Differentiated Banks: THE LAST-MILE BANKERS

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P C Panigrahi 
General Manger – Financial Inclusion,
Union Bank of India

The Differentiated Banks thrive on capital, area of operation or scope of activities and geography or sectoral focus, says P C Panigrahi, General Manger – Financial Inclusion, Union Bank of India, while discussing their scope and challenges in tete-a-tete with Arpit Gupta of Elets News Network (ENN)

Define the concept of Differentiated Banks and its advantages.
The concept of Differentiated Banks first talked about in 2007 and again by the Reserve Bank of India (RBI) in 2013 as a transitional path for banking for all. The Nachiket Mor Committee on Comprehensive Financial Services for Small Business and Low Income Households came up with two broad frameworks of Differentiated Banks, which work in niche areas. They offer a limited number of services/products.
Advantages of these banks are normally unlocking potentials of the area, better Risk Management Practices, reduction of cost of transactions and other fixed costs/ investments, core competency leading to enhanced productivity, etc.
Basic objectives of small finance banks is to amplify and broaden steps on Financial Inclusion by provisions of Savings and Supply of Credit to Small Business Units, Small & Marginal farmers, Micro & Small industries and other unorganised sector entities through improved technology and low cost operations.
Objectives of payment banks are to further financial inclusion by providing (i) Small Savings Accounts and (ii) payments/remittance services to migrant labour workforce, low income households, small businesses, and other unorganised sector entities and users.

What are major challenges for Differentiated Banks?
Some of the major challenges include:

  • Lack of consumer protection and grievance redressal mechanism
  • Poor Liquidity Risk Management
  • Insufficient capital allocation and exposure norms
  • Tough to create trust among last-mile customers
  • Creation of banking awareness among last-mile customers and making them transact
  • Inadequate promoters’ experience and corporate governance
  • Poor last-mile connectivity and building franchises – factor related to operational risk
  • Low income from customer services rendered

Regulatory norms like 75 per cent of lending to priority sector by small finance banks and 75 per cent investment in government securities by payment Banks is prescribed, which may be a tough proposition and it may crimp their Return on assets (ROA) and erode capital base even with a slight economic turbulence. Ample unmet potential available in the rural, unexplored areas and unserved and underserved consumers needs contextualisation. Hence long-term sustainability balanced with Financial Inclusion goals will be the roadmap for their stakeholders to draw.
These banks are to aim at providing high-volume-lowmargin and low-value transactions in deposits, payments, remittances, etc., in a fully secured technology-based environment. Any variation in these breakeven statistics may impact adversely the Net Interest Margin (NIM) of the Differentiated Banks.

last_mileCan technology for Payments Banks’ profitability and Service Excellence for Small Finance Banks be marked as key differentiators for Differentiated Banks?
Based on Capital, Scope and Area of Operation as key factors in benefiting from the massive financial inclusion policy being implemented by banks, creation of Payments Banks and Small Finance Banks have emerged as a favourable and welcome move in the Indian context.
It has been seen that payment technologies have proved effective and satisfactory in countries, especially in Kenya, where mPesa is used to transfer money, make purchases and remit funds. In other words, technology-intensive payment services can only enable reduction of transaction cost and as such can lead the customers to a cashless regime. It’s also important to note that Differentiated customers will require changes in financial products and services, and therefore, will require innovation for these banks to maintain and progress with customers’ expectations.
India’s journey into a cashless economy requires promotion of digital ecosystem, and creating and facilitating ‘digitally smart’ financial services. This will lead to a paradigm shift in delivering Retail Banking as a key differentiator and creating a difference in value proposition for customers.
People and process are always around technology, hence improving skill sets of people and innovation of processes is a priority for the Differentiated Banks. Technology requires investment of time and money, generating banking interest among customers followed by making own Staff/ Correspondents tech-savvy. Thus, investment in technology is substantially required for customer convenience in use and choice.
Banking, at present—be it PSBs, private or Differentiated Banks—is in a seller’s market and as such customers’ expectations are ever-changing. As bank branches shift to cloud and banking becomes accessible from any part of the globe, technology becomes all the more indispensable. Hence these Differentiated Banks require huge skill development—both that of their staff and the last-mile customers—to move entirely to mobile banking and digital solutions.

As banks shift to cloud, technology becomes indispensable. The Differentiated Banks require huge skill development-both that of their staff and the last-mile customers-to move entirely to new-age banking

What role technology would play in the Differentiated Banks ecosystem?
The Differentiated Banks should also leverage technology for compliance and risk mitigation, upgradation of systems and processes to make new-age banking a success and evolve a mechanism for direct payment of government subsidies and benefits in healthcare, education, scholarship, gas, etc., to the beneficiaries.
Differentiated Banks, therefore, while providing a whole suite of banking products can increase financial inclusion and provide services at low/affordable cost, subject to compliance of above issues. Obviously they will bring an economic revolution, especially in the last-mile banking, focus on volumes over margins, boost competition in Retail Banking and will be more agile and nimble in responding to the changing market scenario.
Customers’ adoption and engagement at the last mile, enriching their basic banking awareness, creating digital infrastructure and connectivity, etc., to address business strategy for making them viable over the next five years are the primary challenges.

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