Universal access to banks still distant goal in India

Universal access to banks still distant goal in India

New Delhi: Access to banking services is still not universal in the country, says a new study, though the country’s banking regulator, the Reserve Bank of India (RBI), had identified this as a focus area for banks two years ago.

The study by Mandira Sarma, a fellow at New Delhi think tank Indian Council for Research on International Economic Relations, seeks to arrive at an index of financial inclusion.

This is a number between 0 (no inclusion) and 1 (complete inclusion); India’s index score according to Sarma’s study is 0.197. That’s good enough for a rank of 38 among the 81 countries studied by Sarma. Canada comes on top with an index score of 0.853. The US is at No. 10, China at 19 and the UK at 20.

Sarma, a PhD from Indira Gandhi Institute of Development Research, Mumbai, who describes the study as “a work in progress," is also working on computing index scores for all states in India to help focus on the relatively more unbanked regions in the country.

A good measure of financial inclusion, said Sarma, “should incorporate information on all aspects of inclusion, such as the number of bank accounts for every 100 people, the number of branches for every 10,000 people, the ratio of credit to gross domestic product (GDP) and the ratio of deposits to GDP."

However, due to difficulty in finding comparable data, Sarma has used only two dimensions for the final analysis of 81 countries. These are: availability, which is measured by the number of bank branches, and usage, measured by credit and deposit ratios.

Sarma also compared the index with the United Nations Development Programme (UNDP) Human Development Index (HDI) ranking of countries and found that they moved together; the lower the ranking in the HDI, the lower the inclusion. This, she said, could be because the methodology used by her is similar to that used by UNDP. She also plans to compare the index with Gini coefficients of countries, which measure income inequalities.

Except for the Union territory of Puducherry, where RBI conducted a pilot project through Indian Bank, no other state or territory in India has achieved full financial inclusion. In 2005, RBI estimated that 41% of India’s population did not have access to banking services. And the actual proportion could be even higher.

A. Ramanathan, chief general manager, National Bank for Agriculture and Rural Development (Nabard), said: “The present estimate of banked population assumes one bank account per person. If we take into account more than one account per person, which is common in urban areas, the share of unbanked population will go up."

In November 2005, RBI asked all commercial banks to work towards full financial inclusion. It defined this roughly as people’s access to basic banking services, that is, a no-frills savings account with nil or very low minimum balance requirement. It followed up by prescribing a business correspondent or facilitator model, which allowed banks to tie up with post offices, voluntary organizations and self-help groups to work as “cash in-cash out" branches. Between March 2006 and March 2007, six million no-frills savings accounts were opened, mostly in public sector banks, RBI data shows.

“The business correspondent scheme has been a bit of a non-starter because of the poor commission payments, which is 0.5 to 1% of the initial deposit," said Ramanathan. That makes it a maximum of Rs5 for an account of Rs500. “In a situation where 36% of cash dues of rural households still come from informal sources, we need to recognize that the poor don’t need cheap credit, but the right quantity at the right time, without hassles," Ramanathan added.

They also need a mechanism to keep safe their thrifty and tiny surpluses, he said. According to him, the existing definition of financial inclusion doesn’t include services of microfinance and non-banking finance firms, which are important in developing countries such as India and Bangladesh. Their inclusion could improve India’s index score.

Bangladesh, for instance, has come in at No. 59 in Sarma’s list with an index score of 0.129 despite the huge reach and success of Grameen Bank.

“This debate (on inclusion)," said Mathew Titus, executive director of Sadhan, the association of community development finance institutions, “has progressed without a clear definition of financial inclusion." Microfinance institutions have reached almost a quarter of the unbanked population, or 10% of the population, he added.