Issue India’s prosperity lies in increasing the affluence of rural India.
Analysis Success of some of the products of FMCG companies but various reason for which financial sector not able to succeed here.
Benefit of expansion of financial sector First mover would have advantage and will eliminate moneylender.
Key to succeed in this market Develop appropriate product
Examples of appropriate product Digitalising procurement of wheat
Potential for other products Commercial vehicles loans, personal loans, saving schemes etc.
Challenges Financial Literacy
Rural households constitute 55-60 per cent of India’s population. Thus the key to India’s prosperity lies in increasing the affluence of this so-called Bharat.
The potential of this rural market was recognised by fast moving consumer goods (FMCG) companies and thus their products were successfully able to cater to this segment like shampoo, soap, hair oil, etc.
But financially it is a very under penetrated market. Financial sector is still dominated by unorganised sector and bank lending is mainly driven by priority sector lending rather than search for business.
The main reason for this are:-
- Rural markets are highly dispersed and fragmented across villages and semi-urban pockets.
- Lack of infrastructure, such as roads and electricity.
But some banks have taken the lead in adjusting their strategy to exploit this untapped goldmine . In this, technology specially the mobile phone revolution and government push to energize this market is helping them.
Benefit of expansion of financial sector
The bank which moves first will be in an advantageous position as it has huge potential even after lateral entry by others later.
A good rural strategy is to provide a complete range of appropriate products for rural customers and replace the moneylender.
Key to succeed in this market
Develop appropriate products for this segment of customers, instead of offering the same products that work in urban markets. Appropriate products and fair lending rates would automatically eliminate the moneylender.
Examples of appropriate product
For wheat farmers, the time taken between delivering the produce to the agent at the time of grain procurement and his final payment through a cheque or draft typically took 15 to 20 days.
With digitalisation this can be reduced to 48 hours.
The key steps for this would be issuance of a smart card to procurement agents, installation of an electronic data machine (EDM) at the mandi backed by the e-payment system RuPay, quick generation of MIS and reports and, finally, e-approvals by the procurement agency.
Similar initiatives can be undertaken for other sectors, such as milk, sugar and fruits and vegetables, with the bank participating at every stage of the supply chain.
Banks can offer cash-flow-based working capital and loans to farmers like cattle loans and unsecured personal loans. Back-end systems can capture the entire cash flow and income profile of farmers, to ensure there’s no compromise on credit standards.
Potential for other products
There’s a large market for products like car loans, two-wheeler loans, tractor loans, light commercial vehicle loans, small working capital loans to traders, personal loans, gold loans, commodity finance, along with the more conventional agricultural credit.
Also a strong demand for savings products, ranging from basic savings accounts to recurring deposits and life and general insurance products.
Rural population is mobile enabled to a large extent and this segment is growing twice the rate as compared to urban India, ensuring a growth for banks in these geographies higher than market growth for the next decade.
Financial literacy is low and incomes and livelihoods are volatile.
Thus along with timely credit, it’s critical to conduct financial literacy and credit counselling programmes, offer skills training to enhance income generation, form self-help groups and fund these groups for income-generating activities.
This will ensure sustainability of credit delivery and also inculcate savings and banking habits.
Extending finance to the rural markets has traditionally been viewed as a social obligation enforced through diktat rather than the lure of profits. But there is potential of profit in this market and all that is needed is the right mix of technology, business model and outreach through targeted programmes to tap these opportunities.