Bank on us

Bank on us

Kailash Chandra, a 26-year-old auto-rickshaw driver in New Delhi, enjoys an easy life these days. Reason: He now has a bank account and knows how to keep his finances in control.

Until some months ago, Chandra was struggling to open a savings account with one of the private banks, but, given the high minimum balance one needs to keep these accounts active, he soon gave up the idea.

One day, he met a friend, who told him that several banks have introduced accounts that do not have any minimum balance requirements. “I was excited and opened a Kisan account immediately with HDFC Bank," he says. “I deposit my monthly earnings in my savings account and withdraw as much as I want. This also enables me to save."

Chandra isn’t alone in opening such an account. No-frills savings accounts seem to have come of age in India, bringing people at the bottom of the financial totem pole under the ambit of mainstream banking. The scope of the business is not lost on the lenders. In November 2005, banks were advised by the Reserve Bank of India (RBI) to make available basic banking—no-frills accounts with low or zero minimum balance requirements that were free and had few or no transaction fees—to reach out to the underbanked. Most of these accounts do not require proof of residential address or identity but come with some riders that limit the number of withdrawals, maximum balance, and issuing of passbooks and chequebooks.

Despite the more than 9% growth the Indian economy is enjoying, a large number of people have never even stepped inside a bank. This segment is equally likely to not have a permanent address or proof of identity. Without these basic documents, required to open a savings account, these people, mostly daily-wage earners, have no mechanism to put aside money for a rainy day.

When these unbanked or underbanked people need money on an emergency basis—due to a sudden illness, for rent, food or a daughter’s wedding—they cannot turn to banks for loans. They usually go to local moneylenders who hang on to a collateral, such as jewellery, and charge exorbitant interest. Moneylenders can provide loans quickly and are often the poor man’s only and last resort.

Nearly four out of five debts among those earning less than Rs80 a day are sourced from moneylenders—who often charge interest rates from 36-72%—or friends and relatives, according to the Invest India Incomes and Savings Survey 2007 conducted by IIMS Dataworks, a Noida-based retail finance firm.

This suggests that the poor of India do not approach the banks for a loan. Financial planners agree that the poor need affordable credit and savings through the regular banking system to partake in India’s growing economy.

“No-frills accounts are a very powerful concept but they require much more awareness among the prospective customers they hope to target," says Preeti Sahai, manager (New Delhi operations) of Basix, a Hyderabad-based microfinance lender that services the rural poor, particularly the landless and women to promote self-employment.

Basix and other microcredit lenders run by non-profit organizations approve small loans especially for women, who are in self-help groups in villages, at interest rates that average between 18% and 36%, according to the IIMS survey. Nearly 6% or 19 million working-age Indians are members of such groups, which primarily are rural initiatives. The standing committee on finance is currently reviewing a Bill to tighten accounting standards to allow microfinance agencies to accept deposits.

In addition, several of these non-government organizations providing loans are also diversifying their operations to include insurance products for the poor that have attracted big money from global investors. Some of the potential customers of these no-frills accounts don’t even know what these accounts are and doubt whether they would be allowed to enter a bank.

“What are these no-frills accounts?" asks Pooja, 21, a New Delhi-based housekeeper who just goes by her first name. “I get my wages in cash and I don’t feel the need to have an account. Moreover, I don’t know whether they will take me seriously at the bank."

The poor need to be tapped, Sahai says. “The staffing and other infrastructure patterns of bank branches are often inadequate to service several customers with small transaction sizes," she adds.

Besides, there is a history of subsidy-driven government programmes, administered through public sector banks that are embedded in the mindset of such banks, which regard the poor as unworthy customers. Because they are low-income accounts with high transaction costs, these accounts have not been given serious attention so far.

Officials of microfinance institutions complain that even the nationalized banks and Regional Rural Banks (RRBs), which have followed a conscious policy of branch expansion in remote, unbanked areas, have failed to reach out to the poor adequately.

Post offices vs banks

Post offices have their presence even in the remotest of Indian villages. But the reality is that post office savings schemes have few takers. How successful can no-frills accounts be when postal savings schemes have failed to draw out the poor? “Post offices are not financial institutions," says Sahai. “They primarily are investment instruments such as Kisan Vikas Patra and National Savings Certificate. As these products don’t have much liquidity, they can’t be a substitute for bank accounts."

Sahai says she wanted to open a post office savings account for her housekeeper at a post office in east New Delhi but her request was turned down by the post office because it was understaffed. Even the threat to file a complaint with the post office head had no effect. Post offices have had been around for a long time but their financial products and services are what keep people away.

In contrast, bank accounts make a customer eligible for home loans, car loans, debit and credit cards, and money transfers. Post offices offer no value-added services.

Bank initiatives

Realizing the roadblocks in reaching out to a vast sections of the underbanked or unbanked population, banks have launched an array of products targeted at the rural class. “We have tied up with business facilitators at village levels to bring the poor under the banking system," says Raja Mukherjee, assistant vice-president of retail banking, Axis Bank. The lender has also started pilot projects in Andhra Pradesh with Basix, and plans to bring the programme to New Delhi and Muzaffarpur, a district in Bihar.

Banks have also set up targets for their employees to penetrate deep into rural India. “We have given an annual target of 100,000 accounts to our employees," says Chitra Pandeya, liabilities and payment product group head of HDFC Bank. Though targets are aimed to reach out to the most in need, sometimes, they just are another means to gain business. A personal banker of HDFC Bank admitted that instead of reaching out to poor, bank employees opened accounts for their own security guards to meet targets.

Citibank Pragati is a microfinance programme, which seeks to offer a full range of financial services to microfinance clients in a commercial manner. To that end, the Citibank savings account is promoted through business facilitators among first-time bank account holders who have very low familiarity with and access to branch networks.

Business facilitators are bank agents and non-profit organizations that promote such financial products among the unbanked.

Other than the poor, there is a growing middle class of India that is keen to take up these accounts. Take, for instance, the case of Minu Saini, a resident of Janakpuri, New Delhi, and an employee of a private sector bank.

Saini wants to open an account in a public sector bank because she says they provide better services than her own private bank.

“I will soon open an account in one of the public sector banks, considering their low cost and good services," she says. “Since I don’t have a permanent address in New Delhi, a no-frills account is a perfect option."

She adds that although these types of accounts allow only a limited number of transactions but, because it would be a second savings account for her, she plans to keep its use to the minimum.

Currently, less than a third of India’s population is connected to the banking system. It is estimated that the lack of inclusion in the banking system results in a loss of about 1% to the GDP.

A no-frills account is a powerful concept to connect the unbanked and the underbanked into the banking system. Profit cannot be the only bottomline for the lenders.

Alison Granito contributed to this story.

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