The Prime Minister is all set to announce a mega new programme on financial inclusion on India’s Independence Day. The Department of Financial Services, Ministry of Finance, is busy shaping the ‘Sampoorn Vittiyea Samaveshan (SVS)’ (Comprehensive Financial Inclusion) scheme in consultation with bankers. Anyone closely associated with the financial inclusion space will worry that without very careful engineering, the scheme may be found lacking. While it incorporates some of the lessons learned from the past, MicroSave worries that it may struggle to overcome many fundamental barriers that have stalled inclusion over the years, despite very many concerted efforts by the central and state governments, the RBI, banks and innumerable other agencies involved. So does this grand scheme risk having the fate that all the previous avatars1 of financial inclusion programmes ran into? Quite likely, unless the fundamental issues are understood well and appropriate solutions embedded in the scheme.

Enhancing the reach of financial services to the excluded population and targeted distribution of subsidies to low-income groups have been universal problems to which few developing or underdeveloped countries have found scalable solutions. India has been on this journey tirelessly for over seven years but has made limited progress. It is evident and well recognized that subsidies need careful targeting to have a real impact. Budget 2014 and subsequent announcements indicate the government’s willingness and resolve to overhaul the systems and design suitable mechanisms to achieve this. However, it will take a well thought through approach with intensive inter-ministerial efforts to find real workable solutions that can take us beyond the failed attempts of the past. It will be vital for the government to unearth the root causes of past failures, to learn from these and thus avoid another faulty design.

An approach paper on the scheme talks of six pillars that would comprise SVS. The government needs to be congratulated on several aspects that been addressed for the better. These relate to access to services through multiple channels (business correspondents, branches and ATMs); online transactions; the promise of adequate compensation to the correspondent banking agents/CSPs; provision of a healthy mix of financial products across savings, micro-credit, micro-insurance, and pension.

While many constituents of the scheme are laudable, I highlight major gaps that need attention. The first one is finding real solutions to the last mile delivery problem. According to various research studies including several by MicroSave, less than 0.5% of the business correspondents (the agents appointed to provide banking services) on the ground are in a state of readiness to offer services and earning more than Rs. 5,000 a month (minimum compensation that is being contemplated under SVS). In this situation, who will service the 200 million odd accounts or 2 accounts per household, proposed to be opened? How will the Rs. 5,000 overdraft per account be delivered? And more importantly who will collect the repayments to prevent them from becoming bad debts? 182 million accounts have been opened in the past and RBI’s own data states more than 50% of these are dormant; while a majority of the rest are accessed less than once in a quarter (that too mainly to draw government subsidy payments and not as a full-service bank account). As has happened in the past, we worry that there will be a rush from agencies wanting to make a quick buck from opening new accounts or reactivating existing ones; and from disbursing (and pocketing) the Rs. 200 billion (at a conservative Rs. 1,000 overdraft per account) and going to Rs. 1,000 billion if the entire overdraft of Rs. 5,000 is provided. But if there is no mechanism on the ground to collect the repayments or to service the accounts, these are likely to turn dormant as soon as the overdraft is disbursed. There is a high risk that the scheme leads to massive dole out of subsidies instead of assisting targeted distribution of benefits.  It is hard to comprehend how the arithmetic of using a leverage of 1:20 to set up a credit guarantee fund of Rs. 10 billion will be adequate and prevent credit defaults if the front line structures do not exist or are dysfunctional.

To address this issue, a sharp focus is required on drastically improving the last mile readiness through active business correspondents and operational ultra-small branches (USBs). This can only happen if it is market driven and commercially viable for banks and frontline agencies. It cannot be lasting if it is compliance driven, as we have seen very clearly over the last five years. The existing viability gap can be bridged in multiple ways. According to our analysis, for management and disbursal of government subsidy payments (MGNREGA, pensions, scholarships, LPG and so on) banks need to be paid 3.0%, of which at least 1.25% to 1.5% should go directly into the accounts of active BCs, to prevent pilferage by intermediaries,  including corporate BCs. This can be achieved through linking performance to metrics of account activity and service standards that can be measured easily and accurately, with further monitoring by DLCCs/SLBCs/district and state administration and independent agencies. Only services with a consumer pull will eventually sustain, and in that case, it is also important that consumers pay (at least partly) for these services. Time and again MicroSave has established rural and poor consumers’ willingness to pay a reasonable fee for quality, proximate services. Remittance services provide a great example of this. Most remittance consumers actually pay more than NEFT charges (paid by mainstream account holders) as they find value in instant and safe transfer of funds. Moreover, they realize a net saving compared to informal and alternate channels.

The second major gap, also leading to high cost and viability challenges, is a near-random distribution of villages to lead banks. The current distribution does not allow any bank to have a critical mass of villages to constitute suitable structures for sustained service delivery. A cluster of adjoining villages is often allocated to multiple banks, and in turn, all of them find it impossible to achieve economies of scale or scope. The net result is bare minimum efforts for compliance and not to operate commercial banking. The village and gram panchayat allocation need to be completely re-worked in consultation with participating banks. Forward-looking banks will be very willing to swap villages to have a win-win situation.

A third aspect is a sharp focus and aggressive efforts on consumer awareness and protection measures at all levels from national to panchayat. Financial literacy and credit counseling (FLCC) centers have been in existence in every district for many years, however, their role in enhancing awareness for the under-banked and un-banked has been rather limited. A vast majority of consumers interviewed by MicroSave are completely clueless about the accounts they have opened in the past. Consumer responses range from ‘opened account to get a free photograph’ to ‘getting a smart card that is a must to draw pension subsidy’. Unless consumers are well educated about the power of the bank accounts and their rights in terms of associated overdraft, insurance and so on, only the intermediaries will take advantage of the monies flowing through. There will also be a need to be wary of consumer fraud that is starting to gain momentum amongst the newly banked illiterate population in India. Countries ahead of the curve with the extensive scale of branchless banking and mobile money such as Bangladesh, Kenya, the Philippines, and Uganda are now struggling with the aftermath of incessant growth without adequate consumer awareness, to contain the consumer and channel fraud that is now increasingly common.

The scheme clearly has the right intent and does indeed address several design issues that have marred financial inclusion efforts since 2005. What is needed is meticulous attention to cover the potential pitfalls, some of which as described above, risk completely derailing the programme.

1 Refer MicroSave focus notes, case studies, and papers at 

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