Modern world runs on the idea of money and money itself. Necessarily in that order. Financial inclusion is the idea of easy money. The underlying idea behind financial inclusion is that every single individual should have a shared security derived from the idea of money, which should then translate into affordable access to money in the first instance and latter to derivatives, products and services of money. That’s the theory. Nice, compact and ideal.
Here’s the sobering reality. Out of the 660,000 habitations in India with a population of 100 or more, only 33,000 have a commercial bank branch. That’s approximately one branch for every 20 habitations. In contrast, the total number of ATMs in Mumbai is over 15,000. That’s an average of 8-10 ATMs per locality. There’s more. Just 40% of the Indian populations have a bank account, only 10% have life insurance coverage and a miniscule 0.06% of Indians have non-life insurance coverage.
Without a back-story, these statistics may seem to paint an appalling picture. That impression couldn’t be further away from the truth. It was Dr Kamlesh Chandra Chakrabarty, now the Deputy Governor of the Reserve Bank of India (RBI), who set the ball rolling for financial inclusion in a small village called Mangalam in Pondicherry in 2005. At that time he was the Chairman of the Indian Bank. "There was no grand plan. We had to meet the Chief Minister of Pondicherry and we needed something to show to him," said Dr. Chakrabarty. "That’s when we decided provide all households in Mangalam with banking facilities."
As ironical as it may sound, financial inclusion in India began due to a need to have a conversation starter. Almost like those fancy parties, where an ethnic sculpture or a painting brings strangers together and gets them to open up. Dr. Chakrabarty admitted that Mangalam busted a few deeply entrenched myths. "Poor are more bankable than the rich," he said. That one busted myth meant that a viable business model existed and it just required bankers and the financial services sector to remove their blinkers and see the reality.
What did Chakrabarty and his team do in Mangalam to get it right? Two things. First, relaxing norms for people wanting to open accounts with annual deposits of less than Rs50,000. Second, issuing General Credit Cards (GCCs) to the poor and the disadvantaged to help them access easy credit.
In a way, Mangalam changed the paradigm of money by making the idea of money democratic and accessible. At that time, less than 8% of Indians had a bank account, a little over 1% had life insurance coverage and the number of Indians having non-life insurance was so small that it couldn’t be recorded. That’s why statistics without a back-story often paint an appalling, but an inaccurate picture.
Mangalam’s success story triggered off excitement in RBI. In 2004, the central regulator had set up the Khan Commission to understand the requirements of financial inclusion. The report was taken up with a new seriousness and its recommendations were incorporated into the mid-term review of the policy in 2005-06. In January 2006, the RBI unveiled what is now popularly called the Banking Correspondent model. The model permitted commercial banks to make use of the services of non-governmental organisations and Self-Help Groups (NGOs and SHGs), micro-finance institutions, and other civil society organisations as intermediaries for providing financial and banking services. On RBI’s prodding, commercial banks were encouraged to start 100% financial inclusion campaign on pilots. Some states and Union Territories, for several reasons, did better than the others. For instance, Pondicherry, Himachal Pradesh and Kerala recently announced that they have achieved 100% financial inclusion in all their districts.
Here again, statistics without a back-story has the potential to paint a picture far more flattering than it actually is. Today, inclusion is measured in pure numerical terms by the number of new accounts and branches opened. Such a measure does not take into account the number of transactions taking place within an account or whether financial disbursement is having a desired impact. For instance, out of the 76 million Kisan Credit Cards issued till now, less than 10% are active. It’s a challenge that requires a change in mindset that a lot of top banking officials like Mohan Tanksale are aware of.
Both Tanksale and Dr. Chakrabarty have immense faith in technology. That’s one of the other myths that the domino effect of the Mangalam experiment keeps busting again and again. Adoption of technology is not dependent on functional literacy. The spine of the Banking Correspondent model is the adoption of a hand-held device that doubles up as a mobile bank branch. By all available evidence, it’s been a success. Technology is not the puzzle anymore. Then, what is the biggest challenge that faces RBI’s ambitious Vision 2020 to open nearly 600 million new customer accounts and services?
Tanksale says "We need trained human resources. A Banking Correspondent model requires dedicated people to run it." Today the Banking Correspondent model does not provide the structure and the incentives for a person to make a career. Consequently the retention capacity of the model is low, leading to a constant churning of human resources that adversely impacts the level of service and commitment. Financial inclusion is as much an issue of access to affordable money as it is an issue of social exclusion. The concept cannot divorce itself from the socio-economic and cultural realty of moneylenders. Nor does it help to embrace the strictly theoretical definition of a moneylender being exploitative and ’heartless’. Like all realities, the truth is somewhere in between. Moneylenders have to become part of the system of formal finance and in that challenge is the RBI’s next biggest policy puzzle. How do you ensure that moneylenders become part of an institutional financial mechanism, while at the same time ensuring easily accessible and affordable finance to a larger majority of Indians?
Today, there is a viable business model around financial inclusion. It has moved from the realm of good intentions to good and profitable business practice.
(The author is a Visiting Fellow at Observer Research Foundation. He is also a National Internet Exchange of India Fellow)
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