Linking Bharat with India, Financially

The much-awaited Union Budget 2017 was presented by Finance Minister Arun Jaitley yesterday. In the weeks leading to the budget, and even thereafter, the primary emphasis and conversation in the political, economic and corporate circles has been on balancing the growth in rural areas through livelihood creation and social empowerment, with the success of India Inc. Especially post demonetisation, which has become an issue of contention and continuous discussion for the last 80 days, the concerns of rural India have been increasingly highlighted. How many of these are directly connected with demonetisation is a matter of separate discussion.

However, in the context of financial access and empowerment in rural India, and the role of banks and financial institutions, I share the example of one of India's most successful private banks in balancing its presence and operations in the urban and rural areas, and working towards a vision of economically and socially empowering 1 crore households in rural India. Within a span of about two decades since inception in 1995, HDFC Bank achieved what was considered unimaginable - a market capitalization of over Rs 2,75,000 crore that equalled twenty of India’s state-run banks put together! State Bank of India (SBI), India’s largest bank, whose balance sheet was three and a half times more than that of HDFC Bank, had a market capitalization of Rs 1,54,000 crore. Interestingly, with all the attractive financial figures, they have put into place a rural strategy. So let's see how they went about executing it.

Image: HDFC Bank Head Office, Mumbai

Due to a social and regulatory mandate in India, 40 per cent of a domestic bank’s loan book is focussed on priority sector lending (PSL). In the year 1978, RBI mandated all banks to direct 33.33 per cent of net bank credit to priority sector areas. Later, this was expanded to 40 per cent for domestic banks and 32 per cent for foreign banks. The philosophy of mandatory PSL in India has been to ensure that banks’ profitability concerns should not deprive employment-generating sectors from getting sufficient funding when compared to medium and large enterprises. It is an important role given to banks by RBI for providing a specified portion of the bank lending to specific sectors like agriculture and allied activities, micro and small enterprises, and specific sections like poor people for housing, students for education and other low income groups. These may not get timely and adequate credit in the absence of such a mandatory arrangement.

Almost all banks have a PSL department to achieve annual targets that need to be reported to RBI and other regulatory authorities. However, HDFC Bank did something different. From around 2008, HDFC Bank did not have a separate PSL department. Instead, in every single business - corporate, retail, SME, or the emerging corporate’s group, the bank identified businesses, segments and customers that would fall within the priority sector categories. Paresh Sukthankar, Deputy Managing Director at HDFC Bank shared the bank’s differentiated approach to PSL, ‘We have figured our approach as the only sustainable way of doing PSL. Otherwise you have a focused department, where you go and find out one more opportunity to lend, do it and that’s the end of it. Then you are looking for next year’s opportunities. The purpose behind the target is lost.’ Right from the beginning, HDFC Bank distinguished between financial access and financial inclusion. Financial Access involves providing access to different financial products and services. Financial Inclusion or inclusive financing is the delivery of financial services (such as opening accounts, accepting deposits, money transfer, etc.) at affordable costs to disadvantaged and low-income segments of society.

Image: Aditya Puri, Managing Director, HDFC Bank (Image Courtesy: Financial Express)

Aditya Puri, Managing Director, HDFC Bank, often emphasized,

‘You give a poor woman a consumption loan. Before she was a poor woman with no loan. Now (after the loan) she is a poor woman with loan.’

While financial access meant opening bank accounts for the rural populace, financial inclusion for the bank meant economic empowerment leading to a life of self-respect and dignity.

In order to achieve the latter, in 2009, the bank launched the Sustainable Livelihood Initiative (SLI). Through this, it reached out to unbanked and under-banked segments of the population with the objective of providing them livelihood finance. Over the last decade and more, increasing levels of literacy, access to information and communication technology, and a number of government programmes at the state and central levels, have marginally increased the levels of disposable income among the rural and semi-urban masses, thereby improving the demand for basic facilities and products. With a little support, vocational training and financial assistance, a lot could be done to make rural youth (constituting one-third of total Indian population) economically self-sufficient.

The SLI attempted to do just that. Just like many other banks, it also lent to micro finance institutions (MFIs). It also lent to self-help groups (SHGs) and joint liability groups (JLGs). Apart from the actual lending activity, SLI contributed towards financing the formation of these groups and their training. An integrated approach of offering capacity building, enhancing occupation skills, providing credit counselling, financial literacy, facilitating sales efforts and market linkages was implemented. The bank believed that a combination of these could make the rural population economically independent and bring them into the banking fold.

According to the Government of India’s 2011 Census, only 58.7 per cent households utilized formal banking services. According to CRISIL, 37.8 per cent in the southern region and 71.4 per cent in the eastern region had no access to formal banking facilities. For many decades, financial inclusion initiatives aimed at opening banking accounts, especially in the rural areas. In fact, PSBs received mandates to open accounts in the unbanked and under-banked regions of India. And they did, thousands of them. But there were hardly any transactions. The high-powered Nachiket Mor Committee on Comprehensive Financial Services for Small Businesses and Low-Income Households, set up by RBI, found that 60 per cent of rural and urban population in India did not have a functional bank account. The reason being that along with the account opening, it was also essential that the rural customers had a sustainable banking need.

Most often, the loans were not for income generating activities, but for consumption requirements such as marriage of children. And eventually, due to lack of sustained sources of income, these were written off, thereby making banking in rural areas a loss-making endeavour. Contrasting with this, SLI aimed at encouraging the habit of savings through financial literacy. This was in the form of cultivating a habit of saving the money received. Paresh highlighted the virtuous cycle that the SLI Approach created,

‘An integrated approach helps the individual who is borrowing, because you are also helping her to improve her ability to repay by supporting her earning capacity. This in turn also has a positive impact, on her ability to service the loan, and therefore on the bank’s asset quality.’

The bank envisioned this win-win approach of contributing to society at large by having a well-integrated strategy within the regular course of banking.

Figure: Differentiating Traditional Banking and Purpose Oriented Banking

At an operational level, the SLI reached out to 20 lakh households across thousands of villages in 24 states pan-India, through 439 rural business hubs attached to the bank’s branches. The average ticket size of loans was between Rs 10,000 and 25,000. Interestingly, 100 per cent of SLI customers were women. The bank aimed to help five crore individuals from one crore rural households to rise above the poverty line. [The Rangarajan Committee of 2014 proposed a per capita expense of Rs 32 per day in the rural areas as being above poverty line. This meant a monthly per capital expenditure of Rs 1000 in the rural areas. In 2012, according to the Government of India estimates, about 22 per cent of the Indian population (approximately twenty-six crore individuals) was below the poverty line.]

Underlining the success of SLI, the bank reported that through SLI, rural women availed credit and utilized it for occupations like tailoring, designing jewellery, starting grocery shops, and grazing goats. They also sought to take advantage of services such as credit counselling, occupation skills enhancement and connecting with markets. The SLI also linked rural people with mainstream banking facilities and substantively eliminated the role of middlemen and money lenders who charged usurious rates of interest on small ticket loans to the ill-informed rural folk. [Over 7,000 employees (about 10 per cent of the bank’s total employee strength) were working on this project. In 2013, the total size of the rural business was Rs 2,250 crore. The bank aimed to reach Rs 10,000 crore by 2016-17. Though this was a small proportion of the bank’s total book size, the positive social ramifications were immense.]

Along with the SLI, the bank also planned a conscious spread of its presence in the semi-urban and rural areas. In 2013, 53 per cent of the bank’s 3,251 branches were in semi-urban and rural areas, up from 34 per cent in 2010. In 2012 alone, 88 per cent of the bank’s branches were opened in unbanked markets.

‘It may be by 2020, but through this initiative, we would have really altered lives,’ affirmed Aditya Puri.

Figure: A Rural Branch of HDFC Bank

While this initiative looks interesting, there were challenges galore. How did the bank overcome them? What were the innovations that helped them enter and successfully implement SLI in a new and unknown terrain? In another post, I’ll elaborate on these.

Know more about India's leading corporations and their unique approach to business in 'WIN-WIN CORPORATIONS: The Indian Way of Shaping Successful Strategies'.

Published by Penguin Random House India, 'WIN-WIN CORPORATIONS' is now available at your nearest bookstore and on select metro airports. It can also be ordered on Amazon in Print version and Kindle version. You can download the multi-stakeholder implementation toolkits from: shashankshah.com