Just like subsidised latrines in rural India are rarely used, several basic bank accounts are dormant. The brick-and-mortar approach needs a re-think
Speaking from the Red Fort on Friday, Prime Minister Narendra Modi in his first I-Day speech announced a financial inclusion scheme known as the Jan Dhan Yojana. At the heart of the scheme is a grand plan to open bank accounts for all Indians. Unfortunately, this reflects a thinking that is well past its due date. A basic bank account hardly serves the purpose of inclusion, despite all its well intentions.
In line with its goal to ensure all Indian citizens have a bank account by 2016, the Reserve Bank of India had directed banks to open ‘no frills accounts' which are basic banking accounts with nil or very low minimum balance. The number of no-frills or zero-balance account holders was 103.21 million as on March 31, 2012, rising from 49.33 million in March 2010. But importantly, over 90 per cent of these basic Savings Bank Deposit Accounts are lying dormant. The purpose of financial inclusion is hardly served while banks are unable to realise the costs incurred on opening and maintaining these bank accounts, estimated to be somewhere around Rs 250 per account. A back of the hand calculation shows that banks would have suffered losses worth 190 million on inactive accounts between 2010 and 2012.
The bigger problem with the brick-and-mortar thinking is the assumption that ‘access’ is only physical in nature. It isn't — as the 'latrine' case demonstrates. Policymakers in India, egged on by activists who decry open defecation, because of its negative public health impact, have for years subsidised building toilets in rural India, without assessing their impact on sanitation. Household surveys have found that villagers often opt to defecate in the open, even as toilets lay unused. Educating the targeted recipients of any social sector scheme and bringing about attitudinal changes should come before actual infrastructure building. Financial inclusion is going to be a lost cause if financial literacy is not imparted first and procedures are not smoothened out especially for the illiterate, most of whom stay out of formal banking channels because they relate to the informal moneylenders better, even if the latter charge exorbitant interest rates. This explains why even today about 70 per cent of rural credit is held by the local moneylenders.
Between 2011 and 2012 and 2012 and 2013 commercial banks set up a total of 5,484 new bank offices in rural India as per RBI directives. While at first glance this might sound encouraging, probing reveals that a rise in brick-and-mortar branches has not had much impact on financial inclusiveness. For one, despite some growth in rural credit, rural areas continue to be under-financed compared to urban centres. last year, the rural and semi-urban populations got only about eight per cent and 10 per cent of total credit disbursed by commercial banks. Even the RBI acknowledges that while 30 per cent of all new branches set up by commercial banks in India are in rural areas, less than 10 per cent of total credit is allocated to rural areas.
The way to go about financial inclusion is to exploit technology — in this case, mobile phones. The rural poor in India might be ill or semi literate, but almost everyone has a mobile phone in his hand. At last count, the number of mobile phone subscribers in India was 900 million. The Indian subscriber base is going to rise by 23 per cent in the coming decade, and most of this growth is to be fuelled by the rural demography. One would be foolish to underestimate the power of mobile phones in delivering financial inclusion to India's poor. Mobile banking has been a proven success in large parts of Africa.
Another way to go about financial inclusion in India is to focus on door-step banking, as this adds an element of personal interaction and even affection — attributes that often matter on the ground, especially in rural India. But above all, educating the poor about the need for, and the benefits of, entering the formal banking channels is the need of the hour.
(The author is a senior research analyst with the Institute of Economic Growth, New Delhi)