Taking Banks to India's Poor

Image: Manoj Patil for Forbes India

Award: Start Up of the Year
Name: Manish Khera, CEO, FINO
Age: 41
Why He Won: For setting up the largest banking correspondence network in India and bringing financial inclusion to millions of people across 26 states, and using mobile tech in a smart way. It is poised to become the country’s largest banking correspondent.


Like any bank, FINO Paytech wants people to save, borrow and use financial services. Just that FINO is not a bank, and its clientele is not the kind of people you run into at teller machine kiosks. The company’s clients are rickshaw pullers, maids, paanwallahs, chauffeurs, casual labourers and other odd-jobbers who barely manage to eke out a living. Saving for the future does not really cross their minds. Or so it would seem. “Don’t assume for a moment that poor people can’t save,” says Rajeev Arora, director, Financial Inclusion Networking and Operations (FINO) Paytech.

Arora recounts meeting a paani puri vendor in Satara, Maharashtra. He tried persuading him to put Rs 100 in a recurring deposit account with FINO every month. The vendor refused saying he did not have any money left to save. “I randomly asked him, ‘Chit fund karte ho? [Do you invest in chit funds?]’ Pat came the reply, ‘Haan saab. Mahine ke Rs 1,500 [Yes sir, Rs 1,500 a month]’. I was blown away. Here I am begging him to give us Rs 100 and he goes and puts Rs 1,500 into a chit fund company; and we know how they shape up.”

FINO wants people like the paani puri seller to start saving in bank accounts, transfer money electronically, take loans and buy insurance. There are already a set of companies that are focussed on this segment: Muthoot Finance, Manappuram Gold, Western Union, chit funds, and pathpedi outlets. FINO wants to offer all that under its umbrella; a financial superstore at the bottom of the pyramid.

“There’s no doubt that there’s need for a gamut of services which would fulfil the needs of this sector,” says Samit Ghosh, founder of Ujjivan, a financial services firm for the urban poor. “You can’t just open a bank account for the poor and say they are financially included. You have to offer them loans, insurance, etc. I always draw a parallel with the Indian middle class. Until 1985, the middle class had only savings. It was later that banks reached out to them and gave them loans etc. FINO is using technology to do it and that is the right way. However, the hard work is only just beginning for them,” he says.

The challenge is to wean people away from their familiar and largely informal ways of saving and bring them to a proper, well-regulated banking channel. These are people who earn between Rs 90,000 and Rs 200,000 a year and float a little above the government’s poverty line. “They are too far down the value chain [for banks],” says Manish Khera, the CEO of FINO. Where banks don’t see a viable business case, Khera sees a catchment of 90 million potential customers for selling loans, insurance, mutual funds and other financial services.

FINO, incubated by ICICI Bank in 2006 to act as a technology provider to microfinance companies and banks, has now evolved and describes itself as a business and banking technology platform with an extensive services delivery channel. In plain English, it operates as an agent of banks in areas where they don’t have branches.

At the time, the Reserve Bank of India and the government were trying to expand the formal financial sector, beginning with a bank account for every Indian. But banks were reluctant to open branches in remote areas. That’s where FINO stepped in as a banking correspondent (BC), an agent which takes over banks’ front end for a fee, and did the due diligence for banks in lending money and opening accounts for customers. Between 2007 and March 2009, it signed up five million customers for banks. However, over 80 percent of these accounts were inactive and banks took just cursory measures to ensure that they were in line with the RBI. Then the Central bank cracked the whip. In 2009, then RBI deputy governor Usha Thorat decreed that banks would have to reach 70 percent of India’s villages by 2013. Banks had no choice but look for agents who would act as their extensions. 

FINO had the pedigree, all that was left was getting business, for which it needed money. “Working capital kept me awake through most of the early years,” says Rishi Gupta, the chief financial officer. The nature of the business means that payments, the commission that banks give FINO, are often delayed, sometimes up to six months after money has been disbursed. It was a huge problem in the early years.

 FINO raised capital several times. ICICI Bank had given it Rs 10 crore in September 2006 and ICICI Lombard contributed another Rs 5 crore six months later. IFC, Legatum and Intel Capital came in with $15 million in June 2007. HSBC Private Equity bought out Legatum’s share for $15 million two years later. “We had an off-site in Goa in 2009. I said, ‘I hope this is the last year we are coming here on borrowed money’,” says Gupta. It was not to be.

In March 2011, FINO went back to the markets and after three months of intense negotiations, Blackstone India bought an undisclosed amount of equity for $30 million. It helped that FINO had posted its first profits in FY11 and hasn’t looked back since.

 It had invested in technology, had the sales force on the ground, and was flush with money. FINO’s custom-built devices went a long way in ensuring that its customers stayed connected to the grid. Their ‘pod machines’, hand-held biometric devices that recorded customer fingerprints, reduced the risk of fraud to a great extent. Its machines function both online and offline, so money still got transferred in areas without any network. By January 2010, it had 10 million customers (across 15 banks). It added another 15 million in the next year and doubled the base to 50 million by August 2012, two-thirds of the clientele base in the sector. It’s eyeing 100 million by 2015.

Soon after Thorat’s decision, the Central government decided to distribute funds under its various social service schemes through electronic transfers. This brought in much-needed revenue for FINO. It gets a 1.75 percent transaction fee every time it makes a payout called electronic benefit transfer (EBT). In FY12, it disbursed Rs 2,300 crore in EBTs and clocked a revenue of $55 million, 34 percent of its total revenue kitty. For every account it opens, the bank pays FINO a commission, contributing to 40 percent of its revenues. The company also works with the government’s RSBY insurance scheme and earns a share of the Rs 30 fee paid by each customer.

Khera believes that the BPL (below poverty line) segment business will continue to grow steadily. He is eyeing the next level of growth with insurance, loans, remittances, and savings. He believes he can sell the bouquet to the APL (above poverty line) segment as well. “There is not much difference between the two segments. The characteristics are the same and in the 50 million customers that we have covered, there is quite a bit of overlap,” he says. To do all of this, the company will have to take on chit funds, local saving schemes, moneylenders, the post office, hawala operators, and local businesses. He believes it is a matter of approach and points out how banking changed with new private sector banks hiring direct sales agents who sought out customers instead of them lining up at branches. “We don’t want to reinvent banking. We will just reinvent the approach,” Khera says.

Mathew Cyriac, managing director, Blackstone India, says FINO’s got tremendous potential. “This is the only BC that has worked. It’s because they have established scale. Now they are engaging more with banks. It’s the right time to take this call and expand,” he says. Cyriac believes FINO will have a market cap of close to Rs 3,000 crore in five years. For that, FINO will have to crack the APL market. In some ways that means creating another company, one that services customers the way FINO wants to. A FINO 2.0 if you will.

Unnikrishnan Nair, business head, consumer services, believes remittances and lending will deliver the thrust. FINO is working with Union Bank of India (UBI) and ICICI Bank for domestic remittances. There are more than 100 million migrants in the country, most of whom use informal channels like hawala, cash couriers or post office money orders to remit money back home. These channels charge 3-6 percent depending on the amount remitted. FINO charges 1.5-2 percent, closer to what banks levy. Rolled out over the past two years, FINO’s remittances business averages 5,000 transactions a day. Each of its two million customers sends home an average of Rs 16,000 to Rs 20,000 every year. Nair believes the potential market is around Rs 50,000 crore annually.  

FINO is similarly bullish on the lending business. The company believes there is huge potential in the microfinance sector in the aftermath of the SKS meltdown in 2010. The Andhra Pradesh government has all but stopped microfinance institutions (MFIs) from operating. Most MFIs across the country are struggling with their business models. And most borrowers have gone back to their old sources of funds, the moneylenders and the loan sharks, paying 8-10 percent interest a month.

FINO is avoiding hotspots like Andhra Pradesh and focusing on lending to groups to reduce risk of default. Social pressure means that every individual in the group is forced to make good his loan payments. FINO works with UBI for this vertical. The average ticket size of a loan is Rs 10,000 to Rs 14,000 at an interest rate of 24-26 percent. FINO has also tied up with microfinance credit bureau High Mark to check out the credit history of the borrowers.

A big differentiator for FINO is that it has acquired Intrepid Finance Services, a non-banking financial company (NBFC), that gives it a small equity base. This means FINO is not dependent on banks to lend money. It has defined geographies with UBI and doesn’t intrude into the areas where it sells the bank’s loans.

Unlike MFIs, FINO is able to take deposits from customers. It is encouraging people to open micro-recurring deposit accounts of as low as Rs 100 a month. The company is also piloting Hospicash, its version of Mediclaim in a tie-up with HDFC ERGO, to offer Rs 750 a day for 10 days. For accident policies, ICICI Lombard and HDFC ERGO are on board. For these to succeed, FINO is looking to triple its agent force from 31,200 to 100,000 by 2015. “You will see us increasingly engaging directly with the customer: More control and ownership of execution,” says Khera.

A tool for that change is Alpha Payments, previously Nokia Money, Nokia’s prepaid mobile payment business for India, which FINO bought out this June. Shweta Apremeya, who runs the business now, says digital money will be another banking channel. FINO will use Alpha to let customers pay for services like DTH, electricity and telephone. “Do we expect a paanwala in a village to make DTH payments? Yes. Do we expect someone to send money across mobiles? No,” says Apremeya.

In the urban market, FINO expects college kids to be early adopters. Then there are the taxi, autorickshaw and bus drivers. “These people work through the day. They don’t have time to stop and refill. They can do it on the move with Alpha,” says Apremeya. “Sourcing is not the business case in this game. The business case is when you connect sourcing with servicing of the customer. And servicing will happen only if you offer the product. We focussed on sourcing in the hope that after you acquired the customer, you could service him and get the tail income,” she says. Seems the tail has begun to wag now.