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B S Suran: Financial inclusion excludes the client

Current RBI rules don't cover group-based lending models where levels of trust and involvement are high enough to ensure that the poor really do get the benefits of inclusive banking

B S Suran 

B S Suran

A recent article in The Huffington Post on in India ends on a very optimistic note. Written by Tilman Ehrbeck, CEO, CGAP, a consultative group for assisting the poorest, the article says, "It (India) will be one of the most exciting places to watch, and to learn from, over the next few years."

The writer had every reason to be very optimistic about what is happening in the scene in India. Certainly, the numbers look impressive: 646 million biometrically-enabled (Aadhaar) cards issued; mobile penetration, which would technically enable cash transfers, at about 800 million; business correspondent (BC)-enabled access for basic banking accounts covers about 200 million; peer-enabled banking inclusion through (SHGs) covers over 100 million households, physical outlets of banking cover over 100,000 units and counting and India Posts (a future payment bank!) has over 1,50,000 outlets.

These numbers, combined with the new government's stated intent to develop a new plan and the Reserve Bank of India (RBI) relaxing certain norms for non-banking finance companies add to the general optimism.

But numbers sometimes don't tell the whole story. The country has been on the path of mass and inclusive banking with bank nationalisation in 1969. Since then we have experimented with a host of schemes, incentives, delivery systems and so on but discarded several over the years. With the new financial inclusion mission being chalked out, will some of the existing schemes be shown the door? Hopefully not. But should this multiplicity of effort be pursued together?

Mainstream discussions have been narrowly focused on achieving numbers or on specific programmes per se. Thus, banks have been concerned with enlarging the supply architecture and expanding the number of bank accounts; the finance ministry on enabling direct benefits transfers for various government programmes; and the Ministry of Rural Development on the National Rural Livelihood Programme by forming and second-tier institutions and so on.

Though all the approaches are intended to enable economic inclusion, the actions don't reflect a commonality of purpose. As a result, these institution- and programme-specific approaches actually leave a large segment of this populace clueless and unaware that these efforts are being made for their good. The fact that a majority of the basic savings bank account opened are dormant or have minimal or zero deposit balances is a testimony to this fact.

What is missing in these financial inclusion efforts? It is a basic lack of client-centricity.

What, then, needs to change in the approach to financial inclusion? A study by Microsave clearly highlights the problems: 37 per cent of BCs are dormant and 25 per cent of BCs are unable to process transactions. Above all, there is a very high level of attrition rate among BCs, principally on account of the insufficient attention that is paid to their BCs, and general lack of trust. Banks view financial inclusion as a "mandatory requirement" rather than a future business option. The current discourse on the subject has been largely on ensuring viability of BC outlets and the lack of client-centricity continues.

Reports also highlight how the poor are victims of mis-selling when the local elite become BCs. Thus, BCs/BC agents should come from a socially acceptable and trusted community. Nabard's experiences in piloting the use of women SHG members as BCs in banks have shown encouraging results. Women can effectively function as a rallying point for creating a "pull" for financial services. Added to this is the "neighbourhood" factor and trust, which can work to the advantage of an effective financial inclusion outreach in a limited area like a village.

The poor are a heterogeneous lot, and their needs are better addressed through the right kind of local intermediaries rather than the formal banking system. Trusted peer support from, say, "Bank Sakhis" can also help spread financial literacy. These BCs also serve a community cause with minimal services charges and earning. They derive greater value in recognition and dignity in the work they do for their peers and hardly crave for compensation. Similarly, well-functioning federations of can serve as the anchor institutions and effectively function as BCs and enablers of financial services.

But all this demands key investments in human capital in these people's institutions, so that these BCs understand the nuances of digital inclusion, banking products and features, Know Your Customer norms and so on to make financial inclusion a reality.

The current approach for financial inclusion has been overtly focused on technology-enabled banks. Core banking solutions and their linkage with payment systems has largely been the yardstick for participation of banks in the financial inclusion drive. While this is a necessity, it has resulted in deliberately leaving co-operative banks out of the financial inclusion drive even though many fulfil technological requirements. Being localised institutions, these banks have a long affinity with their clients. It is, therefore, critical to leverage these institutional linkages to achieve the national goal of financial inclusion.

Current instructions on financial inclusion plans don't cover group-based lending models such as joint liability groups (JLGs) and SHGs, although these approaches have helped the unbanked connect with banks. Why is a client segment that avails of two or three basic services from the bank out of the ambit of financial inclusion?

Finally, the banker's attitude needs to change from sheer target-chasing to facilitating the poor's entry into the formal financial system. Banks, and the government need to send the right message and remove barriers to enable greater participation of the poor in the formal banking system for their economic good. The understanding gained through banking with SHGs and community groups needs to be effectively leveraged for widening the depth and range of financial inclusion.

First Published: Wed, August 13 2014. 21:46 IST