In a country of 1.2 billion individuals, if we exclude children, we should at least have 900 million bank account holders before we can say the job of basic inclusion in banking is complete. No matter how we count, however, the actual number of bank account holders do not seem to cross 200 million. This is appalling to say the least—and may also, in part, explain why we escaped the subprime crisis; many people were simply outside the financial system. The real mystery is why this should be the situation at all?
India has a concentrated banking system, which means that if five individuals decide that this needs to be done, it will be done. These five are the finance minister, the Reserve Bank of India (RBI) governor and the chief executives of the top three banks. Prompted by proactive statements by the finance minister in his 2006 budget speech, RBI allowed banks the use of business correspondents to expand rapidly their outreach in a low-cost manner. (Business correspondents are intermediaries who carry out banking functions in villages or areas where it is not possible to open a branch.)
The technology and the on-ground capability to make this possible with virtually no frauds, complete with smart cards and fingerprint readers, came soon thereafter and have existed for a while now. Most major banks—certainly the top three—have acquired full familiarity with the system, and are using it, though in isolated pockets, producing a daily issuance rate of at least 50,000 new accounts and 300,000 transactions.
Brazil, using similar legislation and far more primitive technologies, was able to go from financial access statistics similar to ours to over 80% penetration from 2000 to 2005. Given that all the enablers are in place in India, why are we dragging our feet? Why has this effort reached out to only around 10 million individuals in the last three years against the 900 million that it needs to?
One issue that has clearly emerged as a barrier is the cost of providing this service and, more importantly, who will bear it. To provide business correspondent access at each of the 300,000 gram panchayat (village council) points, we estimate a one-time cost of around Rs1,000 crore (including the provision of biometric readers) and an annual recurring cost of around Rs4,000 crore for the 300,000 business correspondents (one for each panchayat).
There is a potential additional cost on smart cards that may be needed if the USO (universal service obligation) fund available to the telecom sector is unable to provide reliable Internet connectivity to every gram panchayat; with in excess of Rs18,000 crore at their disposal, in our view, this connectivity is something the telecom sector should be able to provide, or, in the interim, use USO funds to pay for the smart cards.
This estimate is indeed a large number, and on the face of it, represents a barrier. However, on closer examination—even if we discount the considerable value-add for the 900 million citizens when they get such an account (such as a far superior transmission of monetary policy and far better allocation of systemic savings) and the enormous expansion in the opportunity set for multiple stakeholders across the country—there are several directly connected sources of revenue that each of the stakeholders could put on the table to defray these costs, obviating the need to play musical chairs.
RBI with close to Rs7 trillion of issued currency notes alone makes in excess of Rs45,000 crore (estimated using an interest rate of 7%) annually from what is referred to as seigniorage—the net revenue derived from the issuing of currency. This high income is almost directly a result of the need to hold a large amount of cash. On the over Rs4 trillion of annual payments (at a 5% saving in the cost of making these payments), the Union and state governments alone stands to benefit up to Rs20,000 crore annually if these payments become completely electronic. Banks with over Rs5 trillion of demand liabilities (deposits) raised at very low costs on account of controlled interest rates on them (controls designed specifically so that they may be able to pay for the provision of financial services to unprofitable areas) would have a guaranteed profit of Rs15,000 crore on a 3% annual savings in the cost of resources, apart from the substantial profits from lending to at least a fraction of the newly banked customers.
If RBI, for example, were to take the lead and agree to directly pay the business correspondents Rs50 for every account that is made available by them, the annual sum of Rs4,500 crore that this amounts to would reduce its seigniorage income by less than 10%. If it chooses to, it could also recover this amount using various instruments at its command from the government and the banking system.
Some state governments currently pay a fee to banks for establishing business correspondent networks. This process would be far more uniform and timely if brought within the ambit of RBI. The finance minister, in the forthcoming Budget, could make a commitment in this regard and also mandate that all government payments henceforth be made only through the business correspondents, and that all participating banks would need to commit to making an automated access point available to every client within 1km of their homes. We have all but achieved this feat for our primary schools; it would be far easier and quicker to do so for financial access with business correspondents.
If, as we have argued, cost is not an issue, then what is preventing this access? Could it be that despite the fact that each of the five individuals referred to earlier has sufficient resources at their command to get the job done, if need be entirely on their own, none of them views this as their problem to solve? Just as microcredit on its own does not represent full financial inclusion, it is our view that neither do business correspondent accounts.
However, as a recent book—Portfolios of the Poor, Daryl Collins et al, Princeton University Press, 2009—points out, the poor lead such uncertain lives that something available to them on a reliable basis becomes a pillar around which they can finally start to build a more stable and predictable life. In our view, while such access to finance is not by itself sufficient to eliminate poverty, it is a necessary precondition and a right every citizen of our country has.
Definitive progress on this count would also obviate the need to allow thinly capitalized entities to accept bank deposits on their own balance sheets; permitting this would do nothing to reduce the costs of access on a systemic level discussed here but, as we have seen in the past, would substantially increase systemic risk and the risk to which these deposits are exposed.
It would be a matter of great shame if, as one of the few nations in the world capable of launching its own satellites, we remain the sole country that is unable to provide all its citizens with the basic means to economic freedom.
Bindu Ananth is president of the IFMR Trust and Nachiket Mor president of the ICICI Foundation for Inclusive Growth.
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