Banks raise barriers to basic banking

Posted on September 30, 2014 by Sumita Kale

A new research paper out by NSEIndia and IFMR Trust (NSE Working Paper Series NoWP-2014-1, Amy Jensen Mowl and Camille Boudot) shows that banks are not aligning their practices with the financial inclusion objective.

An experiment in urban South India revealed that  banks have a high ability to influence financial access outcomes, even when product availability and eligibility rules are non-discretionaryNearly all banks refused to market the regulator-mandated basic accounts, despite the customers being atypically persistent in asking for "basic accounts. Additionally, in more than half (55%) of the bank branches visited, customers were turned away when they attempted to negotiate for an alternative, affordable

savings product—in half of the cases, the bank refused to accept the customer’s valid identity or address proof, while in the other half of the cases, the bank refused to market an alternative low-cost productFor the accounts that were opened, the banks demanded excessive identity and address documents, withheld key information about the product’s terms and fees, and imposed significant time, effort, and incidental costs on the customers.

Clearly, banks appear to be the reluctant partners in the inclusion mission.

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Competition helps improve access for unbanked households

Posted on September 30, 2014 by Sumita Kale

Evidence from the US shows that an increase in bank competition is associated with a large drop in the share of unbanked householdsThe effect is even stronger for populations that are more likely to be rationed by banks, such as black households living in "high racial bias statesThe improved access to bank accounts leads to higher savings rates but does not translate to higher levels of indebtedness (Claire Celerier  and Adrien Matray, Unbanked Households: Evidence of Supply-Side Factors  HEC Paris Research Paper NoFIN-2014-1039)

This result has important policy implications for IndiaWith the RBI going in for differentiated banking licenses as well as proposing licenses on tap, the impact on financial inclusion will be significantFurther, the fears in banking circles of increased indebtedness in low income housholds should be assuaged by this research.

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