Almost 50 years ago, two years before social controls were imposed on banking in 1969, L.K. Jha, the then Reserve Bank of India governor, wrote to the then Union finance minister, Morarji Desai, that he believed it was in the best interests of everyone to ensure that more banks were opened in smaller places. That would also slow down expansion of banks in urban areas, he said. Jha went on to write that the tendency of banks to open branches in a competitive spirit in urban areas had led to a heavy concentration in cities such as Bombay, Calcutta and Delhi. That still rings true five decades later. Official data shows that only 27 per cent of villages in India have a bank within a five km radius and the number of those without a basic bank account is still huge.
It’s only after a major push from the government over the last few years that banks have reached out to the unbanked, initially through no frills or basic accounts and now in the form of the prime minister’s Jan Dhan Yojana. The numbers are impressive — over 24.1 crore bank accounts with an accumulated balance of Rs 42,094.24 crore and an entry in the Guinness World Records for opening the maximum number of accounts in a day. Yet, the sheen of the feat has been taken off by a recent investigative report in this newspaper that found bank officials putting in Rs 1 or Rs 5 to keep some accounts, which were dormant or inactive after opening, alive. These officials said they were under pressure to inflate numbers. Adoption of such methods should raise concern, given the potential for misuse even if that means making a deposit of just a rupee. But it is important to view this from the perspective of larger public policy and social goals.
After 2005, when the word financial inclusion first found mention in the monetary policy review of the RBI and was later introduced as a budget measure by the UPA government the next year, banks were progressively nudged to bring more of those who had no access to basic banking services into the formal banking system. The UPA government and the central bank mandated the boards of banks to formulate plans for financial inclusion. But the NDA government, perhaps, was quick to recognise the economically and politically transformative impact of the scheme in terms of efficient delivery of subsidies and to provide access to financial services.
The government also recognised, last year, that the agenda of Jan Dhan, Aadhaar and Mobile — dubbed as JAM — was up against the challenge of getting money from banks into the hands of beneficiaries, especially in rural areas. The dressing up of numbers and the fact that almost half of the accounts were with zero balance should now prompt the government to look beyond these banks for ensuring last mile-connectivity and universal bank accounts, and, more importantly, for achieving meaningful financial and quantitative financial inclusion.
Here’s why: In neighbouring Bangladesh, millions have been brought into the formal and regulated banking system through bKash Limited, a mobile financial services provider promoted by the Dhaka-based mega NGO, BRAC. bKash has used the telecom networks of leading service providers and its own agents spread across the country to enable ordinary people to send and receive funds, including international remittances, through their own mobile phones and personal identification number-protected accounts. This penetration also has to do with a more responsive central bank. What this, experiences elsewhere and the relative success of some of the microfinance providers and new money transfer firms, here, in a country of one billion telecom subscribers shows is that reaching out to the unbanked in the remotest of areas in the country will call for skill sets, organisational and management capabilities, technology savviness and commitment which may well be beyond the ken of the traditional banker. Besides, when it comes to technology initiatives — key to mobile payments and ultimately universal access to financial services — private players have been way ahead.
This is reflected in the early birds signing up for the unified interface of India, or UPI, the system which powers multiple bank accounts into a single mobile app and offers banking features. This is also reflected in the early subscriptions to the government’s ambitious Bharat Bill Payments, an integrated bill payments system offering multiple modes of paying utility bills such as power, water, telephone and gas. In both, more private banks — such as ICICI Bank, Axis Bank, HDFC bank —have signed up compared to state-owned banks. The early movers have the advantage as business and volumes scale up. Perhaps, banks would be better off promoting subsidiaries or verticals for financial inclusion with a different set of professionals.
India has banking correspondents, who help bring people in the hinterland into the banking fold. For them to succeed, banks cannot crimp on costs. They also cannot afford to ignore investing in financial education and literacy. Banking correspondents are way too small to be viewed as a systemic risk. Yet India’s banking regulator has restricted them to serving only one bank, perhaps to prevent arbitrage. Efforts at banking outreach may succeed only if there are better incentives at work for such last-mile workers and also those providers who ensure not just basic bank accounts but also products such as accident and life insurance and micro pension schemes. Payment banks licenced by the RBI may just do that — offering micro insurance and other schemes. This could be just the push which traditional banks may need soon. Three top telecom firms — Airtel and the Birla group which has Aditya Birla Nuvo Ltd besides Vodafone — have licences for starting payment banks. These, besides India Post, will branch out to rural areas. Over time, as they scale up and transactions grow, there will be money to be made.
Of the over 24 crore accounts under Jan Dhan, the share of private banks was just three per cent. That should prompt the government and the central bank to review the method and playing field for achieving the goal of basic banking and financial services.
Should the burden of achieving the economic and social and political goal of universal bank accounts be solely on state-backed institutions? It’s worth asking that question, if only because the state should not end up further eroding the institutions it owns and controls. The state should start to look gradually beyond these institutions to push its financial inclusion initiative. It is that competitive push which could well be the trigger for traditional banks to look beyond India’s big cities and towns rather than setting targets.