The Reserve Bank of India’s Know Your Customer (KYC) guidelines for banks may have gone some way towards preventing them from being used, intentionally or unintentionally, for money laundering. But this due diligence has been restrictive for low-income, low-literacy clients who are often first-timers to the banking system
The genesis of KYC guidelines can be traced to the recommendations of the Financial Action Task Force on anti-money laundering. The RBI introduced the concept in 2002, defining the customer identification needs for introductory reference, norms for cash transactions and so on. KYC procedures did enable banks a better understanding of their customers and their financial dealings, which, in turn, helped them manage their risks more prudently. So, how do they deter low-income first time clients?
RBI norms clearly prescribe documents both for individual identification, permanent residence proof and, thus, lists acceptable identity proof documents: PAN card, passport, voter ID, driving licence, electricity bill, ration cards and so on. But, for first-time banking clients, these are often unusual and strange documents; even if they have one, it is often a challenge to get their names correctly spelled to the satisfaction of the cautious banker. The issue is even more nightmarish when these first-timers are women members. For group-based savings units like Self Help Groups (SHGs) the issue gets even more complex. Assessments have shown that in 60 per cent of the cases, women in SHGs wanting to open accounts faced challenges in complying with KYC norms. Paradoxically, these challenges are more prevalent in resource-poor areas, which have also shown slow progress in the SHG movement.
The issue is compounded by operational impediments when bank staff, quoting the RBI’s KYC guidelines, insists on the presence of all members of the SHG with ID proof. This despite the fact that the normal practice is to open savings accounts in the name of the SHG and have the accounts operated by leaders chosen by the SHG members, who fulfill the ID requirements. In an intensely patriarchal society, the chance of women members owning any residential property or a piece of land inherited or owned in their name is rare. Thus, getting a permanent address proof entails visits to many offices for these women. These rules have resulted in rural women SHG members having to make numerous trips to the bank even to open a new savings bank account. All of this has had a negative impact on the momentum of the SHG-bank programme and often also demotivated the women SHG members.
RBI guidelines on KYC do provide certain relaxations for small value accounts, where the aggregate credits in a financial year doesn’t exceed Rs 1 lakh with certain restrictions on monthly transactions and balances maintained. But all this would apply, only when the SHG women succeed in convincing the banker and open a savings bank account. Further, the RBI should treat individual accounts and group accounts differently, especially when such group accounts are of SHGs where poor households pool their savings.
In this context, it would be pertinent to consider the World Bank’s recently published working paper on “Measuring Financial inclusion” and the Global Financial Inclusion index (Global Findex), which the paper attempts to map across 148 countries. The global findex shows sharp disparities in the use of financial services across economies, income groups and gender. The most common reason for not having a formal account, cited by 65 per cent of adults without an account, is lack of money to use one, others said it is too expensive to deal with banks as it is too far away and difficult to handle. The gender gap in account penetration persists partly because their preferences for savings are different. Fifty three per cent of female savers report they prefer and use community-based approaches akin to SHGs.
Given these findings and the issues connected with gender preferences, our socio-cultural settings and the comfort level of poor households it is clear that SHGs may be the preferred mode for women from poor households for monetary savings, unlike direct banking services which are costlier, comfortless and not in sync with the needs of poor women. However, the government and the RBI under its Swabhiman initiative still consider individual banking like “no frills accounts” the only way to go about achieving inclusive banking.
But SHGs need to and do park their surplus and unused savings with bank, and this need to be encouraged with special relaxations especially when these account are opened by women SHGs. This suggests the need for a more gender-sensitive policy, especially while handling women SHG members. Besides this, the RBI should also support some facilitating operational guidelines while handling such sensitive accounts, where the prime intent is facilitating the thrift culture and enabling inclusiveness of these poor communities in the formal system. Taking a cue from the World Bank report, and appreciating the unique individual characteristics and its influence in the financial behaviour of poor households, RBI needs to treat SHG-based savings as a part of its financial inclusion drive.
The writer can be reached at suranmcid@gmail.com
