Financial Services for the Non-banking Population of India (Part - II)

Disclosure: I do not hold any positions in the stocks mentioned in this article and not planing to initiate any in the next seven days. The views expressed in this article are my own.

There are approximately 4,90,000 unbanked villages with populations less than 2000. Banks are projected to provide financial services to these villages by March 2016 as per the Reserve Bank of India (RBI) mandate. The poor population living in these villages needs financial services from banks to get loans at cheap interest rates compared to the exorbitant rates of moneylenders and NBFC’s.

This will save at least few lives of farmers, as more than 300,000 farmers have committed suicides in the past decade due to factors including the increased pressure from moneylenders to repay their debts.

“More than 300,000 peasants have committed suicide in India between 1995 and 2012, according to the National Crime Records Bureau (NCRB). Among the big five states with a high incidence of peasant suicides is Maharashtra, where over 50,000 of the total suicides are reported. Within the state, the eastern region of Vidarbha remains notorious for the continuing spell of tragic suicides, mostly by cotton growers.”  

                                                            Source: Telegraph India

There are a large number of people living in poverty without access to basic financial services and better opportunities to grow. However, merely providing financial services will not solve the underlying problem of a lack of better opportunities to grow. Both the farmer and the consumer are being hurt by the large number of hurdles between them; the consumer is buying at higher prices due to too many intermediaries in the chain, and the farmer is earning too little due to the same problem.

Merely providing financial services to the poor people does not benefit the banks or the population in the rural parts of India. Because opening up deposit accounts does not serve the purpose unless there is a stable income source to provide credit to the locals, banks cannot solely depend on collateral.

The solution is not in the hands of banks; rather, they have to provide financial services to the poor population living in villages as per Regulator mandate. However, one bank in the group of banks has taken a step further to provide more than financial services.

Out of the mandate, HDFC bank (HDB) (HDFCBANK) has created an opportunity called the Sustainable Livelihood Initiative. Through this, the bank not only provides financial services to the unbanked population, but it also helps them hone their skills and gives them the opportunity to exploit their skills.

“It involves a holistic approach - from offering training and enhancing occupation skills to providing credit counseling, financial literacy and market linkages - which financially empowers people and brings them into the banking fold.”  

                                                                                                                            Source: HDFC Bank

By helping the poor to earn a livelihood, the bank is helping them live a better life while creating a good platform for their products and services to better penetrate the rural market. The bank is not merely providing financial services that benefit both parties; it is helping the locals earn a living. The trust and the relationship the bank is creating with the locals will benefit the bank in the long run with a good market share and a chunk of deposits.