The honorable prime minister has announced a mission mode to financial inclusion (FI) from the ramparts of the Red Fort on August 15. The announcement and its timing reflect the seriousness with which the new government is committed to achieve higher banking penetration, given the historical background. The government of India and the Reserve Bank of India (RBI) have been making concerted efforts for more than six decades to increase banking penetration. A number of initiatives were undertaken like nationalisation of State Bank of India in 1955, commercial banks in 1969 and 1980; setting up of Regional Rural Banks; encouraging urban and rural cooperative banks; and instituting priority-sector lending scheme. Since July 1982, the National Bank for Agriculture and Rural Development has also made significant efforts to increase FI.
The extent of FI despite such efforts is dismal. According to an extensive study by the Rangarajan Committee on FI (2008), less than 50 per cent of households in 2002 had availed of credit from the formal banking system. The situation has marginally improved since then, with the introduction of business correspondents (BCs), provision of no-frill accounts, and easing of know-your-customer (KYC) norms. Thus, a large amount of financial resources are outside the formal system of finance. This translates into two important issues—first, the resources available for development to nearly half the population are priced at high rates of interest due to which India cannot realise full potential of growth. Second, the formal financial sector, well-regulated by the government and efficient in allocation of financial resources, is deprived of funds.
The reasons identified for slow progress of FI are many. The technological issues like frequent machine breakdowns and lack of connectivity hampers the seamless experience and impacts confidence of customers in formal banking. Further, lack of uniform application of technology across banks, and poor maintenance of the devices pose a major hurdle for the smaller technology partners. Among non-technological reasons, high attrition rate of BCs results in disruption of banking services; limits on daily transaction deter big-ticket customers from using BCs, kiosks and ultra-small branches imposing restrictions on earnings and commission; and time taken, typically 7-10 days in rural areas, in administrative formalities for account opening, credit appraisal, KYC, loan disbursal, etc.
To attain higher FI, technology is being looked upon as a great enabler and technology vendors have justified the faith by offering cutting-edge solutions. Facilities like biometric-enabled and multi-lingual hand-held terminals and back-end infrastructure integration with government schemes like pension payment transfers to the bank accounts substantiate the potential of technology. But, given the ground realities, the need is to build on this strong technology potential to come up with innovative solutions effectively.
To inspire confidence in formal banking activities and address the fear of unbanked population associated with salesman-type and gypsy-like BCs, a network of more than 5 lakh fair price shops (FPS) could be explored. Further, in states like Chhattisgarh and Andhra Pradesh, smart cards and point of sale (POS) machines are being used for PDS transactions. Commercial banks can leverage the network of FPS and with slight upgrade in technology, the smart cards and POS can be used to quickly ramp up FI. Also, owners FPS, benefitting from somewhat “official” status, could be considered for the job of BCs to provide stability in banking relationship in contrast with BCs who reflect high attrition rate. In addition, the premises of FPS could also be considered for operating temporary bank counters for regular transactions with unbanked population.
The attrition rate of BCs could be arrested by ensuring higher remuneration through various alternatives. At present, each BC is linked to one particular bank and can undertake transactions only for the customers of that bank. While this makes it technically easier for banks to operate, financially a better approach will make the BCs interoperable and achieve scale and aggregation economies. Similarly, there is scope for having differential limits for BCs based on location of operations and customer profiles, depending on cropping pattern, demographic trend and main source of income. Customised incentives for BCs based on the effort and distance of their location from the nearest branch will incentivise corporate BCs to reach out to remote villages and help the cause of FI by increased penetration. In this context, demographic and historical transaction data can be used to evaluate the risk to define different limits of transaction for each BC instead of keeping it uniform across BCs, across the country. Also, the number of transactions and instruments offered by BCs needs to be increased to include other financial services like remittances, insurance products and mutual funds.
Lack of seamless connectivity is a regular issue that the BCs face while using the hand-held devices. Upgrading the device to contain basic information in an offline mode and exploring satellite connectivity technology could be helpful. Technological innovations like integrated machine that has functionality of cash withdrawal and deposit; facility of scanning documents to facilitate new account opening and loan disbursal; and biometric identification of users, voice commands and narration for all facilities in multi-language format could help increase banking penetration. Centralised online loan application processing will not only help in more efficient appraisal and disbursal but also impart cost efficiency and consistency. It will also shift the onus and risk of loan sanction to the central/regional authority from local managers.
The PM has announced a debit card scheme to be distributed to unbanked households. A self-sustaining long-term solution will be to encourage cashless payments through card-based POS devices at retail stores, equipment vendors, roadway buses and other public utilities.
Finally, banking services by post offices in India were started in 1882, in the absence of wide-spread bank branch network. Given the fact that nature of banking services has changed, it is for consideration whether postal banking, in competition with commercial banking, be continued? Post offices held `6,03,170 crore under postal banking schemes in 2013, which if released to banks through BCs will probably provide volumes to commercial banking and make FI commercially attractive for reluctant bankers.
Charan Singh is RBI Chair Professor of Economics, and Vaibhav Rathi and Ravi Chandrakar are final-year students, completing their management postgraduate studies from IIM Bangalore