MONTHLY ARCHIVES: JANUARY, 2013
Financial inclusion: it is indeed an enormous task that India has taken upon itself, to make financial services accessible and affordable to every section of its diverse socio-economic spectrum.
At the one hand is the broader definition of financial inclusion which refers to: the process of ensuring access to appropriate financial products and services (we infer as savings, credit, transfers and insurance) needed by vulnerable groups such as weaker sections and low-income groups at an affordable cost in a fair and transparent manner by mainstream institutional players.
The attempt on the banking side has been largely to find ways for the banking system to extend coverage to the last mile, expanding the branches and also working with a field force of banking correspondents. At this level, financial inclusion addresses purely the enrolment level, to even be a part of the landscape before becoming a consumer of its servicesThe available research on the state of play indicates a number of supply side as well as demand side challenges, however the two major bottlenecks that keep getting highlighted are: cost of access and viability; and credibility and ownership risks associated with the BC model. Together, these have resulted in a de facto poor uptake and penetration of banking and financial services at the bottom of the pyramid. The data shared at the Financial Inclusion summit in Jan 2013 confirms the slow branch roll out in rural areas, low consumption of credit/ overdraft in these ‘no-frills’ accounts (now re- named Basic Savings accounts) and high dormancy of these supply-driven accounts, which remain largely pass-through channels for benefits transfersAlso, transaction costs for BCs are not fully covered by service fees for government to person transfers. An important dimension is the credibility of the BC model itself, which finds itself challenged in implementing an equitable accountability framework to address financial risk and security aspects of last mile networksThis essentially cuts to the relationship between banks and their correspondents, which currently seems to suffer from a trust deficit.
On the other hand there is a huge impetus by the Government of India to enhance the efficiency and transparency of its benefits transfer schemes using the bank account as the means to traceability. Already as on Jan 2013, the transfer of benefits under 26 government schemes has been piloted in 43 districts, with reasonable success. The prospect of quick and direct transfer of financial entitlements linked to an identity proof (Aadhaar) and a designated bank account has hastened the urgency among beneficiaries to complete the enrolment of beneficiaries in the banking system. The aggressive deadlines for roll-out of G2P transfers has only forced the pace of ensuring economic viability and risk resilience in the hybrid complex that comprises the financial inclusion providers: regulated banks and largely unregulated correspondentsHowever, even as the throughput of transactions is set to explode, the core issues of viability and risk ownership remain to be settled to everyone’s satisfaction for benefits transfer to work effectively.
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At Indicus we have been working on financial inclusion and digital payments for more than six years and our work coincides with the period in which the RBI and the government have taken many steps to open the space and expand the BC model as well as mobile banking. In 2006 we worked on a paper on “Accelerating Usage of Electronic Payment Options in India” that brought out the advantages of electronic payments. The list of possibilities was long at that time and included increasing use of RTGS, ECS, EFT, ATM transactions etc. as well as initializing e-procurement for government, online tax transactions, government disbursements, remittances, mobile banking through SMS etc. While some of these points had just begun, many were still on paper. Over the past six years, the move towards electronic transactions has been rapid; tax payments for instance are almost all online now, the RBI is vigorously pushing for reducing the use of cheques, the Electronic Benefit Transfers are now being pushed even harder through the government’s direct benefits transfer scheme etc. This is one space where the last six years has seen rapid change in the positive direction.
Yet, there are significant barriers still to break through. It is most important to fix the problems at the last mile, as detailed in our recent policy brief on Business Correspondent Agents. The policy brief drew from experience in India and the following studies by Gregory Chen and Aimthy Thoumoung, Ann-Byrd Platt and Akhand Tiwari and also by Mukul Singh.
Policy Brief Summary: The policy brief focuses on the Business Correspondent Agent or Customer Service Point (CSP) as the critical link in providing a meaningful and sustainable model of financial inclusion. The rapid growth in the number of agents in recent years shows the pressure from policy makers to increase the percentage of the population with access to a bank account. However, the RBI and Ministry of Finance have established targets based on account opening rather than account usage. This has prompted banks to aggressively open accounts to meet their targets, but to invest little in building CSP networks or delivering high-quality products that encourage usage of the accounts. Interviews with CSPs document many areas of concern – high attrition rate, low diversity of product offerings, inadequate incentives, inadequate liquidity at the last mile, connectivity problems etc. Addressing all these issues ultimately helps achieve the goal of raising the number and quality of transactions.
It is time to go beyond solely targeting expansion in number of agents and accounts. Policy makers should set targets that also look at the average number of transactions per CSP. Banks and BCNMs should incentivize quality of service delivery, product diversification etc. Such benchmarks will enable more meaningful financial inclusion as well as raise agent profitability, making for a more sustainable model for India.
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Indicus has been working in the financial inclusion space for more than six years now and we are glad to partner with the GATES Foundation to bring out insights from various sources that can enrich the debate and discussion on financial inclusion in India.
India is a complex country with layers of socio-economic segments, each with its unique needs that have to be addressed. The aim of the centre is to work together with all the stakeholders to achieve the one objective that has eluded India for long - universal financial inclusion. In short, iron out the glitches and smooth the path such that the poor's access to financial inclusion is brought about in a sustainable manner.
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