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This is not financial inclusion, Mr Modi

At least 60,000 business correspondents (BCs) are expected to be appointed by banks to carry out the massive coverage plan. The cost of this will be shared by the National Bank for Agriculture and Rural Development and commercial banks. Photo: HTPremium
At least 60,000 business correspondents (BCs) are expected to be appointed by banks to carry out the massive coverage plan. The cost of this will be shared by the National Bank for Agriculture and Rural Development and commercial banks. Photo: HT

Mere opening of a bank account doesn't ensure access to financial services by weaker sections and low income groups at an affordable cost

The Bharatiya Janata Party-led National Democratic Alliance government’s financial inclusion mission, the most ambitious plan for expanding banking services in independent India, will be launched on 15 August. The government wants two bank accounts (husband and wife) opened by every family in the economically weaker segment of the society—the small and marginal farmers and labourers. Through these accounts, people will be able to save money (by keeping deposits) as well as borrow (through loan accounts).

The Indian Banks’ Association (IBA), an industry lobby group, is drafting the blueprint after it was discussed threadbare by financial services secretary G.S. Sandhu at two meetings with senior bankers in the past fortnight.

The plan, which envisages a nationwide financial literacy programme, has a provision of giving overdraft of 5,000 to the bank account holders. All of them will be covered by a credit guarantee fund to ensure that the banks are not hit in case of defaults. At least 60,000 business correspondents are expected to be appointed by banks to carry out the massive coverage plan. The cost of this—which could be as much as 1,700 crore for the first year—will be shared by the National Bank for Agriculture and Rural Development and commercial banks.

For years now, the Reserve Bank of India (RBI) has been trying hard to expand banking services in Asia’s third largest economy where, according to a 2012 World Bank working paper, only 35% of adult population has access to the formal banking network. For the first time, in January 2006, the RBI had allowed banks to appoint BCs and address the so-called last mile problem in providing banking services to the masses. The scope of business correspondents has continuously been extended over the years. In the last week of June, the central bank permitted banks to engage non-deposit taking non-banking finance companies as business correspondents. The stipulation on the distance between the place of business conducted by a business correspondent and the branch of a bank that appoints it has also been done away with. Going by the earlier norms, the distance between the place of business of a business correspondent and the so-called base branch should not exceed 30 km in rural, semi-urban and urban areas and 5 km in metros. Business correspondents stypically disburse small-ticket loans, collect deposits and loan repayment instalments, and sell micro insurance, mutual fund and pension products.

RBI has also relaxed the branch opening norms—banks no longer require clearance of the regulator to open branches in centres with population less than one lakh; they only need to report after the branches are opened. To step up the opening of branches in rural pockets, RBI has also mandated that at least 25% of new branches must be opened in unbanked centres. It has simplified the so-called know your customer (KYC) norms, allowing customers to open bank accounts by means of self-certification in the presence of bank officials. Besides, the customers need to submit only one documentary proof of address—either current or permanent—for opening an account. This is to ensure that migrant workers and transferred employees are not harassed.

Banks are now offering basic savings bank accounts with zero minimum balance, facility of ATM and debit cards and in-built overdrafts to meet the emergency credit needs of the customer.

Let’s take a close look at how financial inclusion has progressed in the past few years. I don’t have the latest data. Till December 2013, banking connectivity has been extended to 3,28,679 villages from 67,694 villages in March 2010. Overall, 229 million basic accounts have been opened. Credit to farm sector households have touched 39 million households while credit to non-farm sector households have crossed six million households. About 7,400 rural branches were opened between 2010 and 2013 (there was a reduction of about 1,300 rural branches during the last two decades). In the first phase, spanned between 2010 and 2013, almost 74,000 unbanked villages with at least 2,000 population were covered by the banking network. In the second phase, by 2016, about 4,90,000 unbanked villages are expected to be covered.

Indeed, the figures are quite impressive but they don’t always tell the entire story. While around 300,000 banking outlets are available across the country, the number of transactions in the zero-balance accounts aren’t too many and many such accounts are not even operational as they have not recorded any transaction. Most banks are busy opening such accounts and expanding in rural India just to meet the regulator’s diktat while they don’t sniff business opportunities in these pockets. The spread of the banking network alone will not change the scenario unless the mindset of Indian banks changes—they need to accept the fact that poor people are bankable and despite high transaction cost, they can make money in rural business when the volume grows. To increase the volume of business, along with product innovation, they need to overhaul their HR policies and recruit staff to meet the needs of the rural poor. Local recruits will help them understand the psyche of the borrowers and, at the same time, bring down employee cost if the banks are allowed to follow a differential wage policy. Under current norms, a public sector bank employee based in Gadchiroli in the south eastern corner of Maharashtra, at least 1,000 km away from Mumbai, gets as much as his colleague in Mumbai, except for the city compensatory allowance.

The banks also need to forge alliances with mobile telephone operators to bring down their cost of operations while offering doorstep banking to the rural masses.

Technically, financial inclusion is the process of ensuring access to financial services and timely and adequate credit by weaker sections and low income groups at an affordable cost. Mere opening of a bank account doesn’t ensure that.

Tamal Bandyopadhyay keeps a close eye on everything banking from his perch as Mint’s deputy managing editor in Mumbai. He is also the author of Sahara: The Untold Story and A Bank for the Buck. Email your comments to bankerstrust@livemint.com

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