By Prof R Vaidyanathan
Tag Line: Future of Banking | Finance & Economy
Blurb: The most important thing about mobile phones is that — unlike computers — even people who are not literate can use them. The only requirement is the ability to speak and/or hear. We need not worry about language or massive software development. This small communication device provides phenomenal power unthinkable by economists or financial experts some ten years ago. If a tech-savvy service provider can provide banking services instead of banks becoming tech-savvy, traditional banks may be endangered.
The mobile phone is now being used for small-time financial activities, such as information on prices, billing settlements, etc. We have service providers like AirTel/Jio providing internet-based TV channels which will provide competition to Dish TV /Tata sky etc. Over a period of time, satellite-based TV channels might be extinct if the number of TV towers serves well to offer hundreds of channels.
This is one major disruption. But more important is the service provider replacing banks.
Service Provider as Banker
Already Jio is tied up with, SBI and AirTel with Kotak bank etc. This is to act as payment banks. One step more is required to make the mobile revolution complete in banking services. The important development that service providers and bankers should work towards is to make it drive a retail credit revolution. One observes that in the boat markets of Bangkok, one can either pay by baht, the local currency or get charge cards from the service providers and pay through them.
The service providers initially provide an overdraft or revolving credit facility to the retail trader, which is adjusted on a daily basis by crediting the retailer for every debit incurred by the buyer. The payments made by customers are used to bring down credit given in the morning. This is one of the interesting possibilities, wherein the retail trade network is provided with a credit facility and which reduces their cost of borrowing. It requires one mobile instrument with them and periodic crediting of their account based on received calls, which are mostly available free.
The share of trade, [around 10 per cent of the national income] is at Rs 17 lakh crore. The trade sector would have needed Rs 14 lakh crore as credit requirements (since, in trade, the major portion of capital is working capital). The combined financing to trade by all banking sources was around Rs 5 lakh crore. This implies that around 30 per cent of credit requirement is met by banking channels and the remaining by non-banking ones including money lenders. So, the potential available for mobile phone service providers is a market of the order of Rs 9 lakh crore for digital-based lending. Even assuming only Rs 1 lakh crore of this is tapped in the next, say, five years, at an interest cost of 20 per cent (retail credit today in the `open’ market is around 48 to 60 per cent), the sum to be earned is Rs 20,000 crore. We can call this Digi-financing.
Instead of permanently singing the WalMart kirtan, we should think of innovative ways in which technology can facilitate the vast base of self-employed groups. The millions of entrepreneurs involved in the retail trade, instead of being dismissed as “unorganized,” can be made more effective by the credit enhancement and price discovery process simply by using mobile telephony. It is not required for WalMart to come here and squeeze our farmers and small manufacturers and sell their produce/products to consumers at “lower prices”. We can think of leveraging on telecommunications to make all factor markets more efficient and lower consumer prices.
The most important thing about mobile phones is that — unlike computers — even people who are not literate can use them. The only requirement is the ability to speak and/or hear. We need not worry about language or massive software development. This small communication device provides phenomenal power unthinkable by economists or financial experts some ten years ago. Hence the interesting question is if the service provider will swallow the banks or another way. Here the technology-savvy service provider can give banking services easily compared to banks becoming tech-savvy. So banks may become endangered species to be shown on animal planet or National Geography channels.
The appropriate thing to consider is to make the mobile sets — more so the “smart” ones – free goods for the poorer, self-employed groups. This can be done even though self-help groups, wherever they are active, as they may be better able to identify the right beneficiaries. The Central and State governments, as well as various aid organizations, can give the handset free to many in these segments. It must be seen as a process of asset creation and making markets work and should not be condemned, by the metropolitan experts, as a populist scheme. Most of the time, these beneficiaries need to receive calls rather than make them. If we have a market of 800-1000 million smart sets, the unit cost can be brought down to even less than ‘000rs’! But the Government seems to think that the service sector is the economy’s milch-cow, rather than the engine of India’s growth. It may now be taxed at 18 per cent, and the argument is that their share is more than 50 per cent in our GDP and, hence, they should contribute more.
The impact of telecommunications on the self-employed and more particularly among the poorer groups has not been fully understood or appreciated. Mobile phones have created a sort of tsunami among lower-level entrepreneurial groups like plumbers, carpenters, masons, small-time construction contractors, painters, cooks, repair mechanics, winders, welders, water suppliers, tea suppliers, vegetable vendors, retail traders, flower vendors, auto drivers, priests, astrologers, etc. Actually, more than three hundred categories of self-employed entrepreneurs.
Since the growth in the economy is not due to the Government but in spite of it, the least it can do is to allow millions of these entrepreneurs to flourish for a vibrant and sustained growth process.
(Prof R. Vaidyanathan is Dean, Centre for Economic Studies, VIF. He is also the Cho S Ramaswamy Visiting Chair Professor of Public Policy at SASTRA University and a retired IIMB Professor)