What we need is a game-changing business model, which can ‘sachetise' financial services, package them and deliver them at a price that is affordable to the consumer and profitable for the producer.
The tale of financial inclusion in India is akin to that of the blind men and the elephant. You all know the story. A bunch of blind men chance upon an elephant. The one who catches hold of its tail says the elephant is like a rope. The one who touches the trunk says the elephant is like a snake, while the one touching the animal's leg insists it's like a tree.
Likewise, when it comes to financial inclusion, every member of the dramatis personae has got hold of a different bit of the inclusion elephant. And they all appear to think that the whole animal looks like the bit they have caught hold of. The Finance Ministry, for instance, seems to think that financial inclusion ends with ensuring that everyone has a bank account. Whether the accounts have any money, or in what way those accounts will help the holders of these accounts, is not its concern.
The Reserve Bank of India, charged with implementing this goal, has done its bit to ensure that banks do not haemorrhage money in the process. So it created the concept of ‘Business Correspondents', so that banks could actually outsource the actual process of reaching out to the great unbanked — at a reasonable cost, of course.
EBT as magic wand?
As far as the government is concerned, financial inclusion ends with ‘electronic benefits transfer' (EBT), which means that all its subsidy payments are transferred electronically into the beneficiary's account. This will, on paper, stem leakages, remove the corruption that is endemic to all government subsidy schemes, and magically transform the lives of the beneficiaries.
The unstated assumption is that once it can be shown that money is being transferred without being ‘touched by human hands' so to speak, questions over the logic, merits and benefits of such subsidy schemes will also disappear. The latest Tughlaqian diktat in this direction is its fatwa issued last week to banks (read nationalised banks), that they need to ensure that every single household in India has at least one bank account by the end of June.
How this is going to be accomplished in the space of one month, when it hasn't been managed in over 60 years of trying, is not the Finance Ministry's worry. The validity of such an assumption — the EBT is the magic wand to make the ills of the current subsidy system disappear — is the subject of another debate altogether.
But let us look at the notion of whether a bank account at least manages to achieve the limited objective of including the account holder into the financial system.
Plethora of schemes
In a recent article, Mr K.C. Chakrabarty, Deputy Governor, Reserve Bank of India, defined financial inclusion as “the process of ensuring access to appropriate financial products and services needed by vulnerable groups such as weaker sections and low-income groups at an affordable cost in a fair and transparent manner by mainstream institutional players.”
That is an excellent definition, and one which is capable of transformational change — if implemented in letter and spirit. The trouble is, when it comes to implementation, the process has been largely driven by government fiat and regulator-pushed (even if implicitly so) quota regime.
The latest Finance Ministry directive on ‘one household, one account' is an excellent example of this. And nobody has stopped to ask why the previous initiatives aimed at financial inclusion have not worked — or at least, worked satisfactorily. Banking was first subjected to overarching political/governmental objectives as far back as the 1960s, when banks were first nationalised.
We have had, and continue to have, a plethora of schemes, rules and directives aimed at expanding banking coverage and ensuring service to the unbanked. From ‘pre-emptive lending' like imposing quotas for agricultural credit and other defined ‘priority sector' lending, to the current mandatory requirement for all banking licence holders to provide at least a ‘no frills' account to anybody who demands one, both the Government and the RBI have fired any number of regulatory weapons from their arsenal at banks, in order to meet so called ‘social objectives'.
What the numbers say
Take farm credit. The government first set up regional rural banks (RRBs) and even created an apex bank to fund and direct rural development, in the form of NABARD (National Bank for Agriculture and Rural Development). There is also the ‘lead bank' system already in place, with the country being carved up between various state-owned banks, which are supposed to take the lead in development of banking services in their allocated area.
Then there is the ‘service area' scheme, another one for linking self-help groups to bank, yet another for micro credit initiatives. Then came the push for starting ‘no frills' accounts, which saw over 6 million such accounts being opened in just the first year this scheme got pushed politically, 2006-07.
In short, there is no end of schemes, plans and regulations aimed at providing financial services and products to the poor. And as the unending stream of new initiatives and orders in this regard clearly demonstrates, all these have failed to achieve their basic objective of financial inclusion. The numbers back this. A world-wide study to index Financial Inclusion to assess the extent of penetration of banking services saw India rank a lowly 50, out of the 100 countries covered in the survey.
Just a little over one-third — 34 per cent to be exact — of the population has access to or receives banking services. Why is this so? According to Anirban Roy, head of SEED, one of India's largest entities in the country operating in the areas of correspondent banking and financial inclusion initiatives, the exclusion is because of lack of reach, inability to meet basic ‘know your customer' (KYC) norms insisted upon by banks, a lack of collateral, etc.
That, like the blind man's elephant, provides part of, but not the entire answer. The biggest factor is the lack of relevance, even when financial services come within reach. That is because, merely providing an account — which is what the government and even the banks think needs to be done — is not enough. Most of the ‘no frill' accounts opened under the inclusion agenda, for instance, are today dormant, with hardly any transaction.
Tailor it to customer needs
In order to be relevant to the customer, you also have to provide services and products that are tailored to the requirement of this particular customer base at the bottom of the pyramid. That too, at an affordable cost, and in a simple and easy to use format. That is not something which banks can claim to be doing even for their middle class customer today.
Apart from providing very basic savings products, banks did not offer anything to the retail customer till a decade or so ago. Even today, unsecured credit is available to a retail customer largely through credit cards, and not by way of an overdraft account. Retail loan products can be counted on the fingers of one hand — home loans, education loans, and select durable loans such as automobile finance — that's about it.
So expecting banks to break free from their comfort zones to proactively reach out and touch the unbanked is pretty much asking for the impossible. What we need is a game changing business model, which can ‘sachetise' financial services, package them and deliver them at a price that is affordable to the consumer and profitable for the producer. But for that to happen, we need to see the elephant as a whole first.
Keywords: Financial inclusion, farm credit, electronic benefits transfer, farm credit, regional rural banks, RANDOM ACCESS
Comments:
Hammered the nail on the head ! Tragedy is that if a customer holding balance of Rs.20/- wants to close the account ( he does not have debit card etc. ), the bank will charge him Rs.100/- for closure !
Excellent analysis. But as usual everybody criticised what is done and what is not achieved. Are we ready with any solutions? What we really looking at achieving under Financial inclusion? With limited resources are our banks equipped to achieve the goals set within the time frames set? Are our bankers at lower levels trained for achieving them? Let us have a little more constructive criticisam and practical solutions. and probably one size fits all atttitudes should be left out.
Good article. An eye-opener for the policy makers, if they manage to read it...Providing a No-frills SB account and expecting the rural customers to actively use them is like forcing democracy and expecting them to enjoy it!!! Like any other product or service, customer will not use it unless it is beneficial to him/her in some way or other. Be it safety, reduced transaction time/costs, ease of usage, affordability, accessibility and so on... On one hand RBI is forcing banks to provide financial services to rural people but on the other hand there are caps on the charges that can be levied and thus leaving with no incentive for the banks to actively pursue rural markets...Instead of capping the charges, RBI should either allow banks to charge as per their opex or provide subsidy to banks to the similar extent...
An excellent piece. Financial inclusion is an idea whose time has finally come in
India. RBI has taken some encouraging regulatory measures and Banks are starting
to view the bottom of the pyramid as an opportunity. Yet, the enablers (BCs) are
still waiting for the push they require. The BC model is a powerful one in India,
however, to transition from current pilot schemes to scale, Banks will need to offer
BCs a commission rate that is viable. Many BCs are not covering costs with the
current rate and are having to close or suspend their operations. We need the
Government to move past their short term interest to secure electoral votes to
deliver on promises, strengthen the enabling environment (release subsidies to
banks, disburse and channel NREGA wages and other social safety net funds
through BCs), and give the big push or the attrition rate of BCs will continue to
grow and momentum lost.
well said,still few areas are left in article to be pointed out: the hundreds of youth have been cheated in this process by mediateries and parties,extracting maximum out from their so called brand value and name"bank" itslef.
There are existing group wihtin the system who all are actually annoyed and not convienced enough to push the plan at ground level.It is amusing to see where there is need to go for proper implementation,more flexible and customized approach,the babus seating in AC rooms are just finding it as a "reputation risk". The actual problem is "Too many stakeholders but no one is responsible",There is no doubt that CSP are getting exploited across the country due reasons already mentioned by writer above.
Well composed and well said.The problem is a large number of poor and hapless clietele to be served which the 33000 CommercialBank branches are not able to cater, add another about 14500 branches of RRBs the number rises to 47500 outlet and a huge population of 1200000000 to be served i.e. nearly 25000 persons to be served and 5000 families per branch.There are other outlets of Cooperative Banks etc but their coverage is quite marginal and and not very effective.Generally a bank branch should be able to serve 1000 to 1500 families, hence there is a huge gap and any amount of opening of new branches will not be able to suffice the requirements.Second problem is that of illiteracy and lack of awareness and knowledge. Though RBI has talked about Financial Literacy but the efforts will not be enough looking at the huge number.I think the media especially the TV, Radio, can play a significant role coupled with introduction of the mobile for the banking services by the BCs & Bank Branches.
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