No easy routes to financial inclusion

Financial inclusion must be set up to pay for itself

The Jan Dhan Yojana, a scheme for financial inclusion announced by Prime Minister Narendra Modi in his Independence Day speech, intends to take banking services to the 40 per cent of India that does not have bank accounts. This task is daunting. A good portion of those no-frills accounts that have already been opened have only minimal activity - meaning those accounts' holders are still not "included". As literacy levels rise and poverty levels fall, more and more Indians would have come within the formal financial system anyway; but the prime minister's intent is to speed up things - to use financial inclusion as a tool for the uplift of those at the bottom of the pyramid. Mr Modi sketched out an outline of the scheme, listing three elements: a bank account; a debit card with an overdraft facility; and accident cover worth Rs 1 lakh. To deliver just these will be a Herculean task. In particular, every care should be taken to ensure that the burden is not shifted to the already creaking public-sector banks. They simply cannot be burdened with one more massively loss-making operation, however worthy.

One organisation which knows the stakes, and has been steadily working on the innovations and changes required, is the Reserve Bank of India (RBI). Inclusion was a key portion of the current governor's report to the previous administration on financial sector reforms in 2008. Understanding that commercial banks are not the ideal mode of delivery, Raghuram Rajan's RBI has come up with ideas on limited banking through innovations like payments banks, which can maintain small savings accounts, and small banks. Dr Rajan has spelt out things further by listing the necessary product and process innovations. Products have to be devised to meet the needs of the poor - who have to have a safe place where they can keep their savings, make and receive payments, and borrow quickly in case of need. Besides the accident insurance that the prime minister mentioned, products covering life and health risks are also needed - but it is most crucial that these policies be extremely easy to understand. As private players - from banks to business correspondents - will be the intermediaries, and many customers will be first-time users, simplicity must be the foremost concern, along with a rigid consumer protection scheme.

Technology will have to be used cleverly. Mobile phones will be central to the strategy, as a daily-wage earner cannot journey to a bank branch, no matter how near, for every transaction. A phone can be the front office; but the back office - bank branches - will have to be so structured as to keep costs low. And unless this supply chain of financial inclusion is set up so that all its links - from the new-style banks to the village business correspondents - make money, it will simply not work. The state might think that a few choice subsidies might grease the wheels, but that will prove unsustainable. Nor can the public-sector banking system carry the can. The system must be designed to pay for itself, and to protect its users.