This Small Bank's CEO Explains Why Financial Inclusion Should Be a Business Model Rather than an Obligation
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Small finance banks addressing the financial services requirements of the base of pyramid customers as well as SMEs clearly have a much larger base of consumers, and a larger role in nation building
We have observed a wave of social impact companies in recent years trying to make people’s life easier. However, microfinance companies have been a pioneer in this segment as they are busy extending financial services to the unbanked areas of the country much before the word ‘impact business’ came into existence.
With time some of the microfinance firms have strengthened their operations further and went to set up small finance banks (SFBs). One such institution is Fincare Small Finance Bank.
In a conversation with Entrepreneur India, Rajeev Yadav, MD & CEO, Fincare Small Finance Bank explains why financial inclusion is a part of their business model by design, rather than an obligation.
Catching the Big Fish
By nature, SFBs address a very different segment of the society and focus highly on financial inclusion i.e. banking the unbanked. In other words, they serve small tickets size product and services to the lower segment of the society or micro and small enterprise which have been traditionally untouched by the big banks while providing a decent interest rate to interest sensitive investors.
As a new bank with no legacy to look back, Yadav claims that the SFBs are able to establish a new business model through the use of technology, and by focusing on niche segments. Having said that, SFBs might not actually be ‘small’ in terms of their scale of operation and the problem they are looking to solve.
He says, “The number of customers they (SFBs) serve and the households that they impact are by no measure small – these run into millions for most small banks. Therefore, SFBs addressing the financial services requirements of the base of pyramid customers as well as SMEs clearly have a much larger base of consumers, and a larger role in nation-building.”
To put this in perspective, Yadav shares the credit gap in the microfinance sector is expected to be INR 5-6 lakh crore, and in the MSME sector is INR 16 lakh crores. And hence, SFBs will continue to stay relevant as long as there exists a base of pyramid segment and SMEs that are unserved by the traditional banking system.
For an outsider, serving the base might look like multi-lucrative opportunities. But the art of scaling up is all of about building the business from the right set of opportunities.
Talking about the challenges of running an SFB, the MD points out diversification of the asset book to include more secured products and building a retail liabilities base that is more granular and sticky is difficult. Which is why, the bank has introduced products such as loan against gold, loan against property and is not looking to introduce two-wheeler loans and affordable housing loans.
“These products serve existing customers or similar customers in the geographies we already operate in - segments that we have built deep understanding of over the years - thereby reducing the risk of offering products to completely new customer,” he pointed out while adding that, “On the deposits side, our 3D strategy - high deposit rates, doorstep service and digital banking solutions - helps us address the challenges of raising retail deposits by offering an attractive value proposition to customers at their convenience, and providing instant gratification.”
Additionally, one of the key reasons why big banks have refrained from serving this segment is the high cost of servicing small ticket size financial product. And honestly, even small banks are not immune to this. But is there something that technology can’t bridge?
Discussing how Fincare SFB has leveraged on technology, Yadav shares that the bank has built solutions around tab based sourcing and servicing of loans and deposits that reduces the need for paper and any friction associated with it, use Aadhaar based e-KYC (prior to the Supreme Court verdict) for identifying customers and authenticating transactions, real-time integrations with credit bureaus for instant data on customers' credit history, alternate data and credit algorithms for underwriting customers who are new to formal credit.
“This has effectively reduced the cost of delivery of services, enabled rapid scale up and growth, enhanced customer experience through instant gratification – be it with saving account opening, or loan processing; and made possible a viable business model in addressing the financial services needs of this customer segment which was hitherto considered a challenge,” he concluded.