Jul 25, 2016, 03.25 PM | Source: CNBC-TV18
How JAM Trinity will transform lending, propel growth
In CNBC-TV18's 'Indianomics' series, Nandan Nilekani, Former Chairman, UIDAI; Mentor, Ispirt and Ashish Gupta, MD & Head of Research, Credit Suisse discuss how Aadhar, along with government’s financial inclusion program and a smartphone will change the face of banking system.
As of last year, as many as 60 percent of Indians did not have access to formal banking -- a statistic the Narendra Modi dispensation is keen to change.
Last Budget, Finance Minister Arun Jaitley announced the JAM (Jan Dhan-Aadhaar-Mobile) Trinity, through which the government envisages it will revolutionise the way Indians transact. Further, recently, the Reserve Bank of India introduced the unified payment interface (UPI), which will enable all payments to be made through an SMS. As every purchase is made through Aadhaar enabled phones on the unified payment system, a zillion gigabytes of data will be available to banks on the spending habit and indeed the lifestyles of their customers. The father of Unique Identification Authority of India (UIDAI), Nandan Nilekani, believes that there will be a shift in business models and banking system from low volume, high value, costs and fees to high volume, low value, costs and fees. Not just this, Jan-Dhan, Aadhaar and Mobile (JAM) will lead to a dramatic upsurge in accessibility and affordability of credit. Extending the argument forward, brokerage Credit Suisse estimates that total consumer loans will rise from USD 600 billion today to USD 3 trillion in 10 years –that opportunity will be shared by the savviest public and private banks, the new banks and new age non-bank finance companies. Therein is also an opportunity. A five-fold jump in retail consumption can mean a five-fold jump in India's gross domestic product (GDP): a USD 10 trillion India will be a middle income country. Below is the verbatim transcript of Nandan Nilekani and Ashish Gupta's interview to Latha Venkatesh on CNBC-TV18. Q: First the Aadhaar was conceived by you like 5 years ago and it got a big push from the current government. Are you satisfied with the way things have progressed? Nilekani: It’s gone on as perfectly as it could have. It's actually 7 years since 2009 but the fact that the new government under Prime Minister Modi has wholeheartedly supported Aadhaar, for me, is a great news. So, I am very happy with the commitment and the use of that for subsidiary reforms, for biometrics attendance and the whole host of applications. So, I think that’s a terrific story and I am delighted. The pace has accelerated since the time I stepped down in March 2014 when 600 million people had Aadhaar. Now it has crossed the billion mark, and is the fastest growing digital platform in the world. Ours is the only non-US government that owns a billion user platform. So, this is quite an achievement and the current government is fully behind it and they are doing a huge effort on that. What I am thinking about is what the next step will be because the use of Aadhaar in the government is well established, but the real use is for transformation of businesses like the financial services and that’s what led me to partner with Ashish in doing this report. Q: What would you want to see in terms of next steps? The government has given a catalyst in the form of Aadhaar and the Reserve Bank probably in the form of unified payment interface and now it is to be taken over by the private sector. Nilekani: The government has done an amazing job in building the Aadhaar platform. RBI has done an amazing job in supporting Aadhaar and then supporting UPI. Now it’s really for banks whether they are private, public sector banks, new age banks or NBFCs; all these guys can start leveraging the entire stack we have built. Q: You all have given a very, very big call. You are saying that at the moment it is a USD 600 billion retail loan market, USD 600 billion to USD 3,000 billion is actually Rs 40 lakh crore rising to Rs 200 lakh crore that’s huge. Today the retail loan market at Rs 40 lakh crore is about one-third or one-fourth of the GDP, so it means the GDP also grows 5 times, will we be an USD 8 trillion to USD 10 trillion economy in 10 years. Gupta: While there is total consumer loan penetration, SME loans in India are only about 26-27 percent of GDP and by most global standard that is very, very low. Now, over the next 10 years our GDP will grow at least at a nominal compound annual growth rate (CAGR) of 12-13 percent and if the penetration increases by 10 percent of GDP, we will get to these numbers over 10 years. So, there is lot of power of compounding that will kick in and today unfortunately we find a lot of skew in the total private sector credit out there. The concentration is much higher on the corporate side and not as much on the consumer and the SME side and even the loans that are going to SMEs they are relatively very high priced and in fact there is some data from RBI that indicates that even for SMEs borrowing from the banking sector, where the ticket size of the loan is less than Rs 50 lakh, the average cost of credit is 18-20 percent. Q: This is sounding like wide-eye enthusiasm, it feels like probably when India became independent in 1950 Gandhiji and Jawaharlal Nehru would have looked at electricity and rural roads that’s all I have to give and this nation is going to become like Britain. It didn’t happen that way it didn’t pan out that way. Do you think we are getting ahead of ourselves in this dream that India is going to become a middle income country in 10 years? Nilekani: Well, there are lot of other challenges and I don’t dispute the seriousness of those challenges. But I also do know that India now has the best digital infrastructure for financial inclusion or financial universalisation and the fact that we have the Jan-Dhan, Aadhaar and Mobile (JAM) layer, we have Indian stack that allows you to paperless, presence-less and cashless transactions. The fact that India is going to go from being data poor to data rich, which allows lending to be based on data, will actually make it safer. All these are incredibly powerful things that didn't exist earlier and we have the perfect trifecta because India is going to grow. So let’s say GDP plus interest rate, nominal GDP growth at 12-13 percent, credit is going to deepen because more people will get loans, so lets say that institute to 20 percent and then the fact that the PSU bank lending is going to be muted for whatever issues they have NPAs, lack of capital and so on. So a good private sector lender whether it’s a bank or NBFC, I see no reason why they can’t grow at 30 percent compounded for the next several years simply because of the market situation. Q: Coming back to the huge expansion in retail loans that you are expecting, the caveat is poverty and illiteracy. In India even if you take a much diluted version of people below the poverty line, it comes to about 25 percent. If you make it slightly more decent, like people with three meals a day and some healthcare, almost 35 percent of India would by definition be below poverty line. We are not growing or not taking loans because there is no money to save. Digitisation cannot solve that. Nilekani: That is where the direct benefit transfer (DBT) comes in. Look at what is happening in DBT. India has run the world\\'s largest DBT programme, has done 1 billion transactions where Rs 100 crore transactions have been credited. Q: That will be with people who are literate? Nilekani: No, Rs 28 crore Aadhaar linked bank accounts exists today and maybe liquefied petroleum gas (LPG) is more a middleclass thing but if you look at other payments; loans, scholarships, National Rural Employment Guarantee Act (NREGA) wages which are also going to Aadhaar linked bank accounts. They are touching the people who matter and as more and more subsidies become cash transfer, the government will take kerosene, fertiliser, PDS etc and then the state subsidies. Electricity should be a cash transfer. Why are we giving free power? Charge power at normal rates and give cash subsidy to the farmers. So, as more and more people convert existing implicit subsidies into explicit cash transfers, we are going to have billions of transactions which will be going directly into the bank accounts of the poorest. So that will create that momentum. Q: What analogy should we take? Should we take the analogy of electricity which would have led to a huge revolution in India many-many decades ago but didn\\'t because the state didn\\'t intervene correctly or should we take the analogy of telephone, which in 1995 didn\\'t show any promise but by 2015 is a revolution, which trajectory might this take? Nilekani: It is more because of the mobile phone as there is a great case of leapfrog. We had landlines which had tapered off at 60 million for many years and suddenly boom; we have a billion mobile phones because technology made it possible. The same thing is going to happen here. The combination of technology, government push, regulatory push, market forces and demand all that is coming together. Q: Would there be a worry that you are selling, as Ashish puts it, not just consumer durables or loans, you are going to sell a lot of financial products and that is expected to be the engine of growth. There a lot of buyer awareness is needed and we do not have that level of awareness. So can this get short circuited? These are my worries. You try to sell an insurance product, for instance the Atal Bima Yojana is a great idea but is there enough awareness in the mind of the man or a woman who is insured to go and claim that money at the right hour from the right brick and mortar space. Do you see all these becoming impediments to the revolution that you can see? Nilekani: Yes, obviously there will be challenges and misselling and all is a big part of the challenge of financial services and that is why we need to have proper information. But this particular argument we are making is only in lending. We are not talking about any other financials. The argument that Ashish and his team are saying is 5x growth in lending because technology and growth will deepen the credit market - that 5x growth in lending will lead to USD 600 billion marketcap creation which is up for grabs. It can be done by existing private sector banks, new private sector banks, payment banks, small banks, public sector undertaking (PSU) banks, non banking financial companies (NBFCs). I do not think we are taking a call on who will win this or maybe they are taking a call, I am not taking a call. Q: You have pinned your hopes, a great deal on the private sector banks and some of the NBFCs. Where is payment bank in the scheme of things? You don\\'t see that as a big vehicle of taking advantage and operationalising this? Gupta: Absolutely. I think payment banks will play two roles. Q: So telecom companies are to be purchased as a bet? Gupta: I would not like to name because we do not know what are the individuals and their strategies. They still have to launch their product, but the two roles they will play. One is they themselves will come in and second, because of the set of them coming in, the banks themselves will get their act together because otherwise left to themselves the banks would have dragged their feet because all of them are incumbents, they do not want too much change and they would have resisted change but it is only because the payment banks will get launched in the next two-three months, the talk is that in next 15 days 15 of the banks will be launching the Unified Payment Interface(UPI) app. So that is the catalyst that was needed and an external disrupter coming, so that there is a faster change in the incumbents. Q: You are speaking about NBFCs as a potential vehicle because they are the savviest, least constraint by regulation. What about the microfinance institution (MFI) segment? Gupta: They will certainly be beneficiaries. They will be beneficiaries because their operating cost model comes down because of technology. They will be beneficiaries because you will have better cash management system in place but the lending opportunities for MFIs, in my view, will not grow because the MFI model is not based on underwriting. So the data availability will benefit those kinds of loans where you want to do underwriting. So of course some of the foreign institutional investors (FIIs) do slightly higher ticket size loans for enterprises - that is part of their business that will get a big boost but if you are lending to self-help groups etc - that will not change much. Q: Since you come from Bengaluru, the land of start-ups and apps. Do you see a lot of these analytics getting used to lend small and medium enterprises (SME) loans? For the current banking sector, if you speak even to HDFC; HDFC is not using so much of analytics to lend loans. It's actual due diligence that they do on a case by case basis, for a Rs 25 lakh loan to put one officer and do the due diligence is not economical for them. Do you see a whole lot of analytic based, algo based lending? Nilekani: Ispirit, a group which I am a volunteer with, has identified that there are 35 alternate lending start-ups which are going to use data for lending and when those start-ups further use India stack, they are going to further reduce cost and so we see a massive thrust to use database lending and that is all happening because of platformisation. So let's say if you have Uber or Ola or Amazon or Flipkart; they have 200,000 drivers on their platform or they have half a million merchants. Those merchants are now digitally connected to a platform and now you have data of their business - that data can be used to lend and since there is money flow between the platform and the vendor - that money flow can be intercepted to pay the loan. There are lots of things you can do today that you couldn't do earlier. Q: Since you look at businesses more closely has this already caught on to just look at married man, two children in convent schools less likely to default. This kind of lending has already begun? Gupta: Not at the banks and as we talked about the payment banks earlier that it is innovation that is starting in the newcomer rather than incumbents and I think banks will also learn from them and in my view lot of banks will partner with them and you will see banks tying up with alternative lending company, banks have already tied up with payment banks and that will really lead to change in the Industry. Nilekani: In fact, one of the biggest quickest banks of the block has been Bank of Baroda, which on its foundation day tied up with 5 or 6 start-ups. Federal is doing an amazing job, Shyam has brought great thinking there, but if you look at Bank of Baroda which is a public sector bank they have just tied up and lot of many surprising things happening. Q: What would you be worried about? Which are the red flags that you would want to keep in mind as a person who is visualising this? Nilekani: I think there are many red flags. One is that whenever there is excessive enthusiasm about lending money is usually indigestion later, so you are dead bubbles and we have seen them the US and here. So if you don’t do this well, if you don’t use the guardrails of data and just indiscriminately give loans without doing proper checking you are going to have a problem tomorrow so that’s the risk. It is not just that we are saying retail lending should grow 5 times. Retail lending should grow on a platform of data, that’s the only way you are going to make sure there is no crisis in few years that is number one. Number two is the argument about mis-selling. I think in financial services especially with a population they may not know all the things, mis-selling is a huge challenge we need to guard against that. You create the wrong incentives for people to make money by selling and getting their bonuses upfront, it sounds something like the global financial crisis to me is a dangerous thing, so that’s number two. Number three is that obviously governments and regulators may also have a view on this, but we felt that our obligation was to call the opportunity. Look guy this can happen, so don’t tell us tomorrow that you didn’t tell us that’s all. Q: One of the important statements that you are making is that the share of the public sector banks can go down from the current 70 percent to probably 63 percent or thereabouts. Now the state in which the public sector banks are and more importantly the state in which NBFCs and private sector are is this is a very modest call. I would have thought that in the next 10 years public sector banks will be 50 percent if that of the market? Gupta: See, for the market share to shift for banks there are two aspects that need to shift. You need to shift the assets loans, but they can only move if the deposits can also move, because the balance sheets has to be equal on the both side and the challenge till now has been that the deposit side has not been moving, so while all of us are happy to go shopping for loans and we take loans from the guy who is most efficient, who gives the best rates but on the deposit side there is still a lot of incumbency advantage to the public sector banks and that has not broken down yet. Of course, one of the changes that you talked about earlier coming of UPI in my view will accelerate that process as well, but that is what we need to see and you are probably right that market share shift away from public sector banks can be faster, but for that we need to see the UPI platform working quicker. Q: Do you think that regulators play a big role. Do you think that it is important that we should have a younger regulators you will not be even able to take the leap of apps and digitisation if you are already digitally per se. Nilekani: Well, I am 61 so I shouldn’t be making a statement about this, but I think people who are on top of things is what we want, whether they are young or old, lot of young people are not on top of this revolution. So I think whoever it is should have a sensitisation to the digital revolution happening. Q: Will too much conservatism be our problem? Nilekani: It could be because regulation is how do you do calibrated innovation and getting that is a judgement call and so that judgement call is very important. Obviously we need a person who makes the right judgement calls on balance. Q: So what’s your forecast therefore in the next 5 years what is the most outlandish thing that you expect in India? Nilekani: I think whatever you said that the financial inclusion will reach everyone. Every adult will have a Smartphone, a bank account and Aadhaar number and with one click on his phone he will be transacting, buying, selling and transferring money all that is reality. Q: Will cash be outlawed you think in 5 years? I think Denmark is thinking of outlawing cash. Nilekani: Not outlawing, but certainly with all the revolution that is happening will drive the pace of a cashless society.
