Tag: Financial inclusion

The future of Neobanks in India, BFSI News, ET BFSI

Banking & Finance

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The Indian Financial landscape being vastly different from the developed economies, has resulted in a modest pace of newer technologies absorption. The hurdles were multi-fold i.e. sheer size & scale of market, unique risk and compliance, distinctive consumer behaviour and regulatory challenges, to name a few. Pandemic disruptions came with a silver lining – fast tracking the way forward for tech absorption and digital banking. Covid-19 served as a veritable catalyst, and customers as well as banks began to rapidly embrace digitization, there was no option. Consequently, digital transactions in India surged 30% last year.

According to a KPMG report, Fintech investments in India were $3.5 billion in 2019. Despite the recent ravages, we attracted a whopping $2.7 billion in 2020. More so, RBI governor has already referred to the ready emergence of digital banks in India.

Since there is an unrelenting tailwind for a ‘digital future’ of the banking ecosystem, it is appropriate to peek into the world of Neo Banks.

What are Neobanks?

Neobanks are new age digital banking entities that operate 100% digitally without the traditional brick and mortar branch network. Currently in the nascent stages, Neobanks are growing consistently and have already started to carve a definitive path of their own. The RBI Governor says, a segment of banking entities in future would comprise digital players acting as service providers directly to customers or through banks as their agents or associates.

Neobanks are not licensed RBI banks but they rely on their bank partners for offering bank licensed services. In India, Neobanks will broadly work in two distinct categories: One, working directly as service providers. Example – RazorpayX, Instant Pay & Open. Two, working as online entities of already established banks, for instance SBI YONO & KOTAK’s 811.

Unlike traditional banks which offer a full range of financial products, and leverage their branch network to engage with and to build the trust of customers, Neobanks use new age technologies such as Cloud, Data Analytics to target select customer segments. The focus is on cost reduction and on crunching timelines of customer acquisition: offering seamless and paperless operations, customised products & services, solving for the challenges associated with traditional banking, thus ensuring a unique customer experience. They are more agile and target niche segments such as millennials, SMEs, low salaried, which may not be the main focus of traditional banks.

What do Neobanks offer

Employing new age digital technology i.e. Cloud based storage, Artificial intelligence, Machine Learning and open APIs, Banks, NBFCs & Fintech players are able to offer:

Banking as a Service (BAAS)
Data driven approach for decisioning
Customised products
Bespoke customer experience
Open APIs
Cyber Security as well as protection against Cyber Crime
Swifter turnaround

Banking as a Service (BaaS):

BaaS is an end-to-end encryption model that allows digital banks and third parties to connect via open Application Programming Interfaces (APIs) with banking systems and offer secure open banking solutions for customers. API is an intermediary (software) that allows communication between two applications.

With the help of these APIs, banking services of mainline banks can be used by diverse stakeholders such as Fintech companies, web developers and even non financial businesses. These third parties put up a layer on the top of existing banking services and offer innovative solutions. In other words:

  • Fintech company (neobank) pays to mainline banks to use BaaS
  • Bank which is a BaaS platform opens up its APIs to this third party
  • Fintech company integrates APIs and offer innovative financial services

Thus, a Neobank can bring on board unlimited on-the-click innovations and offers for quicker & smarter decisioning.

Holistic Customer Experience: New age digital banks employ AI and ML to provide more personalized recommendations, offers and products, thereby ensuring a pleasurable & unique customer experience. The decisioning is data-driven. The platform creates cohorts of customers based on their behaviour on the platform and offer unique solutions. They do not rely on one or two data points only.

Practical insights: Customers can access online dashboards to get insights on account & services. For example, your bank’s app could offer a Spend Analyser, a customised app that shares Saving & Investment tips basis your monthly inflows & outflows from the account. The recommendations are customised and personalised uniquely for your profile.

24X7, mobile experience: The services can be accessed round the clock as per customer preferences.

BaaS can strengthen the core of legacy banks

In the normal course of business, large Indian banks (like any gigantic organisation) are too large to bring about a swift change in their operations and procedures. Besides the years of experience in customer segmentation and nurturing long-term relationships with clients, traditional banks own huge data of merchants as well as end-customers. By offering open APIs and BaaS banks can partner with several stakeholders (Fintech as well as non financial partners) and drastically expand their basket of products & services beyond banking & lending and that too, across locations. Besides deposit accounts and lending products, neobanking will also be powered to offer innovative services for payroll management, payment gateway, invoicing, taxation, budgeting, cash management & much more.

Support to Financial Inclusion in India

It may not be profitable for a bank to set up brick & mortar branches in remote villages. However neobanking can offer a complete range of services in far-flung locations. As neobanks employ open APIs and Baas, they have 100% digital solutions. They can offer customised and affordable Saving, Investing and Credit solutions to the unbanked customers in the smallest of villages. A huge boost for financial inclusion.

Flash in the pan or next big thing?

Globally, neobanking is fast disrupting the Fintech landscape, and is expected to raise an estimated $400 bn by 2026. India too is getting its fair share of investments in this sector.

Also, India has currently the highest Fintech adoption rate and annual return on investment in the Fintech start-ups. In the long run, however, the success will largely depend on the level of customer awareness, cyber security, protection from cyber crime, API integration and customer ease & seamless experience.

Looking ahead, a hybrid approach involving both digital and traditional banking is the sweet spot for India, and that indeed is in the best interests of consumer services and financial inclusion.

The blog has been authored by Raj Khaosla, Founder and MD, MyMoneyMantra.com

DISCLAIMER: The views expressed are solely of the author and ETBFSI.com does not necessarily subscribe to it. ETBFSI.com shall not be responsible for any damage caused to any person/organisation directly or indirectly.



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RBI doubles deposit limit of payments banks to ₹2 lakh

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The Reserve Bank of India has doubled the current deposit limit of payments banks to ₹2 lakh.

“With a view to furthering financial inclusion and to expand the ability of payments banks to cater to the growing needs of their customers, the current limit on maximum end of day balance of ₹1 lakh per individual customer is being increased to ₹2 lakh,” RBI Governor Shaktikanta Das said on Wednesday.

Also read: RBI proposes mandatory interoperability of full KYC prepaid instruments

The move is with immediate effect, he further said.

“The extant ‘Guidelines for Licensing of Payments Banks’ issued on November 27, 2014 allow payments banks to hold a maximum balance of ₹1 lakh per individual customer,” noted the Statement on Developmental and Regulatory Policies.

Based on a review of performance of payments banks and with a view to encourage their efforts for financial inclusion and to expand their ability to cater to the needs of their customers, including MSMEs, small traders and merchants, it has been decided to enhance the limit of maximum balance at end of the day from ₹1 lakh to ₹2 lakh per individual customer, it further said, adding that a circular in this regard shall be issued separately.

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Customers stand to gain as private banks can now take up govt business

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Surabhi

The lifting of the embargo on granting government business to private banks will not only enable them get a greater share of government business, but will also benefit their customers, say experts.

“Customers of new private sector banks will be very happy, there will be a marginal change for old private banks and public sector banks may lose some ground,” said a former banker.

At present, apart from public sector banks, only a few large private sector banks are allowed to do government business.

Now, all private banks will be able to take up activities such as small savings schemes such as public provident fund and Sukanya Samriddhi accounts, and tax payments and pension payments, among other initiatives.

Customers with existing accounts in a private bank will not have to approach a public sector bank for these activities.

“It will be a gain to the customer as well as to the bank. Apart from the three large private sector banks, other private banks can also now serve customers for services such as tax payments, pensions and small saving scheme,” said Prashant Kumar, Managing Director and CEO, YES Bank, adding that private banks can also offer solutions to the government for payment of subsidies and direct benefit transfers through their strong focus on technology.

Tech advantage

Most private bankers believe that in terms of technology, they are much better positioned to serve customers.

Uday Kotak, Managing Director and CEO, Kotak Mahindra Bank, in a tweet said: “It will enable the banking sector to serve customers better. Private and public sector must both work towards sustainable development of India.”

Private banks are also hopeful of higher fee income and float from doing government business.

“Fee income will be a direct advantage to private banks as they will get commission for doing government business. Public sector banks will lose ground on this,” noted a former banker.

Meanwhile, float or the amount parked with banks by customers, is being seen as another big positive by private banks. Government business brings in float money to public sector banks, some of which will now be routed to private banks.

“The float and fee income that can be garnered on tax collections (₹11 trillion budgeted for 2021-22), duties, GST collections (₹11 trillion), payment facilities, Central/state pension plans (₹2 trilion), small savings schemes (₹13 trillion) can add significant delta to revenues,” said a note by ICICI Securities.

Unions unhappy

However, bank unions point out that public sector banks have been at the forefront of opening Jan Dhan accounts, financial inclusion through branch opening in rural areas, as well as giving out Mudra loans while private banks have lagged behind.

“The government is trying to bring a level-playing filed with a different set of guidelines for private banks. They should create the same rules for them and bring them under the ambit of CVC and other regulatory guidelines,” said Soumya Datta, General Secretary, All India Bank Officers’ Confederation.

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Kinara Capital get $10 mn funding from IndusInd Bank; also 100% guarantee from US Int’l DFC

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Kinara Capital on Monday announced securing $10 million from IndusInd Bank with a 100 per cent guarantee from the US International Development Finance Corporation (DFC).

“This is part of a debt and equity round of ₹100 crore, with equity contributions coming from Kinara’s existing investors — Gaja Capital, GAWA Capital, Michael & Susan Dell Foundation (MSDF) and Patamar Capital,” it said in a statement.

The investment will be used by Kinara Capital towards the expansion of MSME financial inclusion across manufacturing, trading, and services sectors in India.

The fintech is focussed on financial inclusion and has disbursed ₹2,000 crore across over 56,000 collateral-free small business loans.

“The special $10-million investment for onward lending to small business entrepreneurs will be deployed over five years from IndusInd Bank’s Impact Investing division with full backing from DFC,” it further said.

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Kinara Capital gets $10 mn from IndusInd Bank to further MSME financial inclusion, BFSI News, ET BFSI

Personal Finance

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Kinara Capital has secured $10 million (Rs 74 crore) from IndusInd Bank with a 100% guaranty from the U.S. International Development Finance Corporation (DFC). This investment to be utilised towards the expansion of MSME financial inclusion across manufacturing, trading, and services sectors in India.

“Our partnership with IndusInd and DFC underscores our shared commitment to ease the credit hurdle faced by most small business entrepreneurs in India. MSMEs galvanise India’s economy with income generation and job creation and there is an ever increasing demand for financing for businesses to rebuild and grow this year. This investment from IndusInd Bank and DFC will accelerate financial inclusion of small businesses, thereby invigorating local economies,” said Hardika Shah, Founder & CEO, Kinara Capital.

The total amount of $10 million investment for onward lending to small business entrepreneurs will be deployed over five years from IndusInd Bank’s Impact Investing division. This three-way partnership between Kinara Capital, IndusInd Bank and DFC unites the organisations’ shared goals to promote entrepreneurship, financial inclusion and job creation.

“We are glad to have associated with DFC to support a strong impact creating entity, Kinara Capital, in their growth trajectory. The guaranty from DFC eliminates foreign exchange rate fluctuation risk from the balance sheet of Kinara and it has become an important tool to mobilise debt funding for impact space companies,” said Roopa Satish, Head, Corporate & Investment Banking, CSR & Sustainable Banking, IndusInd Bank.

“Commitment towards financial inclusion from Kinara Capital has made it possible for us to collaboratively help India’s small business entrepreneurs. We are motivated by the high potential and the high prospects of the diverse MSME sector in India and proud to partner with both IndusInd and Kinara Capital,” said Loren Rodwin, Managing Director, Social Enterprise Finance Team, Office of Development Credit at U.S. International Development Finance Corporation (DFC).



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Technology Driven Financial Inclusion as a key to unlock the vision of Aatmanirbhar Bharat, BFSI News, ET BFSI

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While the world is grappling with its set of challenges, India has continued to face headwinds due to subdued private consumption and liquidity crisis which has gotten severe with the continued economic slowdown and the COVID-19 outbreak. The lockdown has had a profound impact on the lives of millions of vulnerable people. Yet, India has demonstrated how it rises to challenges and uncovers opportunities therein. Instead of succumbing to these unprecedented times, India aims to resurge the economy by becoming a self-reliant, Aatmanirbhar Bharat. The idea is not to cut off from the rest of the world, but instead to adopt an integrated approach to empower its citizens who are at the receiving end of this crisis, who have a dream but do not have the means to turn their aspiration into reality. This kind of self-reliance is only possible if we can reach out to every single individual in every section of the society.

An idea is only as good as its execution. The ability to get on and do it, is what sets changemakers apart from the rest. Over the years, the government has made several strides, the Pradhan Mantri Jan Dhan Yojana (PMJDY), is said to be one of the biggest financial inclusion initiatives in the world. The scheme ensures access to a range of financial services like availability of basic savings bank account, access to need based credit, remittances facility, insurance, and pension. Sukanya SamriddhiYojna, Rashtriya SwasthyaBima Yojana (RSBY), Prashan Mantri Mudra Yojana, Pradhan Mantri Jeevan Jyoti Bima Yojana (PMJJBY), Atal Pension Yojana, Stand Up India scheme are few of the initiatives that have given an impetus to this vision. With technology at the helm of these initiatives, the government made sure it provided the necessary digital infrastructure to drive this change in the form of Aadhar enabled payment scheme (AePS), PAYGOV India, Bharat Interface for Money (BHIM), Bharat Bills Payment Interface (BBPS), Immediate Payment Service (IMPS), BHIM Aadhaar to name a few.

The government has taken several measures in the context of COVID- 19 to ease the stress of the financial sector by injecting funds into the system. These measures have ensured unhindered credit outflow from financial institutions. But to set the vision in motion, financial institutions need to be driven by the cardinal purpose of delivering financial inclusion that ignites transformative changes and improves the situation for the financially excluded households at the bottom of the pyramid who are often beyond the reach of the ambit of mainstream financial providers.

By moving the needle beyond traditional methods of consumer finance and microcredit, banks and NBFCs can provide solutions to the vast underserved populations across the length and breadth of India and help societies towards attainable financial inclusion. Companies are now harnessing technology to reinvent traditional business models and offer faster, cheaper, and convenient financial products and services. The combination of IT and mobile technology combined with IT enabled services has emerged as a viable solution for financial inclusion with the lack of physical presence of these institutions and stringent social distancing norms in place.

Here are few initiatives undertaken by institutions, that will go a long way in spearheading financial inclusion in the post COVID-19 world and in making the country an Aatmanirbhar Bharat

Digital Lending

Earlier most of the loan disbursement and collections of microfinance loans was done on a cash basis at the branches. With the fear of contraction and stringent lockdown measures, branch operations were severely impacted. With mobile banking platforms and real-time data, some established digital lenders quickly responded to the liquidity needs of individuals as well as SMEs affected by COVID-19 related lockdowns and containment measures. The user friendly and scalable platforms have helped in ensuring continued access to financial services, by maintaining credit flows to households and businesses while keeping people safe. Digitization of loan application processes has enabled borrowers to apply for loans remotely, which is going to prove to be a key driver in the post pandemic world.

Every coin has two sides to it. While there are numerous benefits of digitalization, there also lies a risk associated with the same. Unauthorized dubious online platforms often get away by charging unaware customers an exorbitant rate of interest, later using unfair tactics to recover the loan amount. One should avoid sharing KYC documents to predatory lenders and refuse to sign any agreement of loan with an entity who is not registered with the RBI. The onus lies on the financial community to encourage financial literacy to help the end consumer make informed choices. An Aatmanirbhar Bharat can only be built with a well informed and responsible approach.

Adoption of New Age Technologies

With the growing economic impact of COVID-19, there will be an increase in the need for affordable and personalized financial assistance as well as an upward spiral of bad loans. The nature of risk is no longer estimated by just the credit history. While tradition risk profiling predicts the likelihood of repayment on the loan based on past track record, the financials of the borrower combined with the nature of the industry that the borrower operates in is very important in the present scenario. Psychometric personality test can shed light on hidden personality and behavioral traits including value and belief system of the borrower. Artificial intelligence (AI), machine learning (ML), and big data analytics has made it possible for fintech lenders to collect and analyze the data to carry out a more comprehensive and accurate credit risk profiling. With the introduction of initiatives like video KYC, Aadhar-based KYC, account aggregators, lenders can easily access customer data, with their consent, and ensure better due diligence. It helps to understand potential credit risks and make faster credit decisions, even in the absence of traditional credit history. Data can also be used to offer more customized credit solutions best suited to the borrower’s needs.

Digital Payment

Digital payment is the most common instrument of financial inclusion and has witnessed a rise in the past few months due to COVID-19 with UPI growing by leaps and bounds. UPI – a real-time unified payment interface developed by the National Payments Corporation of India (NPCI) that facilitates inter-bank transactions has made digital transactions easy and instantaneous. It helps users to transfer, receive, and save money on payments bank platforms, which are simplified banks designed to reach customers via mobile phones using a virtual ID. With fear of contraction plaguing the minds of citizens, India has embraced the digital wave exponentially. Google Pay, BHIM, Paytm, PhonePe has been ruling the market with their on the go fast and reliable services.

Digital Financial Literacy Workshop

With technology evolving by leaps and bounds, it is imperative for financial institution to not just make it available, but also hand hold individuals and SMEs by training them to use the platform effectively to their advantage. The government’s DigiDhan Mela’s across the country aims to handhold users in downloading, installing and using various digital payment systems for carrying out digital transactions.

With digital platforms and applications taking precedence now more than ever, even financial institutions across India are organizing financial literacy workshops which are further fueling the widespread adoption. IT enabled kiosks, village screenings, financial counselling sessions, skill development workshops are few means of empowering and enhancing the lives of India’s hinterland.

Thus, with technology and connectivity taking centerstage, the robust digital finance ecosystem is transforming India into an Aatmanirbhar Bharat by being drivers and enablers of financial inclusion.

The blog has been authored by HP Singh, Chairman & MD, Satin Creditcare Network Limited

DISCLAIMER: The views expressed are solely of the author and ETBFSI.com does not necessarily subscribe to it. ETBFSI.com shall not be responsible for any damage caused to any person/organisation directly or indirectly.



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Embedding a gender focus across financial inclusion efforts in the Indian banking sector remains crucial, BFSI News, ET BFSI

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Over the past six years, India has made significant strides in widening the scale and impact of its financial inclusion efforts. Owing to the Government of India’s initiative to provide a bank account to every household, under the Pradhan Mantri Jan Dhan Yojana (PMJDY),an estimated 80% of Indians presently own a bank account .

But while ownership of Jan Dhan accounts improved remarkably (from 35% in 2011 to 80% in 2017), usage of these accounts continues to remain low. To increase engagement with Jan Dhan’s vast customer base, banks must focus on increasing awareness, reaching out to them via relevant communication and distribution channels, but most importantly, they must acknowledge the potential of women customers as the key lever to household financial empowerment and prosperity.

Low-income women customers are among the most important segment as they form a majority (nearly 55%) of the entire Jan Dhan portfolio . But according to Findex 2017only 33%of women actively use their accounts. This is also because many financial products simply don’t work for women. In the absence of disaggregated data, institutions don’t often realize that women have unique needs and gender neutral policies may be limited in providing solutions tailored to their needs.

Relooking at the financial inclusion agenda with a gender lens has the power to accelerate India’s banking sector’s efforts towards the objective. Data proves that when products are created with women’s specific needs in mind, men are just as or even more interested .Data also shows that any inclusion effort that focuses on women results in better conditions for children, household nutrition, and for the larger community . Women’s increased control over household finances leads to more investment in children and has a positive impact on economic growth. Overall, full, and sustainable financial inclusion of women could have a great impact on the reduction of both poverty and income inequality levels.

How banks can embed a gender focus across financial inclusion efforts

To start with, India’s banking sector needs to understand the unique needs and preferences of its Jan Dhan women customers and design for them. To engage women, banks need to understand their barriers and provide women reasons to proactively engage with the bank. For example, women regularly save small amounts of money, but use informal methods due to habit and convenience. Similarly, a pilot with a large public sector bank found that the promise of an overdraft (linked to small frequent savings) acted as a strong motivator to nudge this behaviour change .

But to understand these differences, it is important for financial service providers to collect and act on sex-disaggregated data in order to understand women customers, and their unique needs, better. Going a step further, regulators can play a crucial role by encouraging, or if needed mandating, sex-disaggregated data collection and usage by FSPs and policymakers.

Secondly, it is important to develop an outreach strategy for the Jan Dhan women customer base that increases their awareness of account benefits and welcomes her. Women customers need to understand how using their Jan Dhan account can benefit them; they need to see the value in changing their established habits of using informal banking methods. Women also find banks unfamiliar and perceive them not be relevant for their small savings. Awareness of savings benefits, low cost micro-insurance, access to overdraft, etc.in the Jan Dhan account is also low among women customers. One of the biggest challenges for the banking sector is to be able to reach women customers directly and through usage of alternate channels. This makes SMS, WhatsApp videos, word of mouth, local community influencers even more important. A sector wide awareness drive supported by government could go a long way in addressing these awareness gaps and provide a boost to financial inclusion.

Finally, India’s banking sector needs to nurture Banking Correspondents as strategic channel partners to deepen the engagement with the Jan Dhan customer base–especially with women. Women prefer transacting at local Banking Correspondent (BC) points because of either proximity or because they trust them .Furthermore, women BCs are natural relationship managers and are better able to deepen banking engagement. In addition, even though 55% of the customer base is female, less than 10% of BCs are women. Banks need to transform this last mile channel into relationship managers who can nudge customers to start small savings in their accounts and cross-sell products that address their needs. Creating a cadre of women banking correspondents will help banks deepen customer engagement beyond transactions and improve the engagement rates of their women customer base.

The road ahead

The Government of India is steadily leading the way for banks to address financial inclusion with a deliberate gender focus. In a revolutionary move announced in March 2020,itundertook a Direct Benefit Transfer (DBT) of INR 500 per month for three months (April2020 to June 2020) targeting women customers under the Pradhan Mantri Garib Kalyan Yojana. The objective of the government was to bolster financial security to the most vulnerable sections of Indian society – low-income women – as payments to women customers further ensures that the money is used for basic household needs5.

As we enter 2021, there is tremendous opportunity for banks to take these efforts beyond mere government cash benefits and embed a gender specific approach to address the needs of the 225 million women Jan Dhan customer base. Building women’s leadership in regulatory organizations is equally important to ensure representation for the cause at senior level and enable a favourable environment at the intersection of leadership development and women’s financial inclusion.

Pallavi Madhok, Senior Solutions Specialist and Ajit Agarwal, Product Manager, Advisory Services at Women’s World Banking)

(The blog has been authored by Pallavi Madhok, Senior Solutions Specialist and Ajit Agarwal, Product Manager, Advisory Services at Women’s World Banking)

DISCLAIMER: The views expressed are solely of the author and ETBFSI.com does not necessarily subscribe to it. ETBFSI.com shall not be responsible for any damage caused to any person/organisation directly or indirectly.



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