Challenges to financial inclusion

There have been some recent reports of malpractices with respect to Jan Dhan accounts. In this context, it may be interesting to know the grassroot level challenges that are impacting financial inclusion.

In India, where nearly one-fourth of population is illiterate and below the poverty line, ensuring financial inclusion is a challenge. The two indicators, poverty and illiteracy, vary widely between different States in India. Rural poverty is above 30 per cent of population in places such as Assam, Bihar, Madhya Pradesh, Uttar Pradesh, Orissa, Jharkhand, Chhattisgarh, and Manipur. Rural poverty can be attributed to lower farm income, lack of sustainable livelihood, lack of skills, under employment and unemployment. Thus, ensuring deposit operations in these accounts is a challenge.

India has a literacy rate of 73 per cent with some States such as Bihar, Uttar Pradesh, Jharkhand, Madhya Pradesh and Rajasthan where the literacy rate ranges between 62 per cent and 70 per cent. The banks have devised ways to address limitations arising out of illiteracy by ensuring biometric access to bank accounts. However, Aadhaar seeding implies that some numericals have still to be punched in the machine to operate an account. As all the numerals are in English, only the banker or the business correspondent (BC) can punch in the Aadhaar number. Similarly, the messages that are received on mobile phones from banks are also in English and therefore the illiterate person has to seek someone’s assistance to understand and interpret the message.

In each of the above cases, the privacy of an individual’s bank balance is breached. This makes the illiterates, and population confined at home – females and elderly – vulnerable to malpractices. There are also anecdotes that enterprising BCs, to ensure ease of business, give the same Personal Identification Number (PIN) to all the residents in a single village. This can further compromise privacy and cause embarrassment to the authorities when direct benefit transfers through bank accounts are implemented on a larger scale. Therefore, a financial inclusion strategy sensitive to regional, demographic and gender related factors, needs to be carefully crafted.

Further, it needs to be considered that why despite extensive efforts from authorities, the Prime Minister’s Jan Dhan Accounts (PMJDA) have underperformed. This could be, in addition to poverty and illiteracy, due to the type of products being offered to the unbanked population. Illustratively, recurring deposits are products which are more suitable to the salaried income group rather than people in informal sector whose incomes are uncertain, seasonal and unplanned.

In the opening of PMJDA, mainly public sector banks (PSBs) rose to the occasion in ensuring that every unbanked household had a bank account. Now that 25 crore PMJDAs have been opened in the last two years, a feat unparalleled in history of financial inclusion, it needs to be considered whether is it also the responsibility of the PSBs to ensure that these are operational.

The opening of PMJDA was a mammoth task, as in March 2014 just before PMJDA, total accounts on books of commercial banks were around 1 lakh crore. As can be imagined, given the limited resources in banking sector, opening of such large number of PMJDA within 24 months in far flung areas diverted the attention of bankers from their principal activity of mobilising resources and lending to reliable borrowers.

The next challenge is monitoring existing borrower accounts. Therefore, to ensure that the banking industry is robust and existing banking assets safe, given that heavy lifting has been done by PSBs, should the newly opened PMJDA in rural areas and some in urban too, in a sequentially planned manner be moved to rural and urban cooperatives?

Further, at present, there are a number of regulatory authorities that have a role to play in financial inclusion – Reserve Bank, National Bank for Agriculture and Rural Development (NABARD), Securities and Exchange Board of India, Small Industries and Development Bank of India, and MUDRA bank. There is a need to fix responsibility on a single regulatory authority to ensure that JDAs are operational. In this context, given that NABARD has an extensive presence across the country and was formed for the purpose of development of agriculture and rural areas, it should be made the nodal and accountable agency for financial inclusion. NABARD may not have the existing capacity, as of now, to accept the challenge but can certainly be prepared in a phased manner in next few years. It has been investing in modernising, and infusing technology in cooperative institutions.

There is also need for further research on why the moneylender despite persistent efforts by institutions in formal sector has continued to flourish in the financial market.

Money lenders continue to account for nearly 30 per cent of total banking business. This then gives rise to an interesting related question: do interest rates matter?

After all, it is a fact that Chanakya’s interest rate structure was risk weighted and banking business flourished even then – traders were generally charged 60 per cent per annum, if goods passed through forest then 120 per cent, and sea-borne cargo at 240 per cent.

In modern times, if interest rate matters, why do people prefer to go to moneylenders, despite a network of banks, cooperatives, MFIs and SHGs? Is it simply due to ease of doing business or some other factors? This is one area which requires grass-root level research.

The writer is RBI Chair Professor in Economics, IIM Bangalore. The views are personal

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