Last week I wrote about how major retailers and consumer product companies were opening up employment opportunities across a large swathe of urban and semi-urban India without emphasis on education and technical skills. Kishore Biyani, India’s high-profile retailer told us that while 25-30% of the population is his potential customer base, a massive 40-45% will provide support and services to push the retail consumer boom.
More interestingly, 92% of Biyani’s workforce has an education level of just 10+2. The worry is about the remaining 35-40% of India that does not fit into this grand scheme of economic development and wealth creation.
The good news in this regard comes from ICICI Bank. After a two-year effort, K.V. Kamath, CEO of India’s second-largest and most aggressive bank, is confident that he can successfully take a new model of banking to rural India and grow it into a unique business model.
ICICI Bank, as everyone would agree, is a hard-nosed enterprise, clearly focussed on its bottomline. It is unlikely to turn sentimental over rural development, unless it can be made commercially viable; at the same time Kamath is candid that necessity is an important trigger for the bank’s rural effort.
India’s organised sector is no longer dependent on bank loans. Large companies are well able to fund business needs through internal accruals, equity and low-cost external borrowing. Banks do provide a wide variety of services, but margins are thin and rates are commoditised. Only consumer financing, especially mortgages still provide ‘‘the bread, butter and jam’’.
At the same time, banks have to direct 18% of their lending to agriculture. So it made sense to explore the potential of rural lending. Two years ago, ICICI Bank began to explore the potential of this market, not in terms of jostling to provide crop loans to farmers, but through ‘‘product innovation’’ and ‘‘customer clarification’’.
Kamath’s hypothesis is that rising urban incomes will also stimulate rural aspirations; and ‘‘as rural aspirations grow, it will be important to meet them by helping to create rural wealth’’. One way was to finance business activity at the rural level. But the big challenge is to manage costs. Indian banks, on an average, operate at a tenth the cost and ticket size (for loans) of foreign banks.
Rural markets, says Kamath, would be viable only if costs were further shrunk to a fourth of normal banking costs even in India. This would be impossible through the conventional banking network.
ICICI’s challenge was to find affordable technology and new delivery mechanisms for appraisal, lending and recovering tiny loans of Rs 15,000 to Rs 20,000 each. Creating these structures meant getting past social and infrastructure bottlenecks such as illiteracy, lack of electricity and telecom connectivity. So a solar-powered ATM, operating on wireless technology which uses biometric identification instead of the standard PIN cards was one answer.
However, ICICI Bank is more likely to pursue a better and lower cost alternative more aggressively in the form of point-of-sale terminal attached to the local bania store. This involves the same biometric identification, but since the bania uses and deposits cash extensively, it will marry his financing needs with that of the bank customer.
The challenge is to build these systems at extremely low costs. Fortunately, says Kamath, ‘‘Big name hardware and software companies are seeing the rural market as a huge opportunity’’. And they have put in a great effort to develop low-cost solutions. The business potential is huge: it is common knowledge that unorganised enterprises and rural folk pay usurious interest rates to money lenders. Also, in the absence of funding for value addition, there is large-scale wastage especially in the process of getting agri-produce from farms to markets.
Once the basic structure is in place, the business possibilities keep growing and these would open the doors to a slew of businesses for the ICICI Group. For instance, its test market exercise has successfully offered low premia life and accident insurance.
Another effort, says Kamath, was to explore ‘‘How much can you take price discovery to the farmer’’. This led to possibilities such as actually posting prices with the help of the commodity exchanges; providing warehousing facilities and bridge finance to allow farmers to time the market correctly and even offering weather insurance to secure them.
While the potential for rural financing is indisputable, the key is to get the delivery mechanism right. ICICI is already working through thousands of Self-Help Groups (SHGs), micro-credit institutions and large companies with strong rural markets or linkages (seeds, fertilizers, tea plantations, tractor companies and so on) to be able to lend safely. But barring the last mentioned, the challenge will be to get these groups and credit institutions to operate professionally.
So far, ICICI seems to have had a happy experience with SHGs and the Reserve Bank of India is also keen on encouraging micro finance as a delivery mechanism. But to scale it up to the level of 18,000 to 20,000 credit outlets that will be required for a viable business, ICICI needs to ensure that the credit delivery institutions use robust technology, software and processes and accountability is ensured. Kamath admits that there are some constraints and the need for an institutional building mechanism as also appropriate supervision.
‘‘Slowly, we will have to link the credit rating bureau to this effort’’, says he. Building individual credit histories will allow good borrowers to expand even faster. ICICI’s rural foray is serious business; Kamath sees it as the fourth horizon of the bank’s growth. Once a low-cost model, that works through Self Help Groups is successfully established, this can work equally well for the urban poor, or unorganised businesses (small-time plumbers, carpenters, vendors, hawkers, painters, domestic helpers and more) and workers who currently shut out by the banking system.
ICICI’s CEO is acutely aware that this is a revolutionary effort where ultimate success would often require a quick course correction or modification and some mistakes. At the same time, ICICI’s success in this endeavour has the potential to transform and empower rural and backward parts of India.