At the beginning of last month, the Reserve Bank of India (RBI) created a high-level committee focused on getting India’s financial inclusion efforts back on track. However, without a radical shift in direction, the committee will fail to be more than a false hope in a bureaucratic nightmare.
India is home to the largest unbanked population in the world. Sixty five per cent of adults across the country are excluded from the formal financial system. Over the past eight years, RBI has mandated and worked with financial institutions to open almost 100 million so-called no-frill accounts targeting the poor. However, dormancy rates can run as high as 90%.
With deteriorating policies and rising frustration, can the new committee combat these challenges and find a clear path forward?
In order to do so, the committee will need to spearhead a strategy centered on integrating technology, building private partnerships and finding sustainability. After months of research, data collection and interviews we conducted with almost 30 of India’s leading financial institutions, our report released in October, shows there are huge missed opportunities when it comes to leveraging linkages to biometric identification efforts and growing mobile phone networks.
The Unique Identification Authority of India (UIDAI) has already enrolled 240 million people in its programme. However, only 150,000 Aadhaar-linked financial accounts have been opened. The same missed opportunity exists with the growth of the country’s mobile phone networks. There are around 200 million mobile phone users in India who do not have a bank account. But because of RBI’s strict regulations, the growth of mobile banking has been fairly slow.
The other challenge remains in building an agent network that supports mobile banking for the rural poor. One underutilized opportunity is the more than 150,000 post office branches, the largest network in the world. Ninety per cent of these branches are located in rural areas and should be the heart of India’s agent banking network.
The last clear missed opportunity lies in government-to-person payments. In 2012, almost $40 billion will be delivered in social protection benefits and subsidies by the Indian government. However, the evidence thus far indicates that those who receive government payments in accounts typically withdraw all the amount received, thus rendering the account as a simple pass-through.
None of these recommendations will hold water unless the committee focuses on turning its obsession with access into a concern for the actual usage of accounts. More helpful than the recent RBI mandate to open branches in villages with a population above 1,000 (on top of the prior mandate to reach villages over 2,000), are policies incentivizing usage. This is something commercial banks have thus far shown very little motivation to do. Direct financial subsidies for marketing and promotion of no-frills accounts could help communicate the benefits of bank accounts to low-income households.
In the end, it is crucial for RBI to realize the value of banking for the poor and refocus its efforts accordingly. But the solution won’t solely come from RBI’s efforts. Banks will need to envision long-term profitability as a possibility, and low-income customers will need to experience tangible benefits from the services offered. However, most importantly right now, the newly constituted committee will need to show that it has the guts and foresight to move past stagnation and onto a sustainable way forward.
Eric Tyler and Anjana Ravi are analysts at the New America Foundation.