Retail banking in India - a move towards the fortune at the bottom of the pyramid?

Abstract

Fifty eight per cent of rural households in India do not have a bank account and only 21% have access to credit from a formal source. The figures clearly show a bias against rural households in terms of financial services available. This is because, traditionally, branch banking in rural India has been a loss-making proposition and existing regulations prevent the entry of agents mobilizing deposits or selling loans. The term microfinance refers to the provision of financial services to low-income clients, including the self-employed. Financial services generally include savings and credit, and some microfinance organizations also provide insurance and payment services. With the emergence of the microfinance movement in the 90’s, a number of Microfinance institutions (MFIs), mostly NGOs have sprung up with the objective of targeting the rural poor. Started as non-profit initiatives, the MFIs are now shifting towards a profit orientation. The sector is thus at an interesting phase of development. One of the major factors which has brought in this vibrancy is the entry of large commercial banks into the rural lending space. In an effort to tap into the fortune at the bottom of the pyramid successfully, banks such as ICICI are investing in cheaper technology that would enable them to broaden their reach profitably as well as innovating in respect to means of distribution channels in rural areas. In this report, we have tried analyze the strategies followed by both commercial banks and microfinance institutions in this sector. We evaluated the various models followed by MFIs using data collected regarding performance of various MFIs in India on the basis of parameters developed by us. Two iterations of such evaluation are shown, the first being subjective did not yield conclusive results which is why the parameters were modified for the second version. We have also analyzed the current scenario of microfinance in India and how this affects the choices for commercial banks. The implication identified for each entity in the microfinance space- name commercial banks, microfinance institutions and regulators has been discussed at the end of the report.