Former RBI governor Dr. Y. V. Reddy coined the term financial inclusion, while finalizing the draft of the annual monetary policy statement for fiscal year 2006-07. A decade later, the banks are fiercely competing with each other to bring in more and more people who are financially excluded in the fold of financial services – a few at own will, and most, under pressure from the banking regulator and the government.
Banking in India has traditionally been a top down service. How often the bankers (I am one of them – after heading a microfinance institution for about 13 years, I graduated to banking in August 2015, thanks to the Reserve Bank of India) ask themselves what does a customer need? Armed with digital innovations, these days we bombard the customers with a variety of products without even evaluating their suitability for the target group.
The policies are framed mostly to address the requirement of urban India because the customers here are more visible and vocal in demanding their rights. So, the rural India continues to remain as the “missing piece” in the banking landscape in India. Financial inclusion often is synonymous with opening of a savings bank account and putting some money into it. Why cannot we think in terms of credit?
There is a vast scope for the policymakers to change the approach of financial inclusion and build a credit-first model. The banks can first find ways to extend credit to the customers before opening savings accounts. I am sure that if the credit given is rightly utilized for productive purposes, revenue will be generated and people will have money to save. We will see an increase in the number of savings account transactions. When the focus is primarily on opening deposit accounts, we are bound to face the issue of zero balance and dormant accounts.
Also, the regulator may have to take a relook at some of the norms that are being followed to expand the banking services in the hinterland. For instance, there is no restriction of usage of ATM by a customer in rural areas. The rural customers can transact as many times as they want.
Now, if one person keeping Rs. 2,000 in her bank account goes eight times a month (twice a week) to an ATM and withdraws Rs. 200 each time, the bank will incur a minimum Rs. 120 transaction cost (Rs.15 per transaction) per month. On top of that, it has to pay interest to a depositor. How will a bank make profit?
Lakhs of customers in rural India indulge in multiple transactions to withdraw small amount of money and this makes the business difficult for a bank. The so-called no-frill accounts are opened essentially for direct benefit transfers or transferring various subsidies from the government’s coffer to the beneficiaries directly through their bank accounts. Typically, the beneficiaries (customers) are prompt in withdrawing the money. From the banks’ point of view, this is not a lucrative business as the money flows out fast and the banks cannot use them for giving loans.
Chandra Shekhar Ghosh, MD and CEO, Bandhan Bank Ltd, writes this piece for FICCI’s FIBAC 2017 Knowledge Paper. Post continues on Page 2.