Digital consumer credit in India – time to take a close look
By Monami Dasgupta and Misha Sharma, Dvara Research
Financial inclusion is defined as “the process of ensuring access to appropriate financial products and services needed by all sections of the society in general and vulnerable groups such as weaker sections and low-income groups in particular at an affordable cost in a fair and transparent manner by mainstream institutional players” (RBI, 2016)[1]. Comprehensive financial inclusion, therefore, involves both meaningful access[2] to and use of, a range of financial products and services to meet basic financial needs such as managing risks, smoothening consumption and creating wealth over a lifecycle. Although financial inclusion policies in India are designed for universal relevance and application, studies[3] show that rural households in India do not yet have meaningful access to a suite of financial products and services. The lack of suitable access to and use of a suite of financial products and services reflects the lack of diversity in financial portfolios and a greater reliance on informal mechanisms of finance. This problem is more acute for rural households/individuals compared to urban households/individuals.
While challenges remain, India has come a long way in accelerating inclusive finance through targeted programs across a range of products in the last ten years. However, these supply-led policies have often been critiqued with failing to account for individuals’ financial requirements, their circumstances and their demand for these products and services. To corroborate our understanding of the progress of financial inclusion in Tamil Nadu, we conducted a short primary survey in the form of focus group discussions in remote rural villages of Tamil Nadu[4]. The survey was conducted with the objective of understanding the challenges faced in accessing and using formal financial services among the survey respondents[5] as well as their aspirations and the role of finance in meeting those aspirations. The survey responses revealed a host of insights on the challenges faced by rural individuals/households in accessing and using banking services, gaps in products and services offered by formal financial market due to which households often rely on informal channels of finance, such as moneylender or pawnbrokers (in the case of loans) or chit funds (in the case of savings) and other informal arrangements. They also shared perspectives on the inefficiencies in the process of delivery of these services due to lack of infrastructure and insufficient distribution channel/network. Below, we further elaborate on these challenges.
Challenges in accessing and using banking services
Respondents articulated several barriers to accessing banking services. Distance from bank branches leading to high transaction and opportunity cost[6] was the key deterrent in active use of banking infrastructure. Other factors such as poor customer service in the form of delay in servicing requests and onerous documentation and Know Your Customer (KYC) norms were also factors cited by the respondents as challenges with using banking services. Another crucial insight that emerged from our conversation pertained to survey respondents feeling intimidated in visiting a bank, due to the attitude and unfriendly nature of bank officials, posing a significant psychological cost to them. This is worth highlighting, as, often the issue of poor customer service does not feature in the mainstream conversation around challenges in inclusive finance. Finally, given the socio-economic characteristics of rural households and the lack of infrastructure in rural areas, respondents also highlighted the need for bank-related documents in local language for ease of readability, power back up at bank branches given the frequent power outages in rural areas, availability of restrooms for customers and conveniently located bank branches and ATMs with adequate stock of cash.
Gaps in formal financial products and services
Conversations with respondents revealed a host of gaps around the lack of customised financial products and services offered by the formal financial services industry.
Firstly, with regard to savings account, several respondents articulated auto-debit of penalty charges on ‘no-frills’ account. Conversations revealed instances of mis-selling of such accounts wherein, banking officials sold these accounts as a ‘zero-balance’ account, but failure to maintain minimum balance led to penalty charges. This corroborates the often-cited factor of lack of trust in formal financial services by rural, low-income population due to instances of breach in consumer protection.
Secondly, with regard to loan products, respondents acknowledged a wide variety of loans being available and offered by formal financial service providers. Of these, gold loans emerged as the most popular and preferred form of loan, due to (i) the quick turn-around time to process the loan, considered important especially when funds were raised to cope with shocks and smooth consumption and (ii) affordable interest rate compared to the interest rate on other types of loans. However, respondents cited several challenges with borrowing from formal sources of finance, primarily, onerous documentation and paperwork[7] to file a loan application, lack of flexible repayment scheduled (given the volatility in incomes of this customer segment), lengthy processing time (in some sense defeating the purpose for acquiring loans, if funds were being raised to cope with emergency expenses), low sanctioned amounts, poor treatment of low net-worth customers and unavailability of unsecured loans (aside from JLG loans). These challenges highlight the acute need for greater product and process innovation in meeting the credit requirements of the rural population, without which households are forced to rely on informal sources of finance. This also corroborates with the finding on lack of credit availability in rural areas, highlighted in the previous section.
Thirdly, with regard to savings and investment products such as fixed deposit, recurring deposit and post office savings schemes, the conversations revealed that the overall uptake of these products was low (below 10% in our respondent group), while the uptake of risky financial instruments such as investment in shares and mutual funds was completely missing from this segment of the population. However, it was interesting to note that almost all respondents reported saving regularly through chit funds (informal group-based saving scheme) with contributions ranging from as low as Rs. 200 to as high as Rs. 8000. Primary reasons cited for active use of chit funds was familiarity with chit fund- group members and liquidity, i.e., the flexibility to withdraw anytime, if a member, so wishes. Chit funds was also reported to be used widely for short-term and long-term goals such as children’s education and marriage. This finding highlights the lack of availability of customised savings products that can adequately meet the financial requirement and circumstances of the rural population. However, at the same time, it presents a strong case for a business opportunity for financial service providers to meet this latent demand, based on product features that suit the unique requirement of this segment.
Finally, the uptake of insurance and retirement products among the surveyed respondents was negligible. However, some respondents reported enrolling into an investment-linked insurance scheme. Respondents also mentioned hesitation in taking up a pure term insurance plan and cited reasons such as inability to meet the monthly/yearly premium obligation and experiences of unsuccessful claim settlement among their peer group. This corroborates with the literature[8] on perceptions relating to insurance product being viewed not as a protection instrument but rather as a channel for investment.
All these factors not only highlight the limitations in current product offerings but also strengthen the case for the need for financial advice, in order to assess the financial requirement and circumstances of the household and offer suitable advice as well as increase awareness about the merits of products such as mutual funds and term-life insurance.
Inefficiency in the distribution of financial services
In addition to the need for better infrastructure of banking services, as pointed out above, respondents also articulated challenges they faced in accessing banking points such as ATMs and Business Correspondents (BCs), highlighting the pain points in the delivery and distribution of financial services. Issues that came to the forefront were inadequate cash in ATMs, and lack of availability of BCs in several villages, which was seen as an important barrier as several social security payments are being directly transferred into the bank accounts of individuals. However, high levels of awareness of digital financial services (largely, payment apps) and willingness to transact digitally was observed among survey respondents, indicating the potential for innovation across digital modes of transaction and financial services, in order to somewhat mitigate the challenges posed due to the current state of distribution network of financial service.
To conclude, our survey findings revealed low levels of ‘meaningful’ access and usage of formal financial services across products. While bank account ownership, at the household level, is close to universal, there remain several barriers in accessing and using banking services. Moreover, access to banking services has not translated into access to a suite of products required to meet the financial needs over a lifecycle. Several supply-side gaps in terms of lack of infrastructure, unavailability of customised products and financial advice and inefficient distribution network emerge as key barriers to inclusive finance and thereby present a strong case for strategic efforts to increase access to finance in rural geographies.
[1] RBI’s Definition of Financial Inclusion as quoted by RBI Deputy Governor, 2016 can be found here
[2] By ‘meaningful access’ we mean not just ownership of financial products but also ease of accessing these products and services reliably and conveniently either through physical proximity of financial services from place of residence, digital modes or through human-assisted models, depending on the requirements and circumstances of the individual. For example, an often-cited barrier to active use of bank accounts is the distance to bank branches, especially in rural and remote areas. These barriers can be overcome if financial service providers provide meaningful access to households/individuals. See (Mowl and Boudot, 2014) here
[3] FII study, Shamika Ravi study, CMIE data (to be completed)
[4] The survey team conducted 10 focus group discussions. Each group consisted of 8-12 members, covering a total of 104 respondents. The group consisted of men and women between the age group of 20 to 60, with majority of them being women in the age group of 25-40. The study was conducted in Thanjavur, Pudukottai, Ariyalur, Adhiyaman Kottai, Kaliyampatti, Rasipuram, Ulagam and Singarapettai
[5] Respondents were typically self-employed and earned a monthly income between Rs. 10,000 to 30,000, although reported significant volatility and uncertainty in their incomes.
[6] Respondents complained of forgoing days’ worth wages in order to visit a bank. This finding is also corroborated in literature on the use of formal financial services by rural households. See (Mowl and Boudot, 2014) here
[7] As per the respondents, loan applicants were often asked to submit proofs such as income certificate, property document verification, property legal certificate, surety/witness details, passbook transaction, etc.
[8] For literature on uptake of insurance products among low-income households, see here
