Banks gung-ho about financial inclusion, but not agents

Financial inclusion is not yet a profitable proposition, but banks remain gung-ho about the initiative, predicting future dividends from the market reach that comes with improved access to finance. Public sector banks entrusted with the task of taking their services to rural parts of the country are suffering losses of 66-93 paise on every ₹100 they transfer to Aadhaar-linked no-frills accounts under the direct subsidy benefit transfer mechanism, finds international consulting firm MicroSave on the basis of inputs from four banks in India.

The banks earn revenue of ₹2.26 for every ₹100 of cash distributed under the Government’s welfare schemes, according to the existing compensation mechanism. But their costs are as high as ₹3.19 per ₹100, translating into a negative gross margin of as high as 41.2 per cent, say estimates by MicroSave.

The firm studied a mix of private and public sector banks, and small banks (including RRBs), says Puneet Chopra, Associate Director for Microsave, which has been providing financial inclusion consulting for 15 years.

Given this cost structure, the more money the banks disburse, the bigger the losses. Yet, rather than going slow on network ramp-up, banks say they are looking to continue their expansion into un-banked India, as they believe this will eventually translate into more business.

“If you see the transactions per se , it (financial inclusion) might not be profitable, but there is significant cross-subsidising happening,” says SBI Chief General Manager (Rural and Agri Business) MG Vaidyan. He points out that it is not only the rural poor that are being catered to by network expansion, but the rural rich as well. “We give farm loans, car loans. It is good business,” says Vaidyan. “We are in the process of bundling a lot of other transactions, such as selling life insurance and medical policies, which will be quite attractive,” he adds.

This is probably why new banking correspondents, or agents, are still being recruited at a rapid pace. Having covered most villages with 2,000-plus population during the 2010-13 period, and the ranks of the banking correspondents swelling to 1,87,167, banks have now shifted focus to villages with populations less than 2,000.

Tough going While banks may be willing to foot the initial losses on the business, banking correspondents who deliver last-mile access in the financial inclusion chain are finding it tough to make ends meet.

Going by the rules adopted by various State Governments, minimum wages across the country range from ₹2,100 in States such as Bihar, Uttar Pradesh, Odisha, Rajasthan and Madhya Pradesh to ₹2,400 in Andhra Pradesh, Maharashtra and Karnataka.

But a separate MicroSave study of 2,932 villages with a population greater than 1,000 found only 2 per cent of the appointed agents were conducting less than 10 transactions a day and less than 4 per cent were earning more than ₹2,000 a month, with a median monthly income as low as ₹1,500.

What’s more, only 7 per cent of the villages had transaction-ready correspondents and only 4 per cent with agents available to transact every day. The survey findings were based on interactions with 1,141 banking correspondents. These were spread across Andhra Pradesh, UP and Bihar. Vaidyan agreed that the income for agents could be seen as supplementary at best. One of the reasons for the losses being suffered by banks is the low transaction volume across millions of no-frills accounts opened under the financial inclusion drive.

With the correspondents not willing to devote time to service accounts, transactions tend to be low and, therefore, banks are unwilling to raise compensation for the agents.

Aadhaar link It is being argued that using direct cash transfers to Aadhaar-linked bank accounts will translate into a saving of 4-5 per cent in the budgets for programmes such as MNREGA, Janani Suraksha Yojana, old-age pensions and scholarships now being paid to beneficiaries through a long chain of intermediaries.

“Better remuneration will incentivise the feet-on-street to deliver more proactively,” said a spokesperson for Fino Paytech, an institution which has helped hire 32,000 correspondents for the financial inclusion drive.

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