INDIA: The trials of banking the unbanked in India

Thursday 18 September 2014

Date: 17 September 2014

Type: Commentary

Source: Financial Times

Keywords: Indian banks, BRICS

By Kavaljit Singh, Madhyam

On 28th August, an ambitious programme on financial inclusion – Jan Dhan Yojana (People’s Wealth Scheme) – was rolled out across India amid much fanfare. The government claims that on the inaugural day, a record 15m zero-balance bank accounts were opened across the country under the program. Nowhere else in the world has such a large number of bank accounts been opened on a single day. This is undoubtedly a big achievement for the new government.

The JDY should be viewed as financial inclusion 3.0 – as two major initiatives were launched previously with mixed results. The first initiative was launched in 1969 when 14 of the largest privately-owned banks were nationalized and the banking network was widened through brick-and-mortar branches. The second initiative was launched in 2005 with a greater emphasis on opening zero-balance bank accounts for poor Indians through the branchless business correspondent (BC) model. A BC is a representative of bank who provides doorstep banking services through the use of smart card handling devices which are connected to the main servers of the bank.

Like financial inclusion 2.0, the JDY also relies heavily on the cheaper BC model to deliver banking services in both rural and urban areas – allowing it to make inroads into unbanked locations. Close to 117m zero-balance accounts have been opened up by nearly 248,000 BCs as on March 31, 2014. These are pretty impressive numbers. But empirical evidence suggests that access to bank accounts has not translated into use. More than 80 per cent of zero-balance bank accounts opened by BCs are dormant.

In cases where poor bank customers receive wages under the national rural employment scheme, they simply withdraw the entire amount immediately after the disbursement. Not even 5 per cent of zero-balance account holders make deposits into their bank accounts. If people are not actively using their bank accounts, it defeats the very purpose of financial inclusion.

Banks, for their part, are not interested in promoting awareness on the usage and benefits of formal banking services as they lose money on zero-balance accounts due to low transactions and balances. Most banks view zero-balance accounts as a corporate social responsibility thrust upon them by the government.

Under the JDY, the BCs will get a compensation of Rs.5000 (£50) per month. For such a meager amount, it would be unfair to expect a BC to visit slums or remote villages at regular intervals, open new bank accounts, process financial transactions and educate illiterate customers about banking products and services.

Other impediments under the BC model include inordinate delay in issuing of smart cards to customers (three to six months); limited utility of smart cards as services such as remittance are not loaded; inadequate cash handling limit given to BCs; devices not working properly due to technical problems or poor network connectivity; lack of customer-centric banking products and services; and absence of a comprehensive strategy for financial education.

If these impediments are not addressed, the JDY may turn out to be another government programme under which ambitious targets of opening millions of bank accounts are achieved on paper but very little meaningful financial inclusion is accomplished on the ground.

The JDY should consider establishment of brick-and-mortar branches which enjoy a high degree of acceptability among the rural people. In a rural setting, a mini-branch (consisting of two staff persons) can easily serve four or five villages. In Andhra Pradesh, for instance, HDFC bank has recently established such mini-branches and found it to be a commercially viable model to offer full banking services to unbanked people.

Given the large outreach of post offices across the country, postal networks also could be utilized to delivery of banking products and services at a low cost.

During a recent visit to my bank located in East Delhi, I found that many low-income customers enrolled under the JDY already had zero-balance savings accounts in another bank. Currently, there is no system in place to ensure that one person does not open multiple accounts under the JDY.

Therefore, it is imperative that the policy focus of JDY should shift from the quantity to the quality of inclusion. The success of the JDY should not be measured only on the basis of number of new accounts opened. The measure of success should also include clearly defined targets for usage. Rather than focusing on opening new accounts, the JDY should give greater attention to those who are not using their existing accounts.

The real challenge is to encourage poor people to actively use a variety of formal banking services (including savings, credit and remittance) so that their dependence on costly informal channels such as moneylenders is greatly reduced.

What is needed is a holistic framework and infrastructure support focused on four core dimensions of universal financial inclusion – affordable products; viable and reliable delivery models; diverse customer needs; and multilingual financial education programmes.

Kavaljit Singh is Director of Madhyam, a policy research institute based in New Delhi.###

See online : Financial Times

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