Video: Best Way to Interact with Clients: High-Touch or Low-Touch

The Master Card Foundation recently organised a Symposium on Financial Inclusion that explored the theme of “Clients at the Center” by focusing on the “Client Journey”. The event brought together key industry professionals ranging from practitioners, influencers and thinkers who are actively involved in the space. You can read the proceeds from the Symposium here.

Bindu Ananth participated in one of the panel discussions that was organised to debate on the Best Way to Interact with Clients: High-Touch or Low-Touch. Kim Wilson of Tufts University moderated the debate on the following proposition: The future of financial services for the poor will rest primarily in highly automated, low-touch models for reaching clients.

Arguing for the high-touch approach, watch Bindu participate in the panel discussion with other participants in the below video:


Storytelling & Evidence

We often dismiss stories, saying “anecdotes aren’t data,” but data enriched with anecdotes can be far more effective than just data in changing minds and getting people to pay attention. In the concluding post of our blog series on the latest Spark edition, Amy Jensen Mowl & Vaishnavi Prathap, as part of their session, highlighted a few examples where just adding some narrative elements to data can have a big impact in overall communication.

Outlining different facets of storytelling, the session focussed on how stories can be a powerful medium to help us understand and engage better, and in addition how effective storytelling can aid in moulding complex ideas into a form that lot more people could understand better of.

Having said this, the session also provided an equally important perspective that while storytelling does provide an interesting dimension, it is equally important to use the right stories – stories that are authentic and speak to the truth without in any way camouflaging the inherent reality that may exist beneath.

Watch below the video & presentation from the session.

Presentation (updated):



Designing a Framework for Event Risk & Loss Estimation

By Vaibhav Anand, IFMR Capital

This post is the first post in a new blog series that would delve and deliberate on different aspects of designing a framework that would enable a credit institution to identify the exposure to extreme events and to estimate the potential losses due to such events. 

Risk premium is one of the components of the cost of providing credit. It is important to understand the nature of underlying risk for estimating the real cost of credit. Historical repayment behaviour may provide significant insights to enable reasonable estimation of credit risk; however, the estimates may be limited to losses experienced in the past. For example, it is possible for a credit institution based in North-West India to have never experienced losses due to a devastating earthquake in its ten year long vintage. But it is not prudent to rule out the potential losses due to an earthquake in future; particularly when the geography is prone to experience devastating earthquakes. The key is to assess the potential risk of events which may have low probability of occurrence, in fact may not have occurred in last 20-30 years at all, but have potential for high impact.

Natural disasters come to mind immediately but these are not the only ones that should be reckoned with to estimate the real risk. Man-made disasters such as industrial accidents, terrorist attacks, and riots are some obvious examples of non-natural disasters. However, other man-made activities such as deforestation, mining, and construction may also lead to seemingly natural disasters. An article in The Hindu daily provides an interesting discussion on this causal relationship.

The focus of this blog series is not to delve into the reasons of such extreme events but rather to initiate a discussion on the design of a framework which would enable a credit institution to identify the exposure to extreme events and to estimate the potential losses due to such events. However, before designing a framework it is important to identify events the framework should address.

Extreme Events

The extreme events discussed here typically have following characteristics:

  • Uncertainty on the time of occurrence: There is usually a reasonable uncertainty on when the event could occur. For example it may be known 72 hours before a cyclone could hit the eastern coast but there may not be any inkling of the cyclone, say, a week in advance. Scientific advances have made it possible to predict some of these events but the time frame between the warning and the occurrence is usually very small.
  • Nature of Impact: Impact is almost always disastrous in nature. However, an unexpected technological innovation could effectively throw an established technology giant out of business, hence a disastrous event for the company, but nevertheless a positive event in a broader frame of reference! But, in this blog we are not focussing on such good-bad or bad-good events.
  • Large scale of impact: The event has to have an impact on a very large scale. A land slide impacting a couple of houses, though tragic and disastrous for the families, may not qualify as an extreme event.

However, the impact need not be instantaneously realised. For example, droughts qualify as extreme events but usually make the impact over a longer period of time, unlike earthquakes.

Also, an event, disastrous in nature on a large scale, may occur periodically, e.g. floods in certain rivers may impact the geography almost every year. Such events, though classified as extreme events, will need different approach for risk measurement. Residents and institutions in geographies regularly affected by periodic events develop, over the time, various mitigation strategies to minimize economic losses. We plan to discuss in some detail such cases in a later post in this series.


The framework should enable a credit institution to measure its portfolio exposure to extreme events and to estimate the expected and unexpected losses due to such events. Ideally it should mimic the linkages between the occurrence of the event and the eventual losses in the portfolio.

Figure 1: Linkages between the event and the eventual losses

The key components of such a framework should include:

  • Mapping Module: To standardize and map the exposure and risk factors like location vulnerability and industry clusters to geographies at a granular level. This is a data intensive module and forms the backbone of the framework.
  • Impact Module: To estimate the loss if an event actually occurs. This, in our opinion, is the trickiest bit to put in place; partly because the loss data is not available always and partly because the nature of impact and the eventual response depend on various factors such as asset class, underlying industry, credit policies, relief activities, past experience, and risk mitigation tools available to borrowers and institutions.
  • Simulation Module: To simulate! Based on the probability and severity assumptions, the module can use the Monte Carlo simulations to generate various extreme event scenarios and estimate the eventual loss distribution.

In the subsequent blog posts we plan to discuss in detail each of the above modules.

As part of our blog series on the recently held Spark sessions, Vaibhav presented his thoughts on the framework at one of the talks. You can view the video & the presentation from his session below:




Suitability becomes a Customer Right

By Deepti George, IFMR Finance Foundation

The RBI has published on its website the final Charter of Customer Rights for banking customers. This Charter has retained all the five Rights mentioned in the draft Charter previously published and includes:

  1. Right to Fair Treatment
  2. Right to Transparency, Fair and Honest Dealing
  3. Right to Suitability
  4. Right to Privacy
  5. Right to Grievance Redress and Compensation

While all other rights have been captured to varying degrees in current customer protection rules and banking industry codes, the Right to Suitability has been enshrined by the RBI for the first time for retail customers of banks.

While Suitability as a regime was given legal recognition initially in Australia, and later on in other developed nations such as the UK, as well as in South Africa, a developing nation, the notion of Suitability as a right for retail consumers in India was first mooted by the FSLRC in 2013. The FSLRC called for three additional protections for retail consumers – these entailed the right to receive suitable advice, protection from conflicts of interest of advisors, and access to the redress agency for redress of grievances. Following this, the RBI Committee on Comprehensive Financial Services for Small Businesses and Low-Income Households recommended that ‘every low-income household and small business must have a legally protected right to be offered only ‘suitable’ financial services. The RBI’s Charter enshrines the Right to Suitability as: The products offered should be appropriate to the needs of the customer and based on an assessment of the customer’s financial circumstances and understanding.

While there are certain divergences between the RBI’s definition and the definitions laid out by FSLRC or the CCFS, especially with regard to placing ‘customer’s understanding’ as a precondition, this is nevertheless a big first step in the same direction. The RBI has in its press release, also pointed out that all scheduled commercial banks, regional rural banks and urban cooperative banks are expected to prepare their own board-approved policy incorporating the five Rights of the Charter, and that such a policy must also contain monitoring and oversight mechanisms to be followed for ensuring that rights are not violated. This will pave the way for customer protection to shift from being an ex-post redressal process at the Banking Ombudsman along with self-regulation through industry bodies, to becoming a prerogative of the Boards of banks.


Payments Banks become a reality

By Deepti George, IFMR Finance Foundation

The RBI has published final Guidelines for Licensing of Payments Banks in India after reviewing feedback and comments obtained by it on the draft guidelines that were published in July 2014 and covered in an earlier post.

The Guidelines have permitted Payments Banks to be established under the Banking Regulation Act by a wide variety of eligible institutions and to be engaged in providing demand deposits and payments and remittance services to domestic underserved populations of small businesses and low-income households through own branches, ATMs, and BCs. There will be no credit intermediation including in the form of credit cards through these banks. An initial restriction of upto Rs.100,000 a year as maximum balance has been placed on such deposit accounts per individual customer. Payments Banks can be part of any card payment network and are permitted cash-out at branches, BCs, ATMs and Point-of-Sale terminals.

The final Guidelines provide more leeway to Payments Banks than what was previously proposed in the draft guidelines with respect to the following aspects:

Deployment of demand deposit balances

While previously 100% of funds were to be deployed in Government securities and T-bills with maturity upto 1 year, the final guidelines relax this to requiring a minimum of 75% in such investments. The Payments Banks are free to deploy the remaining 25% in current and time/ fixed deposits with other scheduled commercial banks for operational and liquidity management purposes. This component will also contribute to risk-weighted assets for market risk as previously there would have been be no capital required to be placed for market risk (due to zero risk-weights for Government securities/T-bills). Also, temporary liquidity needs can be met through the interbank uncollateralised call money market and the collateralised repo and CBLO markets.

Non-risk based backstop

The leverage ratio while previously set at not less than 5% (ie., outside liabilities must not exceed 20 times of its networth / paid-up capital and reserves), has now been eased to at not less than 3% (outside liabilities not exceeding 33.33 times of its networth/ paid-up capital and reserves). This shift is justified as a leverage ratio of 5% was more conservative than what is prescribed even for full-service banks, and also because Payments Banks have no credit risk to warrant such a strict requirement.

Retaining ownership by promoters

The draft guidelines had required mandatory dilution of promoter holding to prevent any self-dealing by the owners. The final guidelines specifically clarify that it does not mandate a diversified ownership structure, which would have been required if these banks were undertaking credit activities. Payments Banks can therefore be set up as fully-owned subsidiaries so that promoters can leverage adjacencies arising from the use of existing infrastructure of the parent companies by the subsidiary Payments Bank. When the Payments Bank reaches the net worth of Rs.500 crore, and therefore becomes systemically important, then diversified ownership and listing will be mandatory within three years of reaching that net worth. Payments Banks are free to list themselves before this too.

It will be exciting to see how the creation and performance of such Payments Banks will evolve now that the final guidelines have been published by the regulator.