Debating India


Losing sight of the base

Monday 15 August 2005

Economic liberalisation since the early 1990s has resulted in the opening up of several sectors that were previously dominated by state-owned monopolies. Reforms came early to the financial sector and there is no doubt at all that that there has been a significant change in the ways customers derive satisfaction from banks and insurance companies. As new players compete with the existing public sector institutions, two consequences have been in evidence. Consumers have plenty of choices across service providers and equally significantly across newer, innovative products. Secondly, the market itself has grown considerably.

While competition has generally been beneficial, a few caveats are in order. To gauge the success of financial sector reform the key question ought to be whether the benefits have started percolating to the lower strata of the consumer groups. In a contextual sense too the question is significant. After all, through the 1970s following nationalisation, the banking and insurance sectors were tied to certain social goals. Reform era banking might not have quite pushed those objectives to the back seat but the emphasis has certainly changed to the advantage of the well-heeled customer segment. It might be self-defeating for banks especially the government-owned ones to abandon their traditions of lending to small industries and agriculture, while focussing on the top rung companies. The one-sided bargaining game, which is what competition has led to, has forced banks to lend at below prime rates. Other customers, "the riskier ones", are in effect subsidising the leading corporates. Banks and insurance companies will surely have to follow the lead of consumer goods marketing companies who have discovered, by trial and error, that commercial success lies in reaching out to customers at the base of the pyramid.

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