It has been six months since the Finance Minister P Chidambaram made his budget speech in Parliament. One of the announcements that he made was regarding financial inclusion, for which banks have been asked to take appropriate steps.
Financial inclusion is one important phrase that comes from Mint Street, headquarters of India's banking regulator, RBI. The idea is very much in sync with what North Block, home to India's Finance Ministry's bureaucrats, has been thinking of late. Since banking services don’t reach to majority of the Indians yet, RBI and the government want steps taken immediately.
The report of the Committee on Financial Inclusion has already been with the government for the last few months. During his budget speech in February, Finance Minister P Chidambaram announced that banks could appoint "Business Correspondents". The "Business Correspondents" have to be former bank officers, retired government officers or ex-servicemen. The government also said that banks will be encouraged to gear up for total financial inclusion.
"Business Correspondents" are supposed to function like an outsourced branch for the banks. They are expected to help banks in extending their reach beyond the traditional segments and help them find customers in a segment that has been untouched by banking. But they cannot earn money have to be a not for profit entity
Finance Minister Chidambaram also said that institutions like Nabard, SIDBI and NHB could expand the reach of banks and help in financial inclusion.
Essentially, it the lack of access to capital through institutions in rural and semi-urban areas that is choking growth. More often than not, moneylenders are happy to lend at interest rates annualized at upwards of 70-80% a year.
But with the largest government run bank in the country, State Bank of India, over 200 years old, the banking regulator having completed 73 years, and the nation turned 61, banking services are yet to reach over 60% of the people in the country. Nearly 60% of the rural households have no access to banking and only around 20% have access to credit from an institution. There are already 80,000 bank branches in the country, and, perhaps, no further evidence is required to suggest that the traditional model of taking banking to the masses has not worked.
Banks have been advised to add at least 250 rural household accounts every year for each of their rural and semi-urban branches. There are nearly 80,000 bank branches in the country and nearly 600illion people to who banking services have not yet reached. If all branches were to comply with the directive, every year nearly 20 million new accounts will be added.
The idea is noble, but, unfortunately, given their history, it seems difficult how most of the country will be covered by banking services in the next 3-4 years.
Banks make it difficult for their low-end customers by charging for every service. So, while these are zero balance accounts, the account holder has to pay for every service that he uses at the bank, the use of ATM or even the cheque book. At the end of the day, with the charges loaded on these accounts, it is very difficult to get 250 customers in a year to agree to pay for these services. So, for those who don’t yet have access to banking services, it is not economical to enter the banking system.
For banks, it costs Rs.100 to do business with a customer at the branch. The cost drops to nearly Rs.15 if the customer uses an ATM and it falls to less than Rs.5 if services are accessed through internet banking. So, clearly, banks would prefer to add customers through non-traditional models.
RBI has recently relaxed the norms for zero balance accounts, and banks now ask for limited KYC (know your customer) documentation. The maximum balance permitted for these accounts is Rs.50,000 and if the balance for any quarter crosses Rs.1 lakh, the account holder has to furnish additional documents. That has certainly helped in improving access for the underprivileged.
But some interesting experiments might hold the key to getting past this hurdle, something that a lot of bankers are keeping a close eye on. A smart card-based banking solution from FINO is now taking shape. FINO has tied up with nearly 10 banks and other microfinance institutions to offer financial solutions in areas where no banks exist. Mumbai-based A Little World is also providing technology to banks to improve their reach without having to roll out branches.
While the two are smart card based solutions, EKO, a mobile banking solution company has tied up with Centurion Bank of Punjab and is carrying out its pilot project. Mobile phone customers are asked to fill up forms for opening a bank account just like they would be asked while buying a mobile phone connection. The neighbourhood retail store becomes the hub of all banking activities - deposits and withdrawals - being carried out by the customer. The banking transactions are recorded using the phone in electronic format.
As the RBI shows the way to banks on financial inclusion, use of technology is the best option to erase the mistakes of the past.