Making financial inclusion sustainable

The Pradhan Mantri Jan DhanYojana, the Government’s ambitious programme for financial inclusion, is being rolled out across the country on a massive scale, targeting comprehensive coverage of over 20 crore households by March 2017. The programme poses several operational challenges to the implementing banks and service providers that could adversely impact its implementation.

In many developing countries, financial inclusion (FI) initiatives are demand driven. The focus is on delivering specific products and services to the target groups. Fund transfer facilities, electronic payment systems and small value consumer credit constitute the usual product offerings under FI. The hosting banks are at the backend, supporting the service providers that retail relevant fee-based products to the enrolled customers.

In contrast, in India, FI is being driven from the supply side, as a pivotal tool for the achievement of inclusive socio-economic development; the thrust is on making basic banking services available at affordable cost to every excluded household. The commercial sustainability of the programme has not received enough attention.

The FI programme is primarily anchored through “No Frills” savings accounts. While the number of basic SB accounts opened through corporate business correspondents (BCs) has moved up from 13.27 million in 2010 to 81.27 million in 2013, the aggregate balances have only marginally increased, from ₹10.69 billion to ₹18.22 billion during the period. According to the RBI Annual Report, 2013, the average balance per account has declined from ₹80 to ₹22 over the period. Given the low level of savings mobilised, compounded by defaults on overdrafts issued on the No Frill accounts, the banks could hardly earn any net interest margins on the funds front. For most banks, the cost of carriage on books per FI account works out much higher than the average balance per account.

The FI projects necessitate substantial investments and recurring costs on the part of technology service providers (TSPs) and BCs engaged by the banks. The costs of handheld POS devices provided to the last mile customer service providers (CSPs) and the commissions are the major components of the outlay on FI. Added to these are the costs of solution software, tele-connectivity, consumables, field travel, project management and cost of smartcards and now Rupay Cards issued to account-holders.

Further, the PMJDY prescribes that CSPs are assured a minimum monthly remuneration of ₹5,000, which is way higher than the average of about ₹1,000-1,500 they currently earn. With the scope of FI being extended to a large number of sub-service area villages, the costs would go up further.

The revenues of the service providers are linked to the number of accounts enrolled and transactions carried out. While enrolments provide one-time revenue, transaction revenue is empirically observed to be sub-optimal, with 70-80 per cent of the FI accounts remaining dormant, since customers don’t feel compelled to operate the accounts frequently. Due to the low volume of operations, most TSPs are unable to meet their costs. Many TSPs have exited from FI ventures. Several banks have terminated the contracts with TSPs on grounds of non-achievement of targeted levels of activity. It is, therefore, imperative for banks to revise the terms of the contracts with the TSPs in alignment with the actual costs.

Banks view FI as a para-banking operation restricted to savings deposits and have been hesitant in leveraging the BC network, especially on the credit front. This renders the FI channel unprofitable. Interestingly, most No Frills FI account-holders also avail credit facilities at the link branches. The convergence of the PMJDY with priority sector lending should be expedited.

Banks may be mandated to channelise all loans to agriculture, small businesses and micro industries through the FI accounts. These would be maintained by the eligible borrowers and operated by them through POS devices. This would enable banks scale up priority sector credit and boost FI revenues.

The writer is a former general manager of SBI

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