Taking Banking to the last mile

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While the new Swabhimaan scheme is a welcome step, the government must maintain its focus on financial literacy and linking financial inclusion efforts to poverty alleviation. 
Team Inclusion reports

The government has planned financial ‘Swabhimaan’ – a programme to ensure banking facilities in habitation with a population in excess of 2,000, by March 2012. The programme will use various models and technologies, including branchless banking through business correspondents. The government has decided to pay banks Rs 140 for every no frills account they open as part of the financial inclusion plan.

Highlighting the objective of the campaign, UPA Chairperson Sonia Gandhi said the initiative would enable small and marginal farmers obtain credit at lower rates from banks and other financial institutions. This would insulate them from exploitation of the money lenders, she said. She also urged the bankers to “‘take up this task with a sense of responsibility and understanding and exercise courtesy and respect, especially to small borrowers.”

The government has actually decided to give out Rs 500 million to banks for this purpose in the upcoming fiscal. “Financial support to the banks for opening ‘no frills’ accounts under the Swabhimaan Scheme as part of Financial Inclusion Plan is Rs 500 million (Budget estimate for 2011-12),” Finance Minister Pranab Mukherjee said during the budget presentation. 

Once banking access increases, it is hoped that it enables government subsidies and social security benefits to be directly credited to the accounts of the beneficiaries, enabling them to draw the money from the business correspondents in their village itself.

The key idea is that there is need for village level presence – a customer-facing channel that’s close to the customer not more than three to four kilometers walking distance. For this, it is important to have entities who are good at delivering outreach while operating in very difficult remote conditions.

But given the size of the un-banked population in the country, the ongoing project can be considered a “significant beginning”. Only a little more than a third of India’s population has access to banking services at present. In other words, only 3,500 villages have brick and mortar branches and even if another 73,000 habitations are brought under the net through the FI project, there would still be about 500,000 habitations left uncovered. That means there is still tremendous scope for the rural money lender (who is often accused of charging usurious interest rates but has had a rather useful role in supporting the rural economy in the absence of formal banking systems), as well as the micro-finance firms. Among the bank-supported initiatives, self-help groups (SHGs) also have a role to play, the government’s FI project is reliant more on BCs and technology to reduce the capital-intensity of expanding the banking cover.
Though several public sector banks have extended their reach to rural areas in recent months, these ventures largely remain unprofitable on a standalone basis. Launched partly due to coaxing by the government, it would take a while for their operations to turn profitable. These banks have been demanding financial support from the government so that the financial inclusion programme can be carried forward with the requisite gusto.

However, as access increases, it is important that financial services benefit consumers and not harm them. The interests of consumers have to be protected to support financial stability and achieve equitable growth. Weak financial consumer protection and low levels of financial literacy can result in disastrous consequences for both the financial sector and society. Recent developments in Andhra Pradesh, for example, show how even though microfinance credit was easily available but the lack of consumer education left many borrowers in despair.


The primary focus should therefore be on financial literacy, with the provision of basic information about money and the benefits of having a relationship with a formal banking institution. The aims should be to build the required long-term trust and ultimately to enlarge the level of ‘bancarisation’ of the population. Moreover, financial education can contribute to a more efficient and more proactive use of scarce financial resources by current clients of banks, through a better understanding of the opportunities and options on offer. Schemes such as Swabhimaan need to underline the importance of financial literacy efforts, especially for children and the young population, and consider introducing financial education as part of schools curricula. Similarly, banks need to scale up their efforts substantially towards educating the clientele in their respective vernacular languages regarding the benefits of banking habit.

It is also important to enable customers, especially the most vulnerable ones, to protect themselves from abusive financial practices and prevent them from being overburdened by debt. All in all, the end objective should be to empower people to achieve their own goals through enhancing their financial capabilities.

This is particularly true in a context of rapid development of branchless banking, with newly banked people being exposed to non-bank intermediaries, therefore with no possibility to directly interact with experienced bankers. This calls for enhanced efforts to teach low income customers how to successfully and safely use the services offered, and manage their money better. This would also open up the true potential of branchless banking.
Jayashree Vyas, MD, SEWA Bank in her remarks recently, underlined the need for a policy framework to enable MFIs to reach out to the poor in the under-served areas. “We need to get closer to our clients, re-design our products according to client needs and ensure ethical lending and recovery practices,” she said.

Swabhimaan would do well to also insist on PRI involvement. The Panchayati Raj Institutions can be utilised to mobilise the people and inculcate financial literacy. The effectiveness of providing services through local bodies cannot be overemphasised as they know their real requirements, and are familiar with every nook and corner of the village and, above all, they are answerable to the people.

Financial inclusion should not only be about reaching high numbers of unbanked or underserved groups. It should equally be about the provision of quality financial services and products. This means that access to safe, adapted, accessible, affordable and usable financial services and products should be offered.

The Insurance Regulatory and Development Authority’s (IRDA) latest Annual Report indicates life insurance penetration at just 4.6 per cent and general insurance penetration at 0.6 per cent. Majority of the people do not have bank accounts, and even though RBI mandates have ensured the opening of 50 million no-frills accounts, hardly 11 per cent are active. While the channel design contributes to low take-up and account dormancy, design of products plays a significant role in this.
Innovations in financial products and technology-based delivery methods can expand the reach of financial services and create new opportunities to provide essential services to the poor. Financial products targeting the poor, such as money transfer services, microloans, microinsurance, or weather and catastrophic risk insurance, micropensions, can all have an important transformative effect. In fact, there should be one hybrid product for financial inclusion, with a single smart card that is UID enabled at the backend. This will reduce the current multiplicity of channels and unwieldy distribution cost in rural and remote areas.

Deepening the financial system and widening its reach is crucial for both accelerating growth and for equitable distribution, given the present stage of development of our country. 

Broader and deeper financial markets will be crucial for mobilising higher savings and intermediating them efficiently to finance higher investment and growth, the Economic Survey 2010-11 observes, saying that while India’s financial markets continued to gain strength in recent years, the twin challenges are to continue this progress on gradual financial reform and to modernise regulations and institutions to ensure its continued safety and stability. Indian markets have been making gains for eight quarters in a row, their longest winning run in at least 20 years, with record foreign inflows supporting the market.

The Survey says financial inclusion needs to be accelerated as a next crucial step and that innovative solutions will be needed in this regard.

ICICI Bank Managing Director and CEO Chanda Kochhar had also underlined that rural markets will be the future growth engine. “Rural India is going to be the market of tomorrow. Therefore, it is important for us to find business models for the rural population.”

It would be well to recall here that one of the key features of the National Rural Livelihoods Mission (NRLM) is to work towards achieving universal financial inclusion, beyond basic banking services to all the poor households, SHGs and their federations. NRLM would work on both demand and supply side of financial inclusion. On the demand side, it would promote financial literacy among the poor and provides catalytic capital to the SHGs and their federations. On the supply side, it would coordinate with the financial sector and encourage use of Information, Communication & Technology (ICT)-based financial technologies, business correspondents and community facilitators like ‘Bank Mitras’. It would also work towards universal coverage of rural poor against loss of life, health and assets. Further, it would work on remittances, especially in areas where migration is endemic. Given this, let not Swabhimaan and the NRLM work at different tangents. A holistic view of different socio-economic outcomes must be obtained and the interventions decided accordingly, schemewise, regionwise. Duplication is not required.

The key lies in linking access to financial services with livelihood options and leveraging the same to achieve poverty eradication. The end purpose of financial inclusion is and must be poverty alleviation. The government needs to singularly work to bring the focus back to this purpose.

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