Ideas for a financially inclusive India

The Prime Minister is expected to outline a policy on financial inclusion in his maiden speech from the ramparts of Red Fort on August 15, 2014.

The new government under the leadership of Narendra Modi has affirmed its commitment to financial inclusion initiatives by proposing an implementation plan in “mission mode” in the Union Budget. However, this is going to be a onerous task given that over half of India’s population remains unbanked even after 67 years of Independence and various initiatives taken by different governments since nationalisation of SBI in 1955.

 RBI and Nabard have also made concerted efforts through schemes like priority sector lending, no-frills accounts, kisan credit cards, business correspondents,  and supporting self-help groups (SHGs) and microfinance institutions (MFIs). To achieve success in financial inclusion, the government will next need to consider out-of-the-box measures to make a difference.  

Importance of physical branches

In field visits and discussions, people revealed a stark preference for banking activity with brick-and mortar-structures, even if manned by single-man “ultra-small branches” as against those served only by travelling salesman like business correspondents. A physical branch establishes a sense of security and accountability, also signalling the scale at which a bank operates. The importance of physical presence of banks also finds resonance with the government representatives. While establishing more such ultra-small branches would undoubtedly put some strain on the exchequer, this is a critical lever if the vision of a fully banked India is to fructify.

Financial instruments

In view of significant differences in socio-economic backgrounds of people there is a need for flexibility in financial schemes designed for different segments of unbanked population. The persistent success of money lenders is because of flexibility in schemes and awareness of local circumstances, among other reasons. Small local banks and local cooperative banks to a limited extent would offer such flexibility which might be difficult to achieve for a centrally sponsored scheme.

Illustratively, people in rural areas generally impacted by seasonal factors would be unable to meet the conditions of generalised monthly recurring deposit (RD) schemes. Limited and sporadic income does not allow informal sector workers to maintain high savings that can be deposited in the RD accounts on a monthly or annual basis.

Thus, the requirements of RD schemes could be made flexible and differentiated between rural, semi-urban, urban and metropolitan areas. A distinction can also be made on the basis of nature of employment of people and occupation. For example, daily wage labourers can be allowed to make tiny deposits on a daily basis in RD schemes.

Business Correspondents

Attrition among BCs continues to be high with a majority quitting in less than six months. The role of a BC isn’t aspirational enough. For most BCs, the profession is just a source of additional income or temporary employment till they move to a better job or get married (in case of women).

The current salary structure of Rs 3,500-4,000 as the base pay and transaction-based variable pay does not act as an incentive as the volume of transactions undertaken by a BC have an upper limit. Allowing BCs to offer additional financial products like insurance and mutual funds would increase scope of enhanced earnings and hopefully stability in the profession.

Financial literacy

Financial literacy efforts have not yielded significant results despite public meetings organised by bankers or leaflets distributed in local languages. To increase awareness and interest in products offered under financial inclusion schemes, increase in advertisements in local languages on radio and television,and in print media with local icons, — like Rahul Dravid in Karnataka or Milkha Singh in Punjab as brand ambassadors —, could help build public confidence. Roping in local artistes, particularly street play groups, and presentation during cultural festivals, can build the interest of the local populations in banking. 

The importance of financial literacy in schools and revival of students small saving programs, where bankers regularly visit schools and collect small deposits, cannot be understated either.  There could be regular interactive training workshops organised in post offices or fair price shops or gram panchayat offices on financial products suited to the local population.

The proposed scheme of offering accounts to unbanked households with Rs 5,000 as an initial balance is good. However, to inculcate the banking habit, a one-time and one-month withdrawal limit of Rs 500 should also be considered.

A financially inclusive future for India hinges on effective implementation. And, Prime Minister Modi has a credible reputation in monitoring projects successfully.

(Charan Singh holds the RBI Chair for Economics at Indian Institute of Management, Bangalore (IIM-B). Akanksha Mittal and Karthik Ram are pursuing masters degrees in business administration at IIM-B)

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