Financial inclusion” is one of the goals of the current government, but the wobbly business case for a vast majority of business correspondents (BCs), built on wafer-thin margins but riding on a promise of large volumes, is falling apart.
Banks and their BCs are making aggressive efforts to provide banking touch-points at each of the 72,721 uncovered villages with a population above 2,000 by the end of this fiscal. These efforts under the “Swabhimaan Campaign” are to be extended to habitations with population of more than 1,000 in north eastern and hilly states.
Going beneath these impressive numbers, the real impact on the excluded has been trivial. MicroSave and other research suggests high levels of inactivity in more than 65 million of the 80 million accounts opened with the intent of delivering wholesome financial services. The remaining 15 million accounts with some transaction activity are primarily a conduit to deliver a part of the government payments under the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS), the Indira Gandhi National Old Age Pension Scheme, Indira Awaas Yojana and other programmes. Poor and illiterate account-holders, barely conscious of the financial transformation around them, still pay kickbacks to receive their rightful dues.
Against a promise of 100 days of guaranteed employment every year, MGNREGS data for 2011-12 shows an average disbursement for only 26 days of employment. That too at an average wage rate of Rs 111 vis-à-vis a minimum rate of Rs 130 per day of work. Although 71 per cent of the poor opened bank accounts solely with the expectation of receiving government payments, only 24 per cent of the MGNREGS payments are being disbursed through banks.
An over-accelerated pace to meet targets is serving little purpose. Policies should be directed towards achieving quality and motivating adoption of financial services.
One of the fundamental shifts needed by banks is to recognise and support BCs as a legitimate and full-service channel — an addition to branches, ATMs, kiosks, mobile and Internet channels. This would certainly be a winning proposition for all. All marginal customers can get doorstep (and perhaps superior) services; banks can decongest their branches, and focus on high net worth customers; while BCs would have a healthier business case. Bradesco Bank and Caixa Econômica Federal in Brazil (which, like India, follows a bank-led agent model) have adopted this approach with a great degree of success.
Providing a balanced mix of financial products is another critical step needing to be taken and rapidly so. Low-income households need everything – savings, loans, remittance, insurance and pension – but invariably buy them at a significant premium from informal channels. Demand and term deposits with post offices and with rural branches of commercial banks and regional rural banks are nearly 20 per cent of the value of total deposits held by commercial banks. Despite proven demand for a variety of products, banks have denied BCs from offering anything more than “no-frills” savings accounts.
Having dabbled in accomplishing financial inclusion through not-for-profit or social motivations, it is now understood that sustainability and commercial viability need to go together. The inevitability of compensating BCs appropriately is increasingly felt. State Bank of India, a dominant provider of domestic migrant remittance services, recently raised charges from Rs 25 to Rs 100 for sending Rs 10,000 via BCs and increased their commission likewise. Other banks, too, are realigning charges, acknowledging consumers’ willingness to pay 1.0 to 2.0 per cent of the transaction amount, since alternatives are unreliable and cost more. For the poor, sending money home through India Post costs five per cent and takes much longer to deliver, whereas informal channels charge anywhere from four to seven per cent.
Cash and liquidity management is an important business hazard associated with branchless banking. BCs undertake long-distance cash transportation that is fraught with the danger of theft or fraud. And for many the volume of cash handled is far more than their net worth. Banks should explore avenues to support BCs along the lines they protect cash at branches, ATMs and kiosks.
Greater collaboration is also imperative to mitigate the numerous other risks arising out of this new form of banking, such as brand protection; preventing frauds and delinquencies by BC staff or agents; preventing mis-selling; protecting consumer data; and ensuring business continuity and disaster recovery.
The poor quality of BC services has been consistently a concern. This has often resulted from acceptance of lowest bids, with inadequate emphasis on quality and performance. For a sustainable solution, banks need to adopt filtering criteria and performance metrics to weed out the non-performing and the non-serious bidders at the threshold.
While enormous support to push the agenda of financial inclusion forward is evident at the regulatory and policy level, certain areas of policies can be made more coherent.
The current target-based approach towards enrolments has resulted in a compliance mindset, leading to depressing levels of account dormancy, mushrooming of fly-by-night enrolment service providers and lack of serious attention by banks to pursue the opportunity as a growth engine in an untapped segment.
Policy requirements like the mandatory delivery of cash into the hands of the MGNREGS beneficiaries, rather than transfer into their accounts, create a losing proposition. There is little incentive for recipients to save surplus funds, or to use their accounts to access additional financial products. The BCs and their field staff are forced to take on a substantial cash risk and are not incentivised to increase customer contact beyond the monthly pay-days. Banks and governmental agencies can play a bigger role in marketing the unknown and non-traditional, location-less correspondent channel, to enhance financial literacy among consumers and communities.
Despite unprecedented efforts to augment access to financial services meaningfully, the potential is yet to be realised. While innumerable players have emerged, only a handful have delivered. Even among them, signs of despondency and despair are now visible. Their coffers are starting to run dry while several challenges remain insurmountable. We seem to be at a crucial inflexion point, where actions or inactions of the stakeholders could bring about a fundamental shift or permanently mar this sector. It is imperative that banks, regulators and governments take notice of the difficulties that participants in this nascent and fragile sector are facing and demonstrate commitment to address their challenges in order to take financial inclusion to the next level.
The author works with MicroSave (www.MicroSave.org). These views are personal
