KC John [FPM1988] and Kiran Deshpande [PGP2002]
UN Environment Program and the World Bank Group launched their joint initiative on a Roadmap for a Sustainable Financial System on October 10, 2017 at the Annual Meetings of the Boards of Governors of the World Bank Group and the International Monetary Fund in Washington. The objective of the Roadmap is to propose an integrated approach that can be used by all financial sector stakeholders – both public and private – to accelerate the transformation toward a sustainable financial system.
The Chennai Chapter invited Sucharita Mukherjee [PGP2001], a key contributor to the UNEP Inquiry: Design of a Sustainable Financial System in India to dwell upon the challenges. She is the co-founder of KaleidoFin, a fintech platform that propels under-banked customers towards meeting their real life goals by providing intuitive and tailored financial solutions. The IIMA Alumni Association Chennai Chapter partnered with the MMA to host the discussion on October 13, 2017 at E-Hotel Express, Avenue Mall, Chennai between 6:00 and 7:30 PM. About 70 participants ensured a lively discussion, anchored by Raghuttama Rao [PGP1988], CEO, Gopalkrishnan-Deshpande Center for Innovation and Entrepreneurship at IIT Madras.
Key Takeaways
- India needs to develop a sustainable financial system to finance India’s goals for inclusive and sustainable growth. It includes:
- Raising incomes for the 800 million people living on less than US$2 per day;
- Generating livelihoods for the 12 million people entering the workforce every year, and
- Generating the natural resource base, increased emphasis on renewable and clean energy and quality of air and water at a time of climate change.
- The overall credit to GDP ratio in India is in the range of 65 to 70%. However, there is an extremely wide variation in the urban and rural areas for disadvantaged communities. In most rural districts, it is around 10% or lower. Despite a reasonable number of access points, financial depth indicators, thus are weak. Empirical studies indicate that every 10% increase in credit to GDP ratio reduces poverty by 2 to 3 percentage points. There is a strong linkages between finance and sustainable development goals. The challenge is providing access to the 800 million poor people in the country.
- Financial services need significant innovations in terms of business model as well as channel. For instance, India has, on an average, 17 customer access points for every 100,000 customers. The actual flow of finance is still very poor. Only 6% actually borrow from a formal financial institution. However, informal borrowing is much higher among the vulnerable communities. Insurance and mutual funds penetration at 3% and 2%, respectively are very low.
- Affordability of credit is interpreted as individuals with similar risk profile should be able to access credit at similar rates, after adjusting for reasonable levels of transaction costs. However, in reality, the spread to risk free rate for vulnerable communities in both urban and rural areas are skewed for a variety of reasons – very high transaction costs, mispricing of credit risks and differences in the cost of funds faced by different channels, even in the formal system.
- Increased mobile penetration and growing disruptions through dis-bundling of services by FinTech is harbinger for innovation in financial systems to address the last mile challenges. Recent policy direction has led to the emergence of 21 new Payment Banks and Small Finance Banks. Also wallets are now inter-operable with bank accounts.
- The spread of credit is akin to an inverted pyramid. For instance, the top 24 million households corner about 70% of total credit. But the 82 million households that is around 400 million people get only US$1 billion credit. Underlying customer profile amongst the vulnerable communities are much complex, diverse and fragile. The challenge is to design a financial system that acknowledges the contingency of this diversity of bottom of pyramid.
- Payment Banks coupled with ATMs and branches aggregate to about 250,000, today. But the round the corner kirana shops that carry out pre-paid mobile top ups are in millions spread in each nook and corner. We need a business model innovation that addresses the last-mile challenges for financial services akin to the mobile top-ups.
- India also needs innovation in risk transfer for the vulnerable section of population. It calls for both institutional and methodological innovation so that the risk associated with the credit could be assessed in terms of quality of these loans and a capital market infrastructure to transfer this risk in large scale. We need more ways in which risks can be transferred to large, well-capitalized financial institutions.
- India also needs innovative financial solutions that addresses the credit needs of vulnerable families with volatile and irregular income streams. We see new banks that have emerged in other parts of the world focusing on designing customer goal-centric financial solutions rather than uniform products. The silver lining in India is the disruptive FinTech startups that can bring down costs.
- Last but not the least, advocacy based on grounds-up innovation to create more enabling regulatory policy environment to make the financial systems responsible and accountable to complex, diverse and volatile customer profile. A starting point could be redesigning the priority sector regulation.
