not see it as a mandate
whose burden they have to bear in terms of higher costs and lower earnings. As Governor
Dr. Subbarao has put it, financial service providers must see inclusion as an opportunity, not
an obligation.
When I accepted the invitation to deliver this lecture and began thinking about an appropriate
topic, the issue of commercially viable financial inclusion came quickly to mind. In effect, this
is exactly what would characterize Mr. Narayanan's career with the City Union Bank and his
contribution to not just the institution that he was associated with but to the broader
socioeconomic environment in which it functioned. Of course, while I have had the opportunity to
work in a commercial organization, I have never worked for a commercial bank. It would,
therefore, be presumptuous of me to approach the topic from the perspective of a business
strategy for banks. However, as we all know, strategies are not designed in a vacuum. A
sound understanding of the market environment is a critical input. Who the potential
consumers are, what motivates and drives their decisions, what constraints and risks they
face and so on are all fundamental questions, the answers to which are the starting points of
strategy formulation. In other words, the better the understanding banks and other financial
service providers have about the potential consumers of their inclusion-oriented products and
services, the more likely their strategies are to succeed in a way that benefits both
consumers and producers.
This is the issue that I would like to address in this lecture. I will attempt to characterize the
potential consumer for financial inclusion products and services, using survey data reported
by a number of survey institutions that have been observing the Indian consumer for some
time now. Based on these characterizations, I will articulate some key messages emerging
for commercially viable financial inclusion.
II. The current status of inclusion: an overview
Before I begin looking at consumer characteristics, let me provide a quick overview of the
current status of access of consumers to financial services. Admittedly, this is not a complete
picture, as it does not cover the role and activities of institutions other than banks. I merely
want to emphasize the gap that currently exists, which in turn represents the opportunity that
the financial sector has to design and deliver appropriate products and services to a very
large number of potential customers.
provides a set of summary statistics relating to the penetration of various categories
Slide 1
of financial products. First, the relatively low penetration of bank branches must be
highlighted - only 30,000 out of 6,00,000 habitations have a banking presence. As is well
understood, the goal of having a physical banking facility in every habitation is unrealistic,
which is why the inclusion strategy is largely based on the use of Information and
communication technology (ICT) to expand banking access virtually through the mechanism
of a Business Correspondent (BC), who carries a handheld device networked to the bank's
systems. This is an enormous technological discontinuity enabled by the spread and
efficiency of the mobile telephone network and, clearly, the inclusion strategy must take full
advantage of this resource. Even then, we must recognize that there are constraints to the
rollout of the BC model, which also needs a certain minimum scale of operation to make it
viable. Therefore, the strategy envisages a phased expansion, with larger habitations being
targeted first to ensure the viability of as many BCs as possible. In this sense, the phased
approach, which first focuses on habitations with populations above 2,000 is based on the
acceptance of commercial viability as a key driver of the success of an inclusion strategy.
The other statistics on Slide 1 provide some indication of the size of the opportunity. Just
because penetration in certain products and services is low does not mean that they
represent a natural and automatic opportunity; penetration could be low because there is no
demand. It is ultimately a matching of consumer characteristics and the potential demand
that is implied by them that allows the service provider to assess the opportunity. However,
the statistics presented on the slide do suggest that, apart from savings accounts, which
have about 40 per cent penetration, there are several other financial products that might
meet existing consumer requirements, such as insurance, which have very low penetration.
Similarly, debit cards, which facilitate the use of technology, thereby reducing the
dependence of bank customers on physical branches, may help to significantly expand the
capacity of the banking network without necessarily setting up more branches.
Apart from the aggregate picture, it is also useful to look at the status from the perspective of
inequality. Slide 2 and Slide 3 present some data that reveal the differential access that
people at different income levels have to the financial system. From Slide 2, it appears that
households with an income below Rs. 50,000 (in 2007) find it relatively difficult, or
unattractive, to open a bank account. The survey does not reveal whether the relatively low
penetration of bank accounts in this income segment is because they can't open them or
they don't want them. This is an important distinction, because it implies different actions by
banks to improve penetration amongst these households. If access is a problem, then
simplified procedures and lower thresholds may be sufficient to achieve the objective and,
indeed, this is exactly what is being done by means of no-frills accounts. However, if it is
because people don't find adequate value in opening accounts, the challenge of inclusion
becomes a little more complicated. Clearly, the mere opening of more and more accounts is
not going to achieve the inclusion objective if these accounts are not used as the platform to
access a range of financial services that meet the various requirements that the household is
trying to satisfy. This raises the issue of product and service design as a critical component
of a viable inclusion strategy, which I shall repeatedly come back to during the course of the
lecture.
Slide 3 looks at the situation with regard to access to loans differentiated by income levels.
Here again, the relatively low access of the lowest income group is striking. It is not as
though these households do not need credit; if the banks do not meet their requirements,
they are clearly accessing other sources. The same question arises here. Are people in this
income segment not getting bank credit because they can't or because they don't want to?
As in the case of accounts, the answer to this question is critical to devising an effective
inclusion strategy. It may underscore the need to look for product design solutions to the
problem of low penetration.
III. An exploration of consumer characteristics
(a) Employment and earnings differentials
Let me now move on to the core of this lecture, i.e., to characterize the potential consumer
for products and services emerging from a financial inclusion strategy. Let me begin with the
nature of employment in the country, which, to my mind, is a critical attribute to the kinds of
financial services which people may want. Slide 4 provides the composition of the domestic
workforce in terms of their sources of income. It is most striking that over half the workforce is
categorized as being self-employed. Of course, this should not come as a surprise, as the
majority of services we consume on a day-to-day basis are provided by people who logically
fall into this category. Another significant proportion falls into the category of casual labour.
Only a relatively small minority is placed in the category of regular wage or salary earners, of
which a relatively large proportion is undoubtedly associated with the public sector.
What does this mean in terms of potential demand for financial services? For the
selfemployed, it clearly means, among other things, the need for a reliable and low-cost source
of working capital, which allows them to optimize on their inventories, if they are occupied in
trading activities or acquire productivity-enhancing and service-enhancing assets, which
have relatively short payback periods. We all have seen how, first, pagers and, then, cheap
mobile telephony completely changed the economics of self-employed service providers.
This, of course, happened at an aggregate level, but as we look deeper into the business
models of different self-employment categories, I am sure we will discover sector-specific
opportunities to make similar productivity improvements. Discovering such opportunities and
converting them into a viable lending model is something that the financial sector may benefit
from, both in terms of furthering the inclusion agenda and expanding their revenue and
profitability bases.
The data presented in Slide 5 and Slide 6 provide a somewhat different perspective on the
potential consumer base. In Slide 5, we see the relative incomes of workers in different kinds
of occupations. This differentiation is important because it reflects a number of underlying
relationships between educational status, employment opportunities and earning potential.
The ultimate goal of development policy, of which financial inclusion is a critical component,
is to raise the incomes of as many households as possible in a sustainable way. There is, of
course, no iron law which says that incomes earned by all occupations must be equal.
Differentials that emerge from qualifications, skills, productivity and value added are all
legitimate in a market economy, in which financial incentives drive resource allocations
across alternative activities. However, from the policy perspective, we must also be
conscious of barriers and bottlenecks, which impede the productivity and, consequently, the
earning potential from different activities.
As Slide 5 indicates, in rural areas, people with some professional qualifications and those in
regular jobs, such as in the administrative sector, earn more than people who are lower down
on the skills ladder and those who are self employed. One response to this could be to
employ as many people as possible in the former areas. In a sense, this was attempted a
few decades ago. It generated benefits, but also imposed costs; in any case, as a strategy, it
is inconsistent with the current emphasis on fiscal discipline and the efficient deployment of
resources across the economy. The focus must, therefore, be on finding ways in which the
earning potential of the other occupational categories can be raised. Access to appropriate
financial products and services is surely one of these, even possibly the most important one.
Of course, it may not be the only requirement - the silver bullet, so to speak - and it is
important for the success of an inclusion strategy to identify the other, complementary
requirements.
One observation that I can make from my recent exposure to and interaction with rural
SelfHelp Groups and other livelihood mechanisms is that they face significant challenges in
finding and accessing the right kinds of markets for their products, which results in relatively
low realizations for their products, thus constraining their earnings potential. To my mind, the
general validity of this proposition and its implications for building appropriate complementary
inputs into the financial inclusion strategy need to be explored further.
Slide 6 presents the same data for urban workers. The pattern is essentially similar to the
rural one and much the same set of conclusions can be drawn about the distinction between
legitimate sources of earnings differentials on the one hand and those caused by barriers
and bottlenecks on the other. The reason I brought the urban picture separately into the
presentation is to emphasize the fact that the financial landscape in urban areas is
completely different from that in the rural areas. If, indeed, lack of access to financial services
is a significant reason for the persistence of earnings differentials in urban areas, then it
suggests that a relatively well-penetrated environment is also not delivering inclusion to its
potential. If this is the case, then we must be cautious in linking the mere presence of
financial service providers with the achievement of financial inclusion. The strategy must go
beyond organizational presence to the design of appropriate products and services, a point
that has been made earlier in the lecture but can be re-emphasized.
(b) Expenditure patterns
Let me now turn to an analysis of how consumers, many of whom can be considered the
target segment for financial inclusion, spend their money. presents a picture of
Slide 7
households' routine expenditures, the largest segment of which is, understandably, food. The
proportion of income spent on food clearly goes down as income goes up, but at the
aggregate level, the proportion is significant. But, this is not an issue I want to dwell on here.
Let me move on to Slide 8, which displays what have been described as "unusual"
expenditures by households, which essentially means that these expenditures are generally
incurred, but not on a regular or predictable basis. The pattern suggests that the most
significant unusual expenditure by far is on ceremonies. This is followed by medical
expenses. The two categories together account for almost 80 per cent of unusual
expenditures across all households. Slide 9 is even more revealing. It suggests that, among
lower income households, the proportion of unusual expenditures spent on these two
activities is even more significant.
We have all heard of people whose household budgets are severely stretched, even broken,
by expenditure on ceremonies and healthcare. We can perhaps be somewhat dismissive
about the first, arguing that this is purely discretionary and the household can work within its
resource limitations. But then, who are we to judge the household's perceptions of its social
obligations? On the issue of medical expenditures, there is no room at all for such discretion;
it usually is a matter of life or death.
Given the significance of these two categories of expenditure, particularly amongst lower
income households but also in others, can we think of financial products that allow
households to meet these expenditures without bearing a crushing burden? The health issue
clearly lends itself to a low-cost insurance solution and there has been some progress on
widening access to health insurance. But, this needs to be matched with an increase in the
supply of health care facilities, not to mention the promotion of low-cost treatments, which
can be accommodated by a mass insurance programme. This is another example of the
need to visualize complementary inputs, which amplify the benefits of financial inclusion.
The need to develop a financial buffer for expenditures related to ceremonies, though more
complicated than health insurance, also appears to lend itself to product design. As a lifelong
employee of the organized sector, I have had the benefit of being a member of one provident
fund scheme or the other. One important feature of all the schemes I have been part of is
that they allow me to withdraw a substantial portion of my accumulated funds for
expenditures connected with my daughter's marriage (though, not my son's, as I recall). This
is, in essence, a systematic investment plan for, among other things, ceremonial
expenditures. Products of this nature are already available in the market; the question is,
essentially, one of threshold contributions and whether they can be lowered to provide
access to large numbers of households, even while giving them a reasonable rate of return
so there is sufficient accumulation.
(c) Savings and investment: choices and motivations
Let us now take a look at the way in which households deploy their resources and what
motivates their savings decisions. This should provide a basis for both addressing specific
needs, essentially an extension of the discussion in the previous section, and also getting a
sense of the limitations on the options households have to deploy their savings.
Slide 10 presents a very striking picture. Across all households, the primary channels for
deploying financial savings are bank deposits and "kept at home", which presumably
includes cash, gold and jewellery. The latter is not surprising, given the earlier data point on
the penetration of savings accounts. What may be surprising, though, is the significance of
the proportion kept at home; more so, the finding that urban households actually hold a
higher proportion of their savings in this form. Of course, this may reflect a greater ability to
afford gold and jewellery, but the pattern raises a fundamental question. Why do these
households prefer to keep their savings in a form that does not optimize on the risk-return
trade-off?
Putting all (or most) of your eggs in one basket, which is essentially the message from
Slide 10, may be an appropriate strategy under some conditions; the complete absence of
investment options, for example. But, clearly, at the aggregate level, options are not absent;
the Indian financial system offers an increasing variety of alternatives with finely
differentiated risk-return profiles, allowing individual households significant opportunities to
match their savings patterns with their anticipated requirements. In all probability, these
opportunities are also subject to some threshold requirements, which means that households
below a certain income and savings level cannot as yet access them. From the inclusion
perspective, the challenge is clearly to lower this threshold in a way that does not
compromise the commercial viability of the service provider.
Slide 11 presents a picture of the motivations that people say drive their savings behaviour.
The question obviously allows people to acknowledge as many of the listed items as they
want and the responses reported indicate the percentage of households who marked a
particular motivation. Although the data reported does not distinguish between households
by income, the height of some of the bars clearly suggests that these motivations cut across
income groups. Let us focus on the four most frequently occurring responses. Of these four,
we have already spent a fair amount of time on ceremonies. The other three are, as might
have been quite reasonably expected, are old age, children's education and emergencies.
Once again, at the risk of repetition, I want to emphasize the point that, for all these
requirements, the Indian financial system currently offers a variety of products and services,
but threshold requirements apply, which means that many lower income households whose
motivations are the same as those of more affluent ones cannot access the same products
and services. One could argue that there are no products and services which can meet these
requirements with commercial viability. But this is a proposition that needs to be explored
and, hopefully, proved wrong.
The essential business-related point I would like to make with reference to savings decisions
and motivations is that they must be seen in a dynamic context. In an economy that is
growing rapidly, households are also equally rapidly evolving in terms of their consumption
and savings choices and motivations. As many successful marketers have demonstrated, a
life-cycle approach to the consumer is an extremely effective long-term strategy. A significant
proportion of low-income households today will achieve middle income status in a few years.
Their choices then will partly be dictated by their experience with service providers during
their transition. Service providers who get customers in first, even at relatively low levels of
activity, provided that they take a forward view of the relationship, can realistically look at
benefitting from the increasing affluence and greater and more complex financial needs of
those very customers.
(d) Borrowing motivations
Let me now turn to the last of the consumer characteristics that I have on my list. Slide 12
presents data on the reasons why people borrow money. Considering all loans taken by the
households surveyed, over 50 per cent of rural households and about 45 per cent of urban
households report that they borrowed money to deal with financial and medical emergencies.
Business purposes were also significant, but not dominant. Of course, since lending money
to enable people to deal with such situations is not the conventional activity of banking or
most other formal financial service providers, it is unlikely that this requirement would be met
by this category of lenders. The data in Slide 12 validate this conjecture; significantly, the
proportion of households who borrowed for these purposes from institutional sources was far
less than those who borrowed from non-institutional sources. In fact, what may come as a
surprise is how many households actually borrowed from institutional sources for the
purpose of dealing with emergencies! This suggests to me that the capacity to meet these
requirements exists. Again, it comes back to the question of whether the right kinds of
products exist to expand the coverage to households that are currently excluded from access
to credit.
IV. Key messages
I have tried to introduce into the discussion a number of attributes of consumer behaviour
and motivations, which I believe are important inputs into a devising a strategy for
commercially viable financial inclusion. These related broadly to the (i) the sources of
livelihood of the potential consumer segment for financial inclusion (ii) how they spend their
money, particularly on non-regular items (iii) their choices and motivations with respect to
saving and (iv) their motivations for borrowing and their ability to access institutional sources
of finance for their basic requirements. In discussing each of these sets of issues, I spent
some time drawing implications for business strategies by financial service providers. In this
section, I will briefly highlight, at the risk of some repetition, what I consider to be the key
messages of the lecture.
The first message emerges from the preliminary discussion on the current scenario on
financial inclusion, both at the aggregate level and across income categories. The data
suggest that even savings accounts, the most basic financial service, has low penetration
amongst the lowest income households. I want to emphasize that we are not talking about
Below Poverty Line households only; Rs. 50,000 per year in 2007, while perhaps not quite
middle class, was certainly quite far above the official poverty line. The same concerns about
lack of penetration amongst the lowest income group for loans also arise. To reiterate the
question that arises from these data patterns: is this because people can't access banks or
other service providers or because they don't see value in doing so? This question needs to
be addressed if an effective inclusion strategy is to be developed.
The second message is that the process of financial inclusion is going to be incomplete and
inadequate if it is measured only in terms of new accounts being opened and operated. From
the employment and earnings patterns, there emerged a sense that better access to various
kinds of financial services would help to increase the livelihood potential of a number of
occupational categories, which in turn would help reduce the income differentials between
these and more regular, salaried jobs. The fact that a huge proportion of the Indian workforce
is either self-employed or in the casual labour segment suggests the need for products that
will make access to credit easier to the former, while offering opportunities for risk mitigation
and consumption smoothing to the latter.
The third message emerges from the analysis of expenditure patterns is the significance of
infrequent, but quantitatively significant expenditures like ceremonies and medical costs.
Essentially, dealing with these kinds of expenditures requires either low-cost insurance
options, supported by a correspondingly low-cost health care system or a low level
systematic investment plan, which allows even poor households to create enough of a buffer
to deal with these demands as and when they arise. As has already been pointed out, it is
not as though such products are not being offered by domestic financial service providers. It
is really a matter of extending them to make them accessible to a very large number of lower
income households, with a low and possibly uncertain ability to maintain regular
contributions.
The fourth message comes strongly from the motivations to both save and borrow, which, as
one might reasonably expect, significantly overlap with each other. It is striking that the need
to deal with emergencies, both financial and medical, plays such an important role in both
sets of motivations. The latter is, as has been said, amenable to a low-cost, mass insurance
scheme, with the attendant service provision. However, the former, which is a theme that
recurs through the entire discussion on consumer characteristics, certainly suggests that the
need for some kind of income and consumption smoothing product is a significant one in an
effective financial inclusion agenda. This, of course, raises broader questions about the role
of social safety nets, which offer at least some minimum income security and consumption
smoothing. How extensive these mechanisms should be, how much security they should
offer and for how long and how they should be financed are fundamental policy questions
that go beyond the realm of the financial sector. However, to the extent that risk mitigation is
a significant financial need, it must receive the attention of any meaningful financial inclusion
strategy, in a way which provides practical answers to all these three questions.
The fifth and final message is actually the point I began the lecture with. It is the critical
importance of the principle of commercial viability. Every aspect of a financial inclusion
strategy - whether it is the design of products and services or the delivery mechanism -
needs to be viewed in terms of the business opportunity that it offers and not as a deliverable
that has been imposed on the service provider. However, it is also important to emphasize
that commercial viability need not necessarily be viewed in terms of immediate cost and
profitability calculations. Like in many other products, financial services also offer the
prospect of a life-cycle model of marketing. Establishing a relationship with first-time
consumers of financial products and services offers the opportunity to leverage this
relationship into a wider set of financial transactions as at least some of these consumers
move steadily up the income ladder. In fact, in a high growth scenario , a high proportion of
such households are likely to move quite quickly from very basic financial services to more
and more sophisticated ones. In other words, the commercial viability and profitability of a
financial inclusion strategy need not be viewed only from the perspective of immediacy.
There is a viable investment dimension to it as well.
V. Conclusion
The basic premise of this lecture was that we need to take fully into account various
behavioural and motivational attributes of potential consumers for a financial inclusion
strategy to succeed. In this sense, it is no different from any business strategy development
exercise. Where it does differ though, is in terms of significance. There is clearly an
enormous gap when it comes to access to and delivery of financial services. Closing this gap
will contribute to enhanced livelihoods through higher productivity, and an improved ability to
deal with occasional, lumpy expenditures as well as cushioning the impact of financial
emergencies. This is not a matter of a few hundred or a few thousand consumers, but an
issue of hundreds of millions. The social costs and consequences of badly conceived and
executed inclusion strategy could be enormous. We need to bring all relevant knowledge and
experience into the development of the strategy in order to maximize the possibility of it
succeeding. Understanding what the potential consumer needs and why he needs it is one
such knowledge input; indeed, I have tried to argue, a critically important one.
I would like to end by thanking Sastra University for inviting me to deliver this prestigious
lecture, to the management of the City Union Bank for their very generous hospitality during
our visit to Thanjavur and Kumbakonam and to all of you for coming here to listen to the
lecture.
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