Fixed, Recurring Deposits score over Chit funds

According to a joint Assocham-EY study last year, 19% of the Indian population is financially excluded or unserved. After 70 years of independence, we still have a large section of Indian population who have no access to banking services in the country. World Bank's Global Findex data indicates that while 53% of Indians have an account, only 14.4% have saved at a financial institution.  

There are also many reasons why people despite having an access to a bank account are not using them optimally. According to our first-hand experience in the field, there are three key factors why unserved and underserved customers don't have or use their bank accounts. The main reason often citied is unfavourable past experience. Our learning is that even though the unbanked are in desperate need to have a secure place to save their money, they feel intimidated while encountering the present banking system. They don't feel welcomed in banks and financial institutions because their cash inflows are much lower and will mostly request for smaller transactions. This is the Account Profitability issue among bankers.

The second reason that we have come across is lack of awareness. This customer segment is largely uneducated and in many cases financially illiterate too. Financial Literacy of the economically deprived is the first step towards ensuring financial inclusion within India. The third most common reason why customers let their existing banking accounts become dormant is the accessibility/distance to the bank or service point.  

Over the last decade, the availability of formal credit has eased with MFIs and NBFCs making a significant effort in servicing the unserved populace. However, a significant majority of them are unable to offer savings options because of regulations which govern them. This often leads to customers resorting to informal and unsafe savings options like chit funds, gold deposit schemes with jewellers or buying physical assets like gold and in some cases keeping cash at home.  

In an effort to promote financial inclusion by making formal savings options available to the unserved and the under-served people in the country, the government has made several determined efforts. These efforts have helped bring in the unserved people under the umbrella of financial inclusion in its truest form by making both credit and liability products available through formal banking channels. However, the lack of last mile connectivity means that a large part of India still remains devoid of access to basic formal savings options.  

Amongst the key initiatives launched by RBI to make all banking services accessible to the poorest of poor was to grant licences for 10 Small Finance Banks (SFBs). Small Finance Banks have been mandated with opening 25% of their branches in Unbanked Rural Centres (URCs) to promote accessibility of formal banking channels for the unserved.

Small Finance Banks are designing products which address the need of the unserved and underserved customers.  For example, in creating awareness about various saving options for customers other than letting their money lie under-utilised in savings bank account or invest in a chit fund. With their understanding of the cash flows of this segment, SFBs such as Ujjivan have come up with Fixed and Recurring deposits where the minimum amount is as low as Rs 1,000 and Rs 100, respectively.    

After opening the savings bank account, FD & RD are the next preferred products by the target customers as it offers them a secure option for their savings to the popular informal savings options like chit funds. Fixed Deposits & Recurring Deposits score over Chit funds in many ways. Chit Funds are not regulated like bank deposits. There has been a history of Chit Funds or similar schemes scamming innocent depositors. Investing in a chit fund may result in a profit, but can also result in a loss. RBI and government are taking measures to bring the rural and lower income groups into the organised financial sector. This will enable these segments to have access to banking facilities and safe investments.  

Technology will play a big role in providing access, taking banking to customer's doorstep or finger tips, eliminate paperwork and introduce multiple channels of serving the customer segment. In the next five years we believe that mass market banks in India will be able to serve several million more of the unserved and underserved customers and transform India for a better, digital tomorrow, thereby providing a great growth impetus to the economy.  

 (The writer is  Chief Operating Officer at Ujjivan Small Finance Bank)