The intention to provide at least two accounts to each household in the next one year is welcome. But the question in everybody’s mind is: how will the target be achieved, and what will be the status of these accounts at the end of this exercise? The target itself is ambitious: we want to open 200 million accounts in a year, which converts to more than 660,000 accounts each day (considering 52 Sundays and 10 national holidays, although banks usually have more holidays in a year). To put things in perspective, all public sector and private sector banks collectively opened just 108.5 million BSBD (basic saving bank deposit) accounts in three financial years up to March-end 2013. Granted that our banks will work more efficiently this time around, and perhaps the government’s focus and guidance on this matter will lead to the achievement of these figures. But what can we learn from the implementation of these schemes in the past?
One need not look too far into history … we are surrounded by the results of earlier, government mandated financial inclusion efforts. Nearly half of the adult population still does not have a bank account; census data gives a figure of nearly 58.7 percent of households availing banking services, while World Bank estimate is lower i.e., only 35.2 percent adults (15 years and above) have an account with a formal financial institution. This is the situation eight years after RBI sanctioned the use of agents (business correspondents - BCs) to allow banks to reach remote and rural locations to serve what is known as the ‘underserved’ or the financially excluded population.
So, while one of the challenges is to ensure the opening of 200 million accounts amongst underserved households, a far greater
The Curious Case of Missing Agents in Rural India
In a survey of 2,932 villages with a population of greater than 1,000, only 39% are covered through customer service points (CSPs) according to State Level Bankers’ Committee (SLBC). Field work reveals that only 7% of the villages have transaction ready CSPs; only 4% have CSPs available to transact every day. A little over 2% of the appointed CSPs are doing more than 10 transactions a day, and less than 4% are earning more than Rs. 2,000 a month; with a median monthly income as low at Rs.1,500 – and so quite likely that such agents will quit the business soon.
challenge is presented by the question, “Where will the 200 million new customers transact?” To service almost 70 percent additional customers, the existing banking infrastructure, especially the number of bank outlets will have to expand significantly. As bank branches are expensive to set up and to operate, the BC channel or extension points which ride on banking agents had been proposed. To use this channel effectively banks will have to appoint, train, manage and remunerate BC agents. But preliminary results of MicroSave’s recently concluded research (report forthcoming) indicates that hardly 35-40 percent Gram Panchayats currently have an active agent. And when villages in Uttar Pradesh and Bihar were sampled, we found that only 7% had transaction ready agents or customer service points – see box.
It may be true that 221,341 agents were appointed by the end of March 2013, but it is also true that many of them have quit and remain only on paper, and many others never even started operations. (They were never provided with POS device, or the device was never repaired/replaced once it broke down, or customers did not come for repeat transactions due to high rate of failure, connectivity issues and so on). Therefore, questions about infrastructure and presence of adequate number of well trained and well equipped cash-in/cash-out points will have to be addressed in addition to the push for opening additional accounts. The government needs to focus on the number of active accounts held, rather than just the absolute number of accounts opened. Otherwise we are staring into a situation of high number of dormant customer accounts because they don’t have a place to transact, a situation that we have been through in the past.
The July 2014report from InterMedia, “India: Financial Services Use and Emerging Digital Pathways”, shows that only 54 percent of accounts are active (activity defined here as one transaction in 90 days), and within this the usage is lower in rural locations. Therefore to assume that providing an account will lead to actual usage and to financial inclusion is incorrect. Customers need the right products, which are designed to suit their specific financial needs. They will not use saving and loan products designed for upper and middle income customers, and do not want a “no frills” account that is stripped of useful features like ATM cards.
If we believe that direct benefit transfer (DBT) payments will take care of account activity, we are forgetting that distribution channel’s viability is still an issue that needs to be addressed. Banks have still not been able to see profitability in the BC channel; and so, in turn, they do not provide adequate support or timely commission payments to the BC network managers. And thus the agents are not adequately managed or remunerated. The DBT programme has the potential to be an anchor product to underpin and make the BC model viable. But in most states banks are not adequately remunerated for delivering DBT payments, so the opportunity is missed.
As a result of an endless procession of directives, pilots, and forced-march roll outs, the country is littered with the debris of “financial inclusion efforts”. These failed efforts and multitude of closed agent outlets erode the trust of the poor in the reliability of formal financial services.
All those who care about bring financial services to the poor could best support the financial inclusion agenda by taking a step back. We need to spend time to learn from the earlier mistakes, align incentives so that all partners are willing and able to move forward and then prepare for a flawless implementation. Rushing out another set of admirable targets and mandating unwilling partners to achieve them will not further the cause. The current government has commendably resisted populist measures until now - be it the financial bill, or the railway budget or any other matter having a direct impact on the common man. It should also resist populist pronouncements on financial inclusion as well. A delay of few months will be less harmful than a repeat of earlier mistakes.