Professor Ajay Shah of National Institute of Public Finance and Policy (NIPFP) visited IFMR recently, where he spoke about ‘Financial Distribution with Consumer Protection and Scalability’ at IFMR Business School and also visited Pudhuaaru KGFS, Thanjavur.
Prof. Shah emphasized that the distribution of sophisticated financial products with consumer protection is a problem and this problem is not typical to India, rather it is a worldwide phenomenon. He cited various examples of pension schemes, mutual fund and insurance products to highlight the fact that a typical consumer does not understand the fees/charges of financial services because of non-transparent and complicated tariff structures. For example, in India people hardly understand the charges and fees of mutual fund and insurance companies, as a result, consumers have to face bad outcomes many times.
Addressing the question of how to scale up the distribution of financial products while protecting consumers, he calls attention to the fact that there is a need to address the problems prevailing in policy as well as in practices. In the past, some of the government policies have not been conducive due to which scaling up of financial services had been restricted. One example was the nationalization of banks that stifled the competition in the banking sector. Similarly, by allowing customers to do transactions with other banks’ ATMs, the incentive of the banks to install ATMs in new (excluded) areas was undermined. Also, foreign banks are highly regulated in our country. Looking at these examples it seems that when government policies themselves restrict financial institutions to expand their services, addressing the problem of financial exclusion is not easy in near future.
Technological innovations in financial distribution are a key to achieve scalability, which Prof. Shah emphasized by saying that at this point, we have to think high tech – this is the only way to get scalability. In finance we do not need huge infrastructure, and to drive down the cost of financial management it is much less expensive than building any other infrastructure, such as roads, and hence we should encourage IT intensive solutions. For instance, mobile technology is a great example of driving down the cost. He supported the expansion of mobile banking, however, I believe it is prone to several types of frauds and therefore we first need a foolproof system to protect consumers before promoting mobile banking.
Taking on the government policy of fixed pricing for financial services and wages, he emphasized that India is a heterogeneous country and therefore the same price point system should not be practiced. Prices of financial services should be hyper local. He strongly argued that we should not standardize the prices and wages, and prices should be benchmarking local conditions/characteristics.
Financial distribution is all about handling risk and cash flow at the consumer and firm level. The poor struggle with so many risks in day-to-day life that the risk in financial services becomes trivial for them and they can let it go. Therefore, public policy response to protect the poor becomes crucial. Overall, Prof. Shah emphasized that financial distribution is possible with both scalability and consumer protection, and we don’t really have to compromise on one to ensure the other. I believe many of the points raised by Prof. Shah during the seminar are very relevant to financial inclusion, and offer several take away lessons for policy makers and practitioners to work on enhancing financial inclusion in our country.
Next day, he visited the Pudhuaaru KGFS where we discussed about the various services being delivered through the presence of KGFS in remote rural areas. While he appreciated our work, he also gave several valuable suggestions in some of our work areas. For example, on the insurance services we are providing, he suggested that we should conduct a high quality actuarial study of some households analyzing the risk for life, health etc. to build a world-class actuarial database, and then bid to insurance companies. This will give insurance companies an authentic database based on which they can price their products. Some other suggestions were regarding the mapping of KGFS branch data and innovations in some of our products. Certainly, these suggestions would help us in refining our work at KGFS.
Picture from left: Anita Sharma, Prof. Ajay Shah, Gurunath N, Anil SG and Sagar Thakar
We could see some parallels in Prof. Shah’s views and our principles of high quality origination. At IFMR Trust, we also believe in delivery of high quality financial services at the front end and trying to demonstrate high quality origination through KGFS model using latest technology in remote rural areas.
Indeed, both the seminar and the PKGFS visit by Prof. Shah were full of enthusiasm and learning for all of us.
Anita Sharma from IFMR Trust, Advocacy, contributed to this post.