Nachiket pointed out in his last comment to one of the posts below that the tendency on this blog has been to focus on failures rather than policy successes and I am afraid to some extent this post is also going to be focusing on what I see as a partial failure. In my defense, I do think that constructive criticism and action research can be important ways to improve public policy.
Given that Financial Inclusion is the new zeitgeist, to borrow a phrase from my fellow blogger Dan, I wanted to write about ‘No Frills Accounts’ and their much touted contribution to ‘Financial Inclusion.’ The idea is essentially that every family without a bank account will be given a zero minimum balance account with a limited number of transactions allowed on that account per month/year. Using this strategy several districts across the country have declared themselves to be 100% financial included.
What is great about these accounts is that their design is very much in keeping with what research shows low-income communities desire and need from such a product, as Sanjay Sinha points out. The account requires no minimum balance; it is secure, simple to understand. However, the usage of these accounts to indicate a less than inclusive story altogether. CMF is conducting a study on the usage of No Frills Accounts, led by Jayaram Venkatesan to look at usage statistics, but prior studies by CMF in Gulbarga and other reports indicate that the accounts are not being used optimally or in many cases at all. What are some of the probable reasons?
Firstly, the problem of physical access to banks remains acute. As an example, one research study showed that in a certain block of Gulbarga district in Karnataka, the average cost of going traveling to a bank was approximately Rs. 20. Given that Self-Help Group in rural areas save anywhere between Rs. 10 to Rs. 50 per week, the expense incurred in traveling to a bank branch actually represents a prohibitively large share of their weekly savings or potential deposits. Secondly, many low-income households suffer from the misapprehension that banks are meant for richer and more educated people than themselves. Informal conversations with rural households reveal the common belief that bank accounts are meant for amounts as large as Rs. 300, over ten times what they are used to saving in any given week. Thirdly, the problems described above are compounded by a lack of information and knowledge of the target clientele. For instance, the No Frills Account is typically advertised through the print media even though the target audience is largely illiterate. Finally, banks are not always thrilled to open these bank accounts which typically show very little activity and do not seem to merit the expense. All these barriers mean that even when banks open No Frills Accounts for excluded households, they may never visit a bank because they simply do not have a proper appreciation of what it means to have a formal banking relationship. Consequently, as a visit to a rural bank branch in Karnataka revealed, No Frills Accounts show very little financial activity.
What needs to be done in order to ensure that this laudable effort does not go to naught? We need to come up with a surefire to make sure that No Frills Accounts that are opened will be used. If No Frills Accounts are used to deliver government assistance, accountholders would be more incentivised to use their accounts. In this context, the Government’s recent announcement to disburse NREGA payments through bank accounts may be the ticket to increasing financial inclusion in this country, as Nachiket points out in his comment here.
Further, the experience with microfinance both in this country and abroad suggests that, especially for low-income communities, doorstep banking may be the most suitable mode of delivery of financial services. The RBI, has made provisions for a Business Correspondent model whereby banks can hire outside agents such as NGOs to offer the banks’ products and services at the doorstep of the client, rather than forcing the client to come to the bank. While this model is mired by various regulatory and operational challenges currently, its speedy launch on the ground holds the key to improving access to finance. I would be interested to hear from readers about successful BC models in India.
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