Inclusive Banking In India: Re-imagining The Bank Business Model

Description

This book addresses the gaps in the present institutional structure of inclusive finance framework in India. It provides a comprehensive review of the role of banks in financial inclusion policy and micro-finance landscape in India at present. It identifies the key issues within the banking system which prove to be obstacles in the way of achieving financial inclusion and sustainable growth. The book conceptualizes inclusive banking, delves into the theoretical foundations thereof and suggests an institutional framework to avoid overlapping of their functions in order to ensure profitability.  It reviews the existing market structure and competition in the inclusive finance arena while considering the role of banks, micro-finance institutions and SHGs in financing the poor. The book proposes a distinct change to the existing business model, examines the bank business model for inclusion and how the banks can and should treat the micro lending clientele as their core client base to counter the issues of profitability and competition in today’s banking sector. It also discusses some of the latest initiatives in inclusive finance and the importance of entrepreneurship development experiments in India and their efficacy in comparison with the micro-lending model. Preface Acknowledgements Contents List of Figures List of Tables 1 Inclusive Banking—Concept and Context Background Inclusive Banking: An Economist’s Approach Need to Redefine the Existing Model of Inclusive Banking Why Are We Still Discussing Financial Inclusion Today? At the Micro-level: The Persistence of Gaps in the Access to Banking Services Along with the Rising Aspirations of People At Macro-level: The Importance of Financial Inclusion for Poverty Alleviation Where Does the Need for a Special Policy for Inclusive Banking Emerge? Socio-Cultural Dimensions of Gender Inequality in Financial Inclusion Can New Models in Inclusive Banking Overcome These Barriers? Defining Inclusive Banking Existing Definition(s) of Financial Inclusion and Financial Inclusion Universe Definition of Inclusive Banking and Its Ideological Implications Inclusive Banking—Global Approach Scope of Inclusive Banking Evolution of Inclusive Banking in India Inclusive Banking - Overview of Recommendations by Various Committees Since 2000 Evolution of Inclusive Banking in India—The Initiatives RBI Initiatives for Inclusive Banking Since 2005 Evolution and Progress of Inclusive Banking in India—The Performance The Current Landscape of Inclusive Finance in India Current Policy—Paternalistic Approach Banking: Social or Commercial? Banking for the Poor Matters—Need to Change the Narrative References 2 Inclusive Finance and Economic Growth: The Theoretical Underpinnings Inclusive Finance in Theory of Economic Growth and Development Finance - a Black Sheep of Macroeconomic Theory? Ignored by Theory but Redeemed by Empirical Evidence Rationale for Inclusive Banking Policy—Multiple Theoretical Perspectives Economic Theories Providing Justification of Policy Intervention Need for Inclusive Banking—Welfare Economics Perspective Pareto Optimality v/s Maximum Social Advantage Social Goods and Welfare Finance Theory of Credit Market Failures and Contestable Markets Theory of Contestable Markets Theory of Credit Market Failure in Providing Finance to the Poor Constrained Pareto Efficiency in the Credit Markets and Incomplete Markets Credit Market Failures in Developing Countries Scarcity of Collateral Security Underdeveloped Complementary Institutions Covariant Risks—Recent Pandemic a Live Example Theory of Incomplete Markets Information Asymmetry & Microlending Adverse Selection, Moral Hazard & Microlending Contracting Problems Conventional Economic Theory Stumped by Issues in Developing Countries & Stunned by Shocks Theories of Microfinance—Stylized Facts The Stylized Facts for More Effective Relief Measures References 3 Inclusive Finance and Commercial Banks Theory of Change: In the Context of Inclusive Banking Methods of Micro-Lending by Commercial Banks Comparative Advantages of Commercial Banks in Micro-Finance Obstacles for Commercial Banks in Micro-finance Internal Bank Specific Factors Acting as Obstacles External Factors—Country Specific Finding Way Through Obstacles—Strategies Used by Banks to Enter the Micro-Finance Space Direct Approach to Microfinance Indirect Approach: Bank Partnership with Existing Microfinance Institutions Outsourcing Retail Operations Through MFIs Providing Commercial Loans to MFIs Providing Infrastructure and Services to MFIs Which Model to Implement? Current Status of Inclusive Banking Persisting Chasm Between Economically Developed and Developing Countries Progress of Inclusive Banking Services in India Deeper Distributional Issues Camouflaged by Growth in Numbers State-Wise Data Reflecting a Regional Divide Key Variables for Successful Inclusive Banking References 4 The Non-Bank Sources of MicroLending in India Taxonomy of Non-Bank Micro Finance Institutions in Formal Microfinance Sector Development of Microfinance NBFCs in India The Pre-Andhra Pradesh Crisis Period Post- Andhra Pradesh Crisis MFI Sector Stunted Growth of not for Profit MFIs (NGO-MFIs) Overview of SHGs Linked to Banks SHG Bank Linkage—The Role of Banks Banks: Ultimate Financiers of Micro Credit Challenges Faced by SHGs in India Current Issues and Challenges—MFI Sector Competition Among the MFIs and Over-Lending Crisis Situation Caused by the Pandemic Liquidity Crunch Factors Leading to Vulnerability of the Sector Banks the Ultimate Saviours? How Resilient Are Financial Networks to Stress? Annexure: Credit Bureaus—Working and Effectiveness for Inclusion Usefulness for Lenders References 5 Inclusive Banking: A Political Economy Approach Political Economy of Financial Inclusion—The Context Political Economy: Factors Determining Access to Finance Political Economy Approach in the Context of Financial Inclusion in India Interaction and Interdependence Among Inclusive Finance Providers Government Initiatives and the Donor Agencies Competition Among the Agents Symbiotic Relation Between Banks and MFIs Competition Within the MFI Sector—Impact on MFIs Competition Within the MFI Sector—Adverse Effect on Clients New Dimensions of Competition Among Microlenders in India Method of Interest Calculation Leading to High Effective Rate Price-Based Differentiation Is Neither Desirable Nor Needed Political Economy: Reasons of Regional Disparity in Microlending Existence of Informal Sources of Lending Inclusive Baking Depends on the Ideology of the State Regarding the Private Sector References 6 Role of Government in Inclusive Banking in India Macroeconomic Goal of Poverty Reduction and Social Justice Challenges in Implementation Bringing the State in—Need for Coordination in State and Central Government Schemes Flagship Government Schemes for Financial Inclusion PMJDY as a Product—Panacea for Banking the Unbanked Successful in Coverage Other Initiatives by Government Public Sector Banks Mandated to Implement the Schemes Reliance on Banks Has Not Decreased in Spite of Academic Criticism Gender Parity Still to Be Achieved Need for Newer Multidimensional Parameters of Financial Inclusion Sustaining the Financial Inclusion Is a Global Challenge Centralized Approach vs. Localized Approach Road Ahead References 7 New Developments in Inclusive Finance Digitalization and New Development Possibilities in Inclusive Finance Fintech Industry Finds Synergy in Rural Outreach Creating New Income Avenues Financial Awareness Trainings Fintech for Uplifting the Poor in Specific Segments Gaps in Outreach Keeping up with the Technology Advancements Capital Market for Social Sector Enterprises Social Stock Exchange in India India’s Experiment with Social Impact Bonds The Case of Primary Education Initiative by ‘Educate Girls’ in Rajasthan Success of the First Social Impact Bond in India Challenges for Social Equity and Bond Markets Need for Bank Representation on the Boards of MFIs Beyond Micro Finance—Case Studies of Women’s Collaboratives ToeHold Artisans Collaborative Subhaksha Strengths of Entrepreneurial Models Weaknesses of Entrepreneurial Models Bank Licensing to MFIs Conclusion References 8 Reimagining the Banking Business Model The Context: Existential Crisis for the Microfinance Sector Business Model of a Bank Current Issues Impinging on Inclusive Banking in India and Need for a New Business Model In Search of a New Model New Approach, New Narrative The New Narrative Bulk of the Population—A Blue Ocean in Banking Development of a Business Model Business Model for Inclusive Banking in India Can the Bulk of the Population (BoP) Be the Blue Ocean of the Banking Industry? Identifying and Nurturing the Blue Ocean and Specifying the Customer Value Proposition The Product—What Do Bulk of the Customers Want? Channel: Awareness and Availability Customer Interface Pricing Strategy: Pricing the Bank’s Products Is the Key Puzzle to Be Solved Administrative Infrastructure for BoP Segment Use of Technology to Reduce Costs Key Resources Component Key Partners Financial Model Potential Financial Viability Comparison with the MFI Business Comparison with the Conventional Bank Business Risk Management of the BoP Portfolio Reimagining Inclusive Banking Annexure Three Case Studies of Banks with Successful Implementation of Microlending–Microdeposit Model References Index