Sucheta Dalal :Racing to the bottom of the pyramid
Sucheta Dalal

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Racing to the bottom of the pyramid  

Sep 18, 2006

It is a veritable race to the bottom of the pyramid. Just a decade ago, banks on an aggressive growth path used to eliminate small & medium enterprises (SMEs) from their portfolio. Then, economic and corporate reform, falling interest rates and a booming capital market changed the game. The best companies aimed for global competitiveness, restructured operations, cut costs, reduced borrowing and met funding needs from the capital market leaving banks to find new customers.


This coincided with the IT services boom and suddenly SMEs were hot. From banks to IT companies, everybody noticed the phenomenal growth of this sector and wanted a part of the action. So HSBC is selling them ‘factoring solutions’ and has appointed 230 relationship managers to achieve a targeted 30% growth in lending to this sector.


Citigroup CEO Sanjay Nayar is extremely bullish about SMEs and has created an entire structure to help them scout for global business opportunities, acquisitions, sourcing material and legal help to structure deals. With SMEs clocking 20% annual growth, it is good business for the banks to ride on their success.


The giant State Bank of India’s (SBI) most profitable segment is its centralised SME unit, which has relatively big investment in health and education; and the Punjab government has partnered with a private company to create ‘SME Business Services’ to “facilitate” the growth of this sector in the state. Global information technology giants are also in line and vying for a chunk of the $7.7 billion that Indian SMEs are expected to spend on IT infrastructure and solutions (according to a study by New York-based AMI Partners). From Nortel to Microsoft, Intel and IBM, everybody has launched attractive packages especially for SMEs.


Now that the SME opportunity is fully recognised, lenders are rapidly moving even lower down the economic pyramid. Anecdotal reports about high indebtedness and usurious interest rates of 40-120% paid to moneylenders is an opportunity for organised lending. And technology-based solutions seem set to allow banks to beat the high cost of dealing with tiny, semi-literate and rural borrowers. ICICI Bank CEO KV Kamath says, “We have indeed made good progress in the launch of our technology-enabled inclusive banking platform.”


It is a chip-enabled, biometric (finger-print) based smart card with a photo and a unique identification number, which can also be used for other identification needs. The bank has opted for smart POS terminals instead of expensive ATMs. It is already rolling these out in rural India, signing nearly 2,000 customers a day. It has set itself a target of 10,000 customers a day in about two months.


Banks are eyeing unorganised or tiny businesses in urban and semi-urban locations


Others such as Citibank have their eye fixed on unorganised or tiny businesses in urban and semi-urban locations. These are carpenters, painters, newspaper vendors, electricians, taxi drivers and a variety of artisans, who earn a steady monthly income but have remained largely out of the banking system.


A fortnight before, Citibank launched a beta site in Hyderabad with a biometric (finger-print) based ATM card. Its country head, Sanjay Nayar, says, “The next beta site will be an ATM somewhere in the middle of Dharavi.” Usually disparaged as Asia’s largest slum, Dharavi is a throbbing centre of tiny businesses. Citibank plans to introduce small denomination recurring deposits for these customers; once they establish a credible credit history over 6-12 months, they would be eligible for small loans of upto Rs 5,000.


HDFC Bank is also paying close attention. Its managing director, Aditya Puri, recognises that “it takes a few hundred rupees to transform rural lives. A mere wheel-barrow for a farmer is enough to increase productivity and income.”


If prosperity at the bottom of the pyramid attracts lenders, then UTI Mutual Fund is finding a social and economic role in tailoring pension schemes for unorganised labour that can be banded together under a self-help group.


After its first scheme for women in Gujarat, chairman UK Sinha has gone to his home state with a pension scheme for dairy farmers under the Bihar State Co-operative Milk Federation. Its target: 50,000 dairy farmers.


Sinha’s moves are being watched with some scepticism, but if he makes it work, it will encourage other players and pave the way for basic financial security to unorganised labour.


-- Sucheta Dalal