Lack of financial literacy hinders use of no-frills a/cs

Only 15 per cent are active users.

Banks may have used no-frills accounts to get many poor people as customers, but the usage of these accounts remains abysmally low, according to a Reserve Bank of India study.

The study conducted at select bank branches in the Cuddalore district of Tamil Nadu has found that the lack of financial literacy was the main reason behind the non-operative accounts. Other aspects like distance from branches also had their share in influencing the degree of usage.

Only 15 per cent of the customers were operating the accounts. Bulk of the accounts hadn’t even been used once, one year after the completion of the drive. However, an analysis of the operating accounts showed a steady increase in balances over one year from their account opening date. About 25 per cent were still left out of the banking net even after the drive.

The study, which was done in December 2008, jointly by the College of Agriculture Banking, RBI, and the Centre for Micro Finance at Chennai-based Institute of Financial Management and Research.

The average account opening and maintenance cost of no-frills accounts were estimated to be Rs 50.45 and Rs 13.40, respectively. At current levels of transaction and average balances, it was shown that no-frills will break even the maintenance cost but not the account opening costs.

Financial inclusion is the delivery of financial services at an affordable cost to the vast sections of disadvantaged and low-income group of people who have been excluded from it.

In 2005-06, RBI had asked to banks to make available a basic no-frills savings account either with nil or very low minimum balances. By November 2008, out of the 342 districts identified, 155 districts in the country were declared to have achieved 100 per cent financial inclusion. Over 1.58 crore no-frills accounts have been opened in the country till end of March 2008, according to RBI data.

Some of the recommendations from this study include the need for financial literacy at the time of opening an account, incentives for branch managers delivering on socially responsible schemes and documentation of best practices.