Small Finance Banks in India: Leveraging ONDC for Financial Inclusion

Small Finance Banks are transforming the landscape of financial services in India, offering a lifeline to underserved communities and small businesses. These specialized institutions are bridging the gap between traditional banking and the needs of micro-enterprises, leveraging digital technology to expand their reach and impact. As the financial sector evolves, Small Finance Banks are at the forefront of driving financial inclusion and supporting the growth of MSMEs across the country.

The Open Network for Digital Commerce (ONDC) is set to revolutionize the way Small Finance Banks operate and serve their customers. This digital infrastructure opens up new possibilities for these banks to offer innovative financial products and services to a wider audience. By tapping into ONDC’s potential, Small Finance Banks can enhance their digital footprint, streamline operations, and create tailored solutions for small businesses.

The Landscape of Small Finance Banks in India

Small Finance Banks (SFBs) in India operate under a specific mandate to expand financial inclusion and cater to underserved segments, including micro, small, and medium enterprises (MSMEs) and the agricultural sector. These niche banks are governed by the Banking Regulation Act 1949 and various RBI regulations. The Reserve Bank of India (RBI) has set stringent guidelines to safeguard and boost the credibility of SFBs, requiring them to direct 75% of their loans to the priority sector, compared to 40% for other scheduled commercial banks.

Regulatory framework and objectives

The RBI’s guidelines stipulate that SFBs must maintain a capital adequacy ratio of 15%, higher than the 9% required for scheduled commercial banks. Additionally, SFBs are required to go public within three years of reaching a net worth of Rs 500 crore. These regulations underscore India’s preference for financial stability and economic inclusiveness.

Current challenges and limitations

SFBs face several challenges in their operations. One significant hurdle is the high cost of transformation from microfinance institutions (MFIs) to banks, including infrastructure, human resources, and organizational changes. They also struggle with deposit mobilization due to limited experience in handling deposits. Competition from existing banks and non-bank financial companies (NBFCs) poses another challenge. Moreover, SFBs grapple with controlling non-performing assets (NPAs), especially in sectors vulnerable to economic fluctuations.

Opportunities for growth and expansion

Despite these challenges, SFBs have shown promising growth. In FY2022-23, their combined profit rose to Rs 4,162 crore, more than four-fold from the previous year. The non-performing asset level stood at a reasonable 4.8% for the same period. To capitalize on growth opportunities, SFBs are focusing on diversifying their portfolios and client base, with an emphasis on secured products like home, vehicle, and gold loans. Adopting technology and developing efficient risk management frameworks are crucial for their future success.

ONDC: Bridging the Gap in Financial Services

The Open Network for Digital Commerce (ONDC) is set to transform financial services in India. Its dedicated financial services portal has the potential to reshape how these services are accessed and used within the digital economy. This platform offers a range of benefits for various stakeholders, including small businesses, consumers, and banks.

Democratizing access to financial products

ONDC aims to simplify access to credit and ensure transparent financial transactions, contributing to greater financial inclusion. It integrates loans into its ecosystem, streamlining the process for small businesses to access credit. The platform also simplifies the purchase and management of insurance policies, allowing consumers to compare policies, calculate premiums, and make claims with ease.

Reducing operational costs for banks

ONDC’s system costs are expected to be lower as it is not locked to a captive ecosystem and does not run proprietary protocols. This reduction in costs benefits both buyers and sellers. Banks can leverage ONDC to offer solutions to both sellers/merchants and buyers/consumers, efficiently monetizing their customer relationships.

Enhancing transparency and trust

ONDC’s blockchain-powered infrastructure enhances efficiency in settling transactions and managing records, leading to faster approvals, lower costs, and a more seamless user experience. This increased transparency and efficiency can help build trust among users and drive the growth of digital commerce in India.

Innovative Financial Products Enabled by ONDC

Micro-lending and peer-to-peer platforms

ONDC is set to revolutionize micro-lending by integrating banks and fintech platforms. This integration aims to offer unsecured personal loans and GST-based invoice loans to small merchants and retailers in underserved regions. The platform streamlines the loan application process, reducing it from days to just hours. In some cases, loan sanctions can be obtained in as little as six to seven minutes, with disbursals following within an hour.

Insurance and investment solutions

ONDC is expanding into insurance and investment segments, offering Life Insurance, marine, health, and motor insurance initially. The platform recently conducted a pilot transaction for marine insurance with InsuranceDekho and Bajaj Allianz. In the investment sector, ONDC plans to launch mutual fund offerings within a month, starting with passive funds like index funds and liquid funds. This approach aims to provide simple wealth-building opportunities to a population accustomed to chit funds and fixed deposits.

Supply chain financing for MSMEs

ONDC bridges the credit gap for MSMEs by offering fair access to finance and integrating financial institutions into one digital platform. The platform enables MSMEs to demonstrate their creditworthiness faster using their digital footprint, streamlining the loan application process. ONDC also plans to introduce B2B credit services, offering large loans of Rs 1-1.5 crore, with protocols expected to be published soon and a pilot launch set for December.

My Views

Small Finance Banks in India can make significant strides to boost financial inclusion, and their integration with ONDC can have impact on their reach and effectiveness. This partnership will allows Small Finance Banks to offer innovative financial products, like micro-lending and supply chain financing, to underserved communities and MSMEs. What’s more, the reduced operational costs and enhanced transparency enabled by ONDC mean Small Finance Banks can provide more competitive and accessible services to their customers.
This synergy creates a more inclusive and efficient banking system, giving small businesses and individuals better access to credit, insurance, and investment opportunities.

References

PS. I have gathered insights from various articles and used AI tools to structure my thoughts on the integration of Small Finance Banks and ONDC, including generating relevant images.

1. https://www.thoughtworks.com/en-au/insights/blog/platforms/ondc-financial-services-India 
2. https://byjus.com/ias-questions/what-are-the-laws-governing-small-finance-banks/ 
3. https://www.investopedia.com/articles/investing/112714/regulations-govern-banking-india.asp 
4. https://eprajournals.com/IJSR/article/1663/download 
5. https://www.frankbanker.com/ondc-potential-impact-on-the-digital-marketplace/ 
6. https://www.linkedin.com/pulse/potential-open-finance-enabled-ondc-blockchain-sharat-chandra 
7. https://www.ey.com/en_in/technology/how-ondc-can-democratize-e-commerce 
8. https://wibmo.co/understanding-ondc-and-what-banks-must-do-to-benefit-from-it/ 
9. https://m.economictimes.com/tech/technology/ondc-to-add-banks-fintechs-to-take-credit-services-to-last-mile/articleshow/111467157.cms 
10. https://www.finverv.com/posts/ondc-solution-to-bridge-indias-msme-credit-gap/
11. https://theprint.in/ani-press-releases/branchx-becomes-indias-first-neobank-to-launch-ondc-loans-for-financial-inclusion/2168232/

Breaking the Mold: A New Era of Life Insurance Marketing Campaigns Beyond Tax Savings

Despite being one of the most significant financial products in India, life insurance is often overlooked and undervalued by many people. The majority of life insurance marketing campaigns are launched during the financial year-end (JFM) since it is widely believed that life insurance is merely a tool for tax savings. But now with hashtag#Budget2023 it is the time to alter this viewpoint and make the most of life insurance.

Life insurance offers many more additional advantages. For instance, it offers financial security to your loved ones in the event of your untimely death. Your family may be able to manage their costs, pay off any debts, and maintain their standard of living with the aid of the death benefit from a life insurance policy. Additionally, a lot of life insurance policies now include investment and savings components, making them effective tools for wealth growth. For instance, unit linked insurance plans (ULIPs) offer the possibility of financial appreciation over time by investing a portion of your payment in the equities or debt markets.

Many life insurance policies have a maturity benefit that pays out a lump sum amount at the end of the policy term. This can assist you in reaching your long-term financial objectives, including as purchasing a home or paying for your child’s education.

The most important aspect of Life Insurance is it gives Peace of mind, You know that your loved ones will be taken care of financially, even if you’re no longer around.
It’s time to see effective advertising efforts and cutting-edge life insurance products that emphasise all of the advantages of life insurance. People will be able to fully appreciate the possibilities of this financial product and make wise choices regarding their financial future. Thanks to #Budget2023 the insurance sector has already begun to innovate and provide fresh, intriguing solutions that cater to different financial needs and aspirations.

In conclusion, it is time to abandon the mentality that views life insurance just as a tax-saving tool. Beyond tax savings, life insurance offers a host of additional advantages. It’s time to take advantage of these benefits and incorporate life insurance into your overall financial planning. You can do this to safeguard both your financial future and the future of your loved ones.

How data-driven marketing is expected to gradually become the new norm

The world is quickly moving toward data-driven marketing as the new standard. The rapid development of technology and the explosion of digital data have made it simpler than ever for brands to gather, evaluate, and use data to drive their marketing strategies. As a result, to acquire a competitive edge and boost their bottom line, many brands are turning to data-driven marketing.

It has been a common practice to use data in marketing. The development of digital technology has, however, made it simpler and more affordable to gather and analyze enormous volumes of data. As a result, data-driven marketing strategies like personalization, automation, and real-time targeting have become increasingly popular.

The capability of data-driven marketing to tailor the client experience is one of its main advantages. Brands can obtain a thorough grasp of their customer’s requirements and preferences by evaluating customer data, and then they can adjust their marketing strategies accordingly. Campaigns could become more successful as a result, of increasing conversion rates and patronage.

One more key component of data-driven marketing is Automation. Brands can automate a lot of the time-consuming and laborious operations involved in traditional marketing, such as lead generation and email campaigns, with the use of technology. This enables them to concentrate on more crucial tasks, including creating new goods and services and expanding their clientele.

Brands are also embracing real-time targeting more and more. Brands can provide customers with personalized messages and offers that are most likely to be of interest to them by using data to analyze their behavior in real time. This can lead to higher conversion rates and more sales.

It is anticipated that data-driven marketing will gradually replace traditional marketing as it continues to develop and get more sophisticated. Brands that adopt this novel strategy will be in a strong position to prosper in the current digital economy, while those that reject change will fall behind.

In conclusion, for brands that want to remain competitive and relevant in the modern digital economy, data-driven marketing is the way to go. Data-driven marketing has the potential to customize the customer experience, automate processes, and target clients in real-time; brand that adopt this new strategy will be well-positioned to succeed.