Deepti George and Dwijaraj Bhattacharya
Individuals and households need a safe and accessible place to store their savings and a convenient way to access inexpensive credit. They also need adequate insurance to protect them from the financial burden associated with unforeseeable events. Additionally, they need reliable investment options that help meet their long-term financial goals. These are the basic essentials that a financial inclusion initiative must aim to fulfil.
The Jan Dhan Yojana marked the beginning of concerted government policy in moving towards fulfilling this promise. According to World Bank’s Findex report, between 2014 and 2018, the number of adults in India without access to banking services reduced by half, from 47% to 23%. The Government then proceeded to provide linked life and accident insurance and pensions to bring most financial needs under one roof. The push for digital payments, including through subsidising UPI, has caused an admirable increase in adoption of retail digital platforms. But adults with dormant bank accounts have remained stubbornly high at 57%.
The need of the hour is for the new Government to reinvigorate, through a two-pronged strategy, the policy focus on financial inclusion, by a) meaningful access to bank accounts, and b) adopting a life-cycle approach to inclusion, where the account forms the gateway to access an entire gamut of products and services, including long term savings, investments, and insurance.
The biggest barrier to account usage is the lack of proximity to transaction points, and policy has tried to increase this through two routes, namely through payments banks and business correspondent (BC) networks. The former is still in its infancy and all eyes are on them to provide a truly nation-wide network of touchpoints across India’s hinterlands. The latter has been making inroads with more than 7.8 lakh agent BCs according to data from the BC Federation of India. But viability remains a serious concern given multiple parallel networks of BCs in a geography has resulted in fragmentation of income streams and profitability.
Allowing for white-label BCs will ensure optimal utilisation, with multiple banks sharing the same BC. For this, the white-label BCs must meet certain prudential criteria and real-time technology capabilities for obtaining direct access to settlements systems. In this regard, it is however unclear whether BCs, especially those who are not classified as Reporting Entities under the PMLA can undertake valid KYC authentication on behalf of their principal banks. Providing clarity on this aspect in KYC rules would go a long way in bringing down authentication costs for all interested providers, including BCs.
Unlike for bank accounts, the delivery of credit needs a different approach to ensure that credit flows to people who need it and can service it at reasonable terms. RBI’s banking statistics show that as of March 2017, bank credit to rural India was low at 9.7% of overall bank credit outstanding despite 35% of branches being located rurally. By just looking at overall credit numbers we miss the deeper picture. There is vast disparity across regions, districts and states on the credit-to-GDP metric, which is a much more salient measure of whether credit is truly reaching the deserving. While metros indicate 400% or more, many districts are at very low levels of less than 20%. We believe this is because priority sector lending targets have allowed banks to often choose the ‘easy-to-lend’ customers in already-served geographies over the “hard-to-lend” customers in more backward or remote regions. This can easily be corrected if RBI adopts a system of weightages that incentivise banks to lend to, as well as hold loans originated by others, from more difficult-to-serve sectors and regions. This idea of using dynamic PSL weightages that reflect the true ability of various regions and sectors to absorb credit was first proposed by RBI’s Mor Committee in 2014.
Individuals also need access to post-retirement income security and the Atal Pension Yojana and the Pradhan Mantri Shram-Yogi Mandhan Yojana (PMSYM) aim to offer this through defined contribution plans. However, given that there is very limited exposure to equity in the investment mix, the low returns on investment in G-Secs and corporate bonds get further eroded when adjusted for inflation. What this means is that for an 18-year old who invests diligently in PMSYM and expects to receive Rs.3000 monthly pension at 60 would end up receiving inflation-adjusted pension of Rs.387 (at 5% inflation). A sole reliance on the banking and BC channel for the collection of subscriptions into APY or PMSYM poses tremendous outreach barriers. White-Label BCs can provide a good solution. Further, a White-Label BC can expand its agent services to other products such as insurance and mutual funds, thus deepening their penetration and enhancing consumers’ access.
A note of caution though. These measures may still be ineffective in the absence of an overhaul of the customer protection regime. The new regime must be one that can hold all entities to a common standard of institutional conduct in how they deal with the individual customer, including how they sell products. A misalignment of incentives seen today between the provider and the customer leaves the customer worse-off, and thus, a dynamic that keeps the customer’s interests above everything else needs to be enforced.
These policy measures can help the new Government establish a brand new order in financial inclusion outcomes for the nation.
George is head of policy and Bhattacharya a research associate at Dvara Research. Views expressed are personal.
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