Banks in rural India are about to get a lot of new customers. And by “a lot” I mean a veritable flood.
With the government’s recent announcement that all National Rural Employment Guarantee (NREG) wage payments will in future be routed through bank accounts set up for labourers, the number of bank account holders in rural areas is set to increase by 15% over the next year.
(Photo by: Hemant Mishra / MInt)
The government’s decision will do a lot to cure the corruption woes that hindered the implementation of the scheme in its first two years. In the past, NREG wages were typically distributed via gram panchayats where venal office holders often kept a portion of the wages for themselves. Bank employees, due to their accountability to managers, are less likely to skim money from workers’ wages. Routing wages through bank accounts will also make it much harder for would-be corrupt officials to add imaginary “ghost workers” to their rolls.
But what about the other effects of the measure? Will this flood of new customers submerge the financial system in a sea of low-value, time-intensive transactions? Or will it raise the tide of development by including a hitherto excluded group in the financial system? Which of these two scenarios plays out depends crucially on whether the Reserve Bank of India (RBI) relaxes restrictions on how banks use third-party agents to conduct low-level transactions.
Gulbarga, a district in Karnataka, where NREG wages are already being routed via bank accounts as part of the 100% financial inclusion drive there, provides a cautionary example of the likely outcome should RBI maintain its current approach. On NREG paydays, the normally tranquil bank branches in the district are transformed into madhouses when a seemingly endless supply of NREG workers descend on the branches for their payments. Some workers spend the entire day here waiting their turn. When you add to this the time spent travelling to and from the branch, many NREG workers in Gulbarga spend a day and a half each week just retrieving their wages. The workers, despite lacking adequate options for savings their wages in their villages, use their new bank accounts only to withdraw wages and the bankers view their new customers as little more than a state-imposed nuisance.
The rest of the country need not follow in Gulbarga’s footsteps. Brazil provides a vision of an alternative future for India’s rural bank branches. In the late 1990s, Brazil’s central bank passed regulation allowing banks to outsource low-level tasks such as processing payments, collecting small deposits and distributing government benefits to third-party agents such as shops and post offices. The results have been phenomenal: Now, a person who depends on a government pension no longer has to spend hours travelling to a public sector bank branch and then wait some more for the chance to interact with a surly teller; instead, this person can simply walk down to the local shop (or any of hundreds of nearby banking agents) and quickly receive his government benefit from a friendly shopowner he has known all his life. Due to the lower cost of servicing clients via this model, banks now fight for contracts to serve the same customer segment they formerly shunned. In addition to public sector benefits delivery, most offer other products as well, such as payday loans, payment processing and flexible savings accounts through the outsourced agent model. The use of smart cards and sophisticated point-of- sale devices keeps agents honest and prevents fraud.
Unfortunately, while RBI has approved regulation allowing banks to employ the services of outsourced agents to process some transactions, the model is far too cautious to be of any use. Currently, kirana stores, NBFCs (a category of financial service provider which includes all of the largest MFls) and retailers are all barred from acting as agents on behalf of banks. The recent committee on financial inclusion and committee for financial sector reforms both strongly recommended that the restrictions on the use of outsourced agents be relaxed. Instead, RBI has responded by tightening its grip and imposing yet another restriction on the model by dictating that out- sourced agents must be located within 15km of a branch of the bank for which they are acting as an agent.
The NREG Scheme holds enormous potential to bridge the gap between India shining and Bharat in the darkness. If RBI allows banks to reach out to NREG workers in ways that are most efficient and convenient, the workers will achieve not just inclusion in the formal labour market, but in the formal financial system as well. The results could be truly transformative.
Doug Johnson is with the Centre for Microfinance. Comment at email@example.com