The recently launched Pradhan Mantri Jan Dhan Yojana aims to bring the financially excluded into the ambit of the formal financial system. But this is only the first step in ensuring inclusion. In an interview with Ishan Bakshi & Rahul Jacob, Daniel Radcliffe, senior programme officer of the Bill and Melinda Gates Foundation’s Financial Services for the Poor (FSP) initiative, talks about the key issues in ensuring financial inclusion. Edited excerpts:
In countries like Kenya, where the financial system is not as advanced, financial inclusion has increased at a rapid pace. Is excessive regulation holding us back?
There has been an evolution (in thinking) within the central bank. The core barrier
was that banks were not equipped to build highly diffused cash digital convergence networks (agents) in poor rural communities. That is the challenge, technology is not.
The Reserve Bank of India (RBI) has been hoping banks will solve this problem on their own. But that has not worked out. You are going to have to allow these other institutions to launch mobile money schemes on their own. But I think what gave RBI the comfort was the Brazilian central bank coming out with similar regulations in 2013, to allow mobile operators to offer payments.
The European Union has a tier regulatory structure, where they have different regulations for different models.
Banks are not good at building diffused networks because that requires making money on high volumes but razor-thin margins. Contrast that with telcos. They have figured out how to make money on the smallest unit of airtime in the poorest and most rural community; that is the type of business that mobile money has in rural communities.
The challenge is to make sure there is a shop in every village that allows me to convert my physical cash into digital cash, and back. That shop has to be liquid in terms of both digital and physical money, it has to offer good customer service and be diffused enough to service my peer (friends, relatives) networks.
What is the state of the business correspondent (BC) model in India?
The BC model is under a lot of strain. The networks are of low quality, so more often BCs are used to ‘dump and pull’. You get your DBT (direct benefits transfer) and pull it out. (On costs) there are various models, I will take East Africa. The average agent conducts 50-plus transactions a day and earns 10 cents as commission per transaction, meaning roughly $6-8 a day. But they have to pay to rebalance every day (go to a branch to offload cash). That costs, maybe, $1. You also need some working capital to have digital and physical cash float, plus somebody has to brand your shop, and usually that is the provider. The challenge is to keep the guys happy when they are getting, maybe, five-10 transactions a day.
What are your views on the payment bank model?
The first step is the access problem and there will be usage through the payment account, but that is not financial inclusion. Payment banks will offer the account and then on the outside you have partnerships with full-fledged banks like SBI offering credit, savings and pension.
I wonder if you are going to have to provide a broader constellation of hooks from the beginning. It is hard to disturb the entrenched payment habits and it is hard to tell someone that your life will be better over the next five-10 years because all these other things will start happening in the future, when you have a digital account. The question is, what will solve my problem today.
Studies have shown the effect of financial literacy programmes on saving patterns has been negligible...
It will need a lot of customer education. However, evidence does suggest that putting people in classrooms and teaching them (about) interest rates does not lead to any change in financial behaviour. Awareness building has to be fused with the product that gets a change in behaviour. In East Africa, whenever they hear financial literacy they dismiss it, calling it marketing. There is some work in Latin America on education. Rather than putting people in classrooms, let us embed it in soap operas.
What are your views on the Jan Dhan Yojana?
Previous mass account opening drives have struggled because you tell banks to open accounts and they do it. But will they build the agent network required to service those accounts? The Prime Minister’s Office and the finance ministry, to their credit, have a laser focus on usage and quality of agent networks. Both of those are major steps forward from previous drives. Payment banks could be the engine that gets Jan Dhan over the finish line.
But it is not clear how the Rs 5,000 remuneration per agent will be implemented. I suspect it will be tied with some level of transactional activity. Also, for the DBT commissions, instead of paying two per cent on a pan-Indian basis, you use something like the CRISIL Inclusix data base to pay four per cent in rural Bihar and one per cent in Delhi (due to difference in costs).