Pay­ments and small fi­nance banks are carv­ing out dif­fer­en­ti­ated strate­gies for reach­ing out to the fi­nan­cially un­der­served.

Business Today - - CONTENTS - By E. Ku­mar Sharma

Pay­ments and small fi­nance banks are carv­ing out dif­fer­en­ti­ated strate­gies for reach­ing out to the fi­nan­cially un­der­served.

The con­trast is stark. Tech-savvy con­sumers of fi­nan­cial ser­vices are spoilt for choice. Pa­per­less on­board­ing of cus­tomers with Aad­haar-linked KYC to dig­i­tal money trans­fer are par for the course. This was un­think­able till a few years ago. So were in­ven­tions such as bots and ar­ti­fi­cial in­tel­li­gence tak­ing over cus­tomer ser­vices. How­ever, peo­ple in re­mote ar­eas do not get even ba­sic ser­vices, mainly be­cause banks find serv­ing them un­prof­itable.

To re­duce the gap, the Re­serve Bank of In­dia, or RBI, has al­lowed two new cat­e­gories of banks — pay­ments banks and small fi­nance banks or SFBs. The idea is to build small and nim­ble in­sti­tu­tions that can of­fer ser­vices in the coun­try's re­motest parts, ur­ban pock­ets where the econ­omy is in­for­mal, and even to sec­tions of in­dus­try, such as small and medium en­ter­prises, or SMEs, which find it dif­fi­cult to ac­cess bank­ing ser­vices. Twelve such in­sti­tu­tions — four pay­ments banks and eight SFBs — have al­ready started op­er­a­tions. Some oth­ers are on the way.

Can th­ese drive the rev­o­lu­tion for which they were con­ceived? It is dif­fi­cult to say, but one thing is clear. Change is in the air, as th­ese in­sti­tu­tions, though small yet, use di­verse ways to meet their tar­gets. Big-time in­no­va­tion in In­dia’s fi­nan­cial sec­tor is still an evolv­ing story.


Rishi Gupta, MD and CEO of Fino Pay­ments Bank, says they are rid­ing DTP (Dis­tri­bu­tion, Tech­nol­ogy and Part­ner­ships) and KPI (Knowl­edge, Prod­ucts and In­fra­struc­ture) to reach their goals. “Fino Pay­ments Bank wants to be­come the one-stop shop for bank­ing needs of all the peo­ple who earn be­tween 1.5 lakh and 6 lakh per an­num with multi-prod­uct and multi-lo­ca­tion of­fer­ings.” This mass mar­ket, a key tar­get for the bank, will be served by what seems like a fee­ton-the-street model. “Our em­ploy­ees are more out­side the branches than in­side.” Door-step bank­ing is one of the major strengths of the bank. He is clear about his key cus­tomers: “Elec­tri­cians, plum­bers, driv­ers, small shop own­ers, sales staff in stores, first-time ac­count hold­ers or any­one from a low in­come house­hold.”

Fino has tied up with en­ti­ties such as Bharat Petroleum Cor­po­ra­tion to reach out to those in the higher in­come seg­ment. For those at the bot­tom of the pyra­mid, it has part­nered with banks. “Since pay­ments banks are not al­lowed to lend di­rectly, we can of­fer lend­ing on be­half of part­ners… third-party prod­ucts. Fino Pay­ments Bank will, there­fore, part­ner will banks as their busi­ness cor­re­spon­dent (BC) and of­fer lend­ing as a ser­vice for a fee.” The part­ners in­clude ICICI Bank, ICICI Lom­bard (for gen­eral in­sur­ance) and ICICI Pru­den­tial (for life in­sur­ance), and Ex­ide Life.


Air­tel Pay­ments Bank, which calls it­self the first pay­ments bank in the coun­try and also the first to in­te­grate with UPI (Uni­fied Pay­ments In­ter­face) — an in­dige­nously de­vel­oped low-cost plat­form for in­ter-bank trans­ac­tions — went live on Jan­uary 12 this year. The neigh­bour­hood bank of­fers a range of at­trac­tions. “We have put a cou­ple of things in our pack­age to at­tract cus­tomers. One is the in­ter­est rate of 7.25 per cent along with a free 1 lakh per­sonal ac­ci­dent in­sur­ance to ev­ery cus­tomer who opens an ac­count with us,” says MD and CEO Shashi Arora; he is quick to add that this in­ter­est rate is not cast in stone and could change as per mar­ket con­di­tions. “Th­ese are ways of get­ting cus­tomers hooked on to a new way of bank­ing be­cause there are sev­eral con­straints that we work un­der. For ex­am­ple, you can­not keep more than 1 lakh in a bank like ours. There­fore, we have to give cus­tomers a holis­tic pack­age.” Air­tel has also adopted the part­ner­ship route and tied up with Hin­dus­tan Petroleum Cor­po­ra­tion, en­abling its cus­tomers to make dig­i­tal pay­ments at the lat­ter’s fuel sta­tions. The pay­ments space is ex­pected to see a lot of ac­tion, es­pe­cially with gi­ants such as Paytm also in the fray. Asked where it stands in the pay­ments space, a Paytm spokesper­son says: “Paytm Pay­ments Bank’s USP is go­ing to be a seam­less mo­bile-first dig­i­tal bank­ing ex­pe­ri­ence com­bined with the trust as­so­ci­ated with the Paytm brand. We will go deeper into smaller cities and towns and help hun­dreds of mil­lions of un­der­served and un­served con­sumers ac­cess es­sen­tial bank­ing ser­vices.” “We have a mas­sive set of users who has ex­pe­ri­enced the power of con­ve­nient dig­i­tal pay­ments through Paytm, and a sig­nif­i­cant num­ber of them are

"My prod­ucts are tai­lor-made. We do not look for large cor­po­rate loans and fo­cus on MSME and af­ford­able hous­ing loans"

sign­ing up for bank ac­counts with us.” On the 4 per cent in­ter­est rate it of­fers on de­posits, she says: “We be­lieve the yearly in­ter­est rate is only one among the set of fac­tors cus­tomers con­sider while sign­ing up for a bank ac­count.”


Pay­ments Banks can­not lend. But SFBs can op­er­ate like a com­mer­cial bank, al­beit with some re­stric­tions. They need to en­sure that 75 per cent funds are used for pri­or­ity sec­tor lend­ing (as against 40 per cent for sched­uled com­mer­cial banks). Plus, half their port­fo­lio has to com­prise loans of less than 25 lakh.

“Both Pay­ments Banks and SFBs are fo­cus­ing on their strengths,” says S. Viswanatha Prasad, Man­ag­ing Di­rec­tor, Caspian Ad­vis­ers, an im­pact in­vestor with over 1,000 crore un­der man­age­ment and an early in­vestor in three small fi­nance banks — Equitas, Ujji­van and Janalak­shmi. He says while “the ser­vice that Pay­ments Banks of­fer on sav­ings and wal­let or re­mit­tance side is valu­able, suc­cess will de­pend on their abil­ity to reach scale with cus­tomers in tens of mil­lions and that is still to be tested.” This is be­cause a big chunk of rev­enue has to come not from in­ter­est in­come but pay­ments and trans­ac­tions.

Prasad sees SFBs as a tested model like a bank with less un­cer­tainty than pay­ments banks where, he says, there may be chal­lenges around prod­uct ac­cep­tance and change in money-han­dling habits. “Some SFBs may emerge as re­gion­ally fo­cused spe­cial­ists while oth­ers with a larger national pres­ence may of­fer di­verse prod­ucts fo­cused on mid­dle and lower-end cus­tomers.” Among those lever­ag­ing strengths in se­lect re­gions are Utkarsh in North, RGVN in North East and ESAF in Ker­ala. The list of play­ers with a national pres­ence in­cludes Ujji­van and Equitas.

“My prod­ucts are tai­lor-made to lo­cal needs. For in­stance, we do not look for large cor­po­rate loans. In­stead, we fo­cus on MSME and af­ford­able hous­ing loans and will, go­ing for­ward, look at agri­cul­ture loans. Here, my fo­cus is more on semi-ur­ban, ur­ban and ru­ral ar­eas,” says Govind Singh, MD and CEO of Utkarsh Small Fi­nance Bank, fo­cused on East­ern Ut­tar Pradesh, Bi­har and Jharkhand. “Take weavers of the Varanasi, Mirza­pur and Bhadohi belt. Our prod­ucts and pro­cesses are tai­lor-made to their needs. For in­stance, loan pro­cess­ing is done with least doc­u­men­ta­tion by re­ly­ing on in­for­mal in­for­ma­tion gath­ered about the clients.” Mi­cro­fi­nance dominates but it’s chang­ing. “Over time, we see the share of mi­cro­fi­nance loans fall­ing but grow­ing in ab­so­lute terms at 20-25 per cent year-on-year. At present, it is 93 per cent. In the next five to six years, it will come down to 50-60 per cent as the share of MSME, af­ford­able hous­ing and other loans grows.”


Chen­nai-head­quar­tered Equitas SFB has built a model be­yond mi­cro­fi­nance. “In 2011, we had taken a de­ci­sion to di­ver­sify our prod­uct range. By 2016, mi­cro­fi­nance was down to 50 per cent of to­tal loans (as against 100 per cent ear­lier). The bal­ance was di­vided be­tween SME and com­mer­cial ve­hi­cle fi­nance. By March 2017, the share of mi­cro­fi­nance was down to 45 per cent. We ex­pect it to get to around 30 per cent by March 2018,” says P.N. Va­sude­van, who spent sev­eral years in the mi­crolend­ing space as founder of Equitas and is to­day the man­ag­ing di­rec­tor and CEO of Equitas Small Fi­nance Bank, which started op­er­a­tions in Septem­ber 2016.

“Once we be­came a bank, we grew SME and com­mer­cial ve­hi­cle fi­nance and added new prod­ucts such as work­ing cap­i­tal loans, busi­ness loans, gold loans and agri­cul­ture loans. The trac­tion for th­ese has been en­cour­ag­ing. By March 2018, we ex­pect non-mi­cro­fi­nance prod­ucts to con­trib­ute about 70 per cent of the port­fo­lio.” In terms of port­fo­lio con­cen­tra­tion, for Equitas, South is more than 50 per cent; the bal­ance comes from West and North.

Ujji­van Small Fi­nance Bank is fairly spread out and sees this as a great ad­van­tage. Samit Ghosh, MD and CEO, is clear about where the bank is headed. “The ob­jec­tive is to be­come a national high-tech mass mar­ket bank in five years.”

The fi­nan­cial ser­vices mar­ket is chang­ing, and chang­ing fast.

SHASHI ARORA MD & CEO, Air­tel Pay­ments Bank "You can­not keep more than ` 1 lakh in a bank like ours. There­fore, we have to give cus­tomers a holis­tic pack­age."

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