The recently announced Jan Dhan policy of the government of India is a laudable effort in bringing large unbanked population under banking umbrella. But to ensure effective financial inclusion, the government would have to think on ways in which a bucket of financial services is provided instead of a vanilla bank account.
A FEW DAYS AGO, Prime Minister Narendra Modi launched Jan Dhan Yojana, opening a whopping 15 million bank accounts in a single day. The figure is expected to swell to 75 million by Jan 26 of next year. An accident cover of Rs 100,000 has been loaded on each of these accounts. This underscored the importance that the government accords to financial inclusion and to bring unbanked people in banking ambit. The effort is commendable, indeed.
A Bill and Melinda Gates Foundation study showed a few years ago that of the 40 per cent of the world’s population which lived on less than $2 a day, less than 10 per cent had access to formal banking. Situation is no different in India. According to a World Bank Findex Survey, conducted in 2012, almost 65 per cent of adult Indian population did not have access to a formal bank account; and less than 10 per cent borrowed from formal lending agencies. The poor section of the population is especially lacking in access to formal banking. No wonder most poor people prefer to maintain their savings in the form of hard cash and jewelry, assets that generate no return.
There is no gainsaying that the huge unbanked population needs to be brought under banking umbrella. But financial inclusion is more than simply affording a bank account to unbanked. Surely, a bank account is the first and foremost step, but it is only one part. There are other financial products and services that need to be provided to large section of populations which are either completely out of banking arena, or have inadequate access to financial services.
The Reserve Bank of India (RBI) defines Financial Inclusion as the “process of ensuring access to appropriate financial products and services needed by all sections of the society in general and vulnerable groups such as weaker sections and low income groups in particular, at an affordable cost in a fair and transparent manner by regulated, mainstream institutional players.” Two important thoughts emerge from this. First, financial inclusion means access to suitable financial products and services. Second, it envisages the delivery of financial inclusion by mainstream institutional layers. It needs to be more innoative than that.
FAILED LEGACY OF PRIORITY SECTOR LENDING
The initial push for financial inclusion in the country was not through pushing the banking network to hinterlands which is the current paradigm. It was for providing sufficient financing to agriculture and small entrepreneurs in form of priority sector lending from commercial banks. These norms were strengthened from time to time.
However, decades after this program, most of priority sector loans are below standard grade, deserving but unconnected applicants are going unfunded and banks are frequently failing to disburse required quantum of loans to priority sectors.
The lack of funding at micro level can be imagined by the very fact that less than 20 million of the over 110 million low income Indian households have access to microcredit. Because of the unavailability, very commonly, villagers borrow from private lenders at exorbitant rates, sometimes at over 100 per cent a year. Surely, the noble push for an ideal financial inclusion endeavor has gone awry.
The situation is even starker on other financial products. Estimates show that less than one in twenty low-income households have access to health insurance.
A World Bank study a few years ago found that about one in every four patients in India falls below poverty line because of hospitalization and about 40 per cent of hospitalized patients need to sell off some asset to foot the medical bill.
PLANNING FOR FINANCIAL ACTIVITIES
So, what transpires is that financial inclusion is basically a framework; a structure through which people are able to avail financial services which could improve their lives and business. As such, financial inclusion needs to have both social and commercial dimensions. From social perspective, financial inclusion needs to be geared to protect the person and act as a basic tool for social security by covering death, illnesses and accident. Here, besides cheap life insurance, it is necessary for creating micro insurance products with which person can foot the hospital bills without selling their assets.
On commercial front, the sore point of grassroots businesses is the lack of affordable loans or credit. It has been the general experience in developing countries that because of poor quality of credit related products and lack of effective monitoring mechanisms, micro credit has proved loss making business for state institutions. However, community based and private players in microfinance have done well, which proves that the problem lies in the loan giving institutions rather than the borrowers. Second aspect of commercial financial inclusion is the micro insurance. Insurance products are required for crop and equipment protection which are the most fundamental business tools for marginal people.
Finally, the money flow between business owners, customers and financial services providers need to be brought on banking platform as much as possible, as cash transactions do not allow either creation of track record for insurance seekers, nor do they allow informed state intervention.
BRINGING ALL STAKEHOLDER ON BOARD
Broadly, micro credit, micro insurance and micro saving form the pillars on which a credible structure for financial inclusion stands. Therefore, any mechanism or model has to incorporate all the three in a seamless manner to make an impact on the ground. What is crucial here is to identify the players and leverage their respective strengths. Besides government, there are micro finance institutions (MFIs), insurers and community groups such as NGOs and self help groups who mostly interact with low income people. Each of these has its own strengths which can be tapped into.
Government’s strength lies in providing administrative and legislative support. Further, it can act as a platform to bring together all stakeholders and provide guarantee of returns to private players as poor people cannot provide market linked premiums. This means it would have to chip in with some money also which is not tough considering its push for direct transfer of benefit. Besides, there are already many public sector institutions such as Post Offices which can act as delivery points of basic financial products.
As for micro finance institutions, they enjoy reliable and extensive networks besides knowing the creditworthiness of a large number of low income people as they are already offering financial services to them. Insurance companies have products but are constrained in assessing risks associated with the target population. Finally, NGOs and self help groups,
because of their credibility at community level, can work as a publicity platform for bringing on targeted population on board.
SEARCHING FOR A READY MADE SOLUTION !
There is no readymade solution or model. A lot depends on the existing institutional framework and their respective stages of development. Different countries have experimented with different models to provide different financial products. For instance, MFI institution FINCA of Uganda has partnered with American International Group (AIG) to provide insurance whereas in Tanzania, in a community owned program, the policyholders own and manage the health insurance program. In India, Rabobank promoted Interpolis Re, leveraged the local reach of a local NGO to help low-income households organize into community groups for risk management purposes and then negotiated with insurers to come up with group policies for such low income groups. The good point about this experiment is that because of large number of clients, insurers were able to provide low premium product and yet be profitable. Such experiments need to be promoted by the state at larger level. The state also needs to promote NGOs to provide financial literacy among low income groups to strengthen demand side of the financial inclusion products.
As for micro credit, the biggest impediment to providing loan to low income people is the poor credit quality. This is why established players such as banks and NBFCs don’t loan them. To assist these borrowers in creating a loan service track record, the government can encourage banks to offer no frill accounts with small overdraft facilities.
Another sound proposal that has done rounds is to create rural credit information bureaus which banks can look at before sanctioning loans. Even postal banks can act as repository of such credit information. Further, the government needs to come up with clear guidelines on writing off loans in case of business or crop failures. On the other hand, to encourage banks to extend loans to low income category, foreclosure norms should be made transparent and efficient.
Finally, micro saving and micro remittance remain huge hurdles on road to credible financial inclusion. Here, MFIs can be tapped who can act as saving collection points. Numerous non-banking financial institutions (NBFCs) have proven that it is very much possible to create network of individuals who can collect money on regular basis from marginal businesses. Banks in under-banked states such as Rajasthan, Chhattisgarh, Jharkhand and the North-East can use MFIs to do the same and pay a certain fee in return. Certain MFIs are already doing this work; these need to be standardized as a model and scaled up.
INNOVATING MICRO REMITTANCE
The unavailability of formal banking network in rural areas compounds the problem of micro remittances. The government of India has made lots of efforts in this direction. For instance, it has facilitated transfer of money through cell phones between two parties using simple apps which is a remarkable progress, but it still requires a bank or ATM to physically get the money. Since banks need to have a minimum business to sustain a branch, they shun rural and remote branches very often. It is, therefore, important to rope in other players in facilitating micro remittance. Towards this end, Latin American countries’ experience with Agent Banking is worth taking a look. By leveraging mobile communication technology, a large number of banks in these countries are using thousands of agents to provide full spectrum banking services to remote customers. The RBI’s initiative on appointing banking agents can be boosted for this purpose. While according to RBI, there are about a quarter million banking correspondents including PCO operators and grocery stores, not much difference had been seen on ground. But experiments such as Eko India Financial Services, which offers multiple financial services to remote customers, show that there is a potential in this business.
However, even if all institutional networks and incentive structures are put in place, the actual impact could still elude if
the demand side is not strengthened. And in this regard, major challenge remains in form of lack of meaningful financial literacy that prevents people from demanding financial products and services. Even today, banking correspondents say that more than four fifth of their accounts are dormant. As such, all stakeholders, especially the NGOs need to spread financial literacy to create effective demand.
While successive governments have attempted financial inclusion, their best efforts have borne little fruits because of lack of proper incentives for stakeholders, poor product design and compartmentalized planning. The need is to integrate right incentives and adequate institutional structure with concerted planning that leverages the respective strengths of all stakeholders.
The government needs to come up with products which makes formal players such as banks and insurance companies see money at the bottom of pyramid. Simultaneously, it should use the human resource and network of MFIs and NGOs.
Only then the remotest person of the land can have access to the right financial products and services when he needs them most.