Bindu Ananth is the President of IFMR Trust, which has a mission of ensuring that every individual and every enterprise in India has access to complete financial services. In pursuit of this, IFMR has made four key investments – IFMR Rural Finance (full service financial institutions for remote rural India), IFMR Capital (guarantee company for high-quality MFIs), IFMR Mezzanine (subordinated debt provider for emerging MFIs) and IFMR Ventures (debt access for rural enterprises). Through these investments as well as other initiatives , IFMR Trust is advocating for an inclusive financial system in India. Recently I interviewed Bindu about how the financial system in India might be configured to deliver complete financial service access.
What is the approach IFMR advocates for that is different from all the other models being used in India, such as scaling up microfinance institutions (MFIs), reforming the cooperatives, promoting the self help group/bank linkage model, or the current favorite of policymakers, the business correspondent model linked to the use of technology?
Our vision for the Indian financial system has three parts:
- An adequate number of local, high-quality financial providers that provide complete access to financial services. (We have borrowed heavily from Prof. Jonathan Morduch in defining complete access to be: reliability + continuity + convenience + flexibility + increasing financial well-being.)
- Orderly ways for systematic risk to be transferred from these local providers to risk aggregators. This would be done through mechanisms like reinsurance and securitization, among others.
- The presence of well-regulated and well-capitalized aggregators like commercial banks, mutual funds, and insurance companies.
Several of the initiatives you mention as models are in line with our vision that I just described. For example, a local microfinance institution that securitizes part of its portfolio to a mutual fund transfers systematic risk now to the mutual fund. This is a perfect partnership because the MFI is very good at customer origination and monitoring and the mutual fund has the ability to provide vast amounts of liquidity for the growing demand because of its size, capitalization, and diversification. Similarly, the banking correspondent (banking agent) that is providing savings services on behalf of a well capitalized bank would be consistent with our approach.
Our approach cautions against local institutions warehousing risk – for example, a local NGO/MFI offering savings services or insurance on its own without links to formal aggregators is compromising the safety of the customers’ savings/insurance.
Why do you think your approach might be able to deliver better results for poor people?
As financial services providers to the poor, we need to balance outreach with long-run financial system sustainability. We believe our approach does this. We know that at the front-end facing the customer, you need an institution that has the culture, values, and competence to serve the poor. Equally, we feel that links to larger financial markets and institutions are critical for scaling up to reach the 500 million people that we still need to pull into the financial system.
What do you think might be the end result of letting all the financial inclusion approaches/models compete with each other?
Clearly, we need a lot of energy and new thinking to solve the vast problem of financial access in India. I think it is fantastic that there is so much entrepreneurial energy in the financial inclusion sector right now. Over time, the approaches that deliver the most “complete” value to the customer will sustain. We believe that product-based approaches to financial services will need to evolve to be more customer-centric and focused on financial well-being rather than mere product sale.
Given that India has been more deeply committed to the cause of financial inclusion for longer than almost any other country, why does it seem that there are as many people still excluded from the formal financial system as ever before, and why should we be hopeful about the future? What role do you think technology will play in the future?
I think for the first time, we have a large community of practitioners that deeply care about solving the financial access challenge and have the execution ability to do so. Technology is helping discover completely new business models. The success of the government payment-led business correspondent models is in large measure due to the ability to uniquely identify the customer. Broadband connectivity is rapidly penetrating even remote parts of the country and all this points to significant operating innovation in the years to come.
We are excited about business models that may have a high upfront fixed cost but where variable costs are near-zero and there is ability to rapidly scale to millions of transactions. That is the transactions context of rural India – many, many small value financial services.
In our Kshetriya Gramin Financial Services (KGFS) branches, all customer authentication is biometric. We are experimenting aggressively with technology-led operating models for hilly regions like Uttarakhand where there are villages with less than 50 people! All this makes me very hopeful that we can achieve universal financial access in the next 10 -15 years.
For more information on advancing financial access to the World's poor, check out the CGAP Blog.