RBI’s going great guns with its financial inclusion plan. Banks have roped in business correspondents to give the project a big push, but structural problems may play spoil sport.
The biggest fad in the financial sector now is ‘financial inclusion’ with almost everyone worth his salt talking about it — be it in seminars, press conferences, contributory articles to newspapers, television debates, parliament, and whenever they find time beyond scam debates.
If four decades of banks’ nationalisation, hundreds of co-operative banks, thousands of regional and rural bank branches, non-banking finance companies, chit funds, lead area banks, foreign banks, private banks and, of course, the crisis-hit micro finance institutions, could not take banking to more than half the population, then there is something vital that is lacking with those people. Money. Why would anyone with no money operate a bank account?
“While no-frills accounts have grown phenomenally, an important challenge before the banking system is to keep these accounts operational, as many such accounts are found to be dormant since the poor often find it difficult to save and deposit money into these accounts,” said the RBI report released on November 8.
The financial inclusion in 2005 was defined as the provision of affordable financial services — access to payments and remittance facilities, savings, loans and insurance services by the formal financial system with no pre-condition or low-minimum balance maintenance.
Just a month before the release of this report, the central bank made yet another attempt to take banking within the reach of the majority of the population, by permitting profit-making companies to be business correspondents (BCs). This is an expansion of a list released previously that did not achieve its objectives. The RBI last year allowed many non-bank entities and individuals, like retired bank and government employees, including ex-service men, to act as BCs.
It also allowed not-for-profit organisations, popularly known as Section 25 companies and self help groups. It expanded the list by adding owners of kirana/medical/FairPrice shops, PCO operators, agents of small savings schemes of the government and insurance companies.
But only the Section 25 companies are active. Though it may be difficult to estimate the active, they typically operate through technology-enabled devices, such as point of sales machines or through mobile banking. Some business facilitators also operate through laptops, through what is popularly known as kiosk banking.
Popular BCs, who have tied up with major banks, include Fino, Seed Enterprises and A Little World among others. Another technology provider Oxigen has tied up with State Bank of
“We conduct transactions worth Rs 5,000-10,000 every day,” says Anriban Roy, co-founder and managing director of Seed Enterprises, whose firm has opened about 1.5 million accounts. While the ultimate onus on the safety of the funds is with the bank, the BC is responsible till he deposits the cash at the nearest local bank branch.
About 130 business correspondents were appointed till last year who opened 90 lakh accounts, according to latest available data. Most of them were by state-run banks. ICICI Bank , Federal Bank and Axis Bank were active among the private sector.
“Though the statistics are disturbing, it may not be fair to totally write off efforts by banks,” says Jayanta Sinha, chief general manager in charge of rural business at State Bank of
But whether the admission of more entities into the BC list will lead to more people coming under the financial fold is doubtful, given that they may continue to face the same hurdles that the existing ones faced.
“As almost all BC transactions are cash based, the flow of cash with BCs has been highlighted as the biggest issue,” says a report prepared for RBI in August 2009 to enhance the BC coverage. “Besides the logistics of handling large volumes of cash, it leads to increased costs and added operational risks,” the report says.
“Beneficiaries of BC services are mostly illiterate and susceptible to misguidance. Further, at times, clients tend to perceive the BCs themselves as banks,” the report adds. “The viability of the BC model has remained the most critical issue that has led to the model not taking off as envisaged,” says the report.
With this experience, it may be too early to assess the corporate interest in the central bank’s offer as banks are still awaiting worthwhile intents. Doubts arise given the fact that post offices, with the biggest reach anyone could dream of, has not succeeded in it so far.
Some believe that post offices did not succeed since they lacked technology and others said it was due to their own products competing with banks’. That makes little sense as it does not matter if one is financially included under the post office or a bank.
Will this time be different?
A good portion of the banking system is now under the core banking solution. As a result, technology is playing a bigger role in the efforts to increase financial inclusion.
RBI has enlarged the list of BCs, but the same old problems remain. Those who have the money don’t trust many of these intermediaries and those who trust them do not have the money. When both these things happen, there are a different set of problems.
RBI has enlarged the list of BCs, but the same old problems remain. Those who have the money don’t trust many of these intermediaries and those who trust them do not have the money. When both these things happen, there are a different set of problems.
“The reason we are apprehensive about appointing individuals as BCs is that we fear they may seek permanent employment with the bank,” said a senior official with Punjab National Bank (PNB), requesting anonymity. Moreover, in case of retired bankers, incentives may not be attractive enough.
With this chicken-and-egg situation, there is little hope that the lives of millions would transform with the slogan getting louder, than action.
“In 2009, deposits mobilised in rural bank branches was a mere 9% of the total deposit mobilised by banks and the share of rural credit in total credit of banks was even lower at 7%,” said Mr Meena. “The percentage of people having any kind of insurance cover is just 10%, while the percentage of non-life insurance is a measly 0.6%.” he added.
Mr Meena may be aware that this statistics have remained more or less the same for decades, like the Gharibi Hatao slogan of Indira Gandhi. Will financial inclusion be Manmohan Singh’s legacy?
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