Thoughts & Ideas

Monday, August 19, 2013

On Financial Inclusion

Regular commercial banking is one of those real boring professions, but occasionally one encounters a Eureka moment. My personal Eureka moment happened about 25 years ago and consists of a matter-of-fact statement made by one of my customers to the effect that “Hajoor, if someone had helped me open this account 5 – 10 years ago, the truck that I drive would have been mine”.

It so happened that after completion of the two year probation period I was posted to a rural branch of State Bank of India somewhere in the back of beyond. The regular practice for most people posted at rural branches was to live at the nearest urban /semi-urban centre and commute daily, which I too followed for about a month. Over this period I realized that instead of wasting nearly 3 hours every day in commuting on dirty, over-crowded buses on roads which were more of an apology, with a high possibility of ending as a road accident statistic, it made sense to find a place and stay in the village where I was posted. With some difficulty, I managed to convince a retired school teacher to rent me a room in his house, and so my rural sojourn started in earnest which was to last for about 1 ½ years. 

I slowly settled down to the pace of life in Kursela (Dist: Katihar, Bihar) and got used to living without electricity, running water, toilets, newspapers, TV and such other sundry conveniences which most people of my socio-economic-cultural background take for granted. I soon befriended a number of people in that village and so was never short of good company. One major problem which remained was access to clean, regular, healthy food. There were no restaurants and the option was either to cook for oneself or eat at a small way-side eating joint where basically farm labourers or other itinerant workers ate. This is where I befriended a truck driver, a poor fellow, driving someone else’s ramshackle truck on some kind of commission basis and just about managing to make both ends meet. He was about 40 – 45 years old, lean, dark, of middling height, and always had a week old salt and pepper stubble on his face. 

One day, this truck driver came to me with a request if I could help him open an account with the bank, something I immediately arranged. Incidentally, opening a bank account at most banks in India used to a massive exercise in bureaucracy, which only people who have gone through would know. One of the tasks that I had, therefore, taken upon myself was to help open a bank-account for whosoever requested. Towards this I initially faced tremendous resistance from the Branch Manager – but that is another story altogether. 

About six months after the simple savings account was opened, this truck driver came to get his pass-book updated which I got a clerk to do (those were fully manual operations days). Before returning the pass-book, as an authorized official, I had to initial the entries in the pass book and I was pleasantly surprised that the fellow had been able to save close to Rs.10,000/- and I jocularly remarked that look you are a rich man now (in those days I used to get a net salary of less than Rs.2000/- a month and had never been able to save more than Rs.3000/- in my account).  The man bent down with folded hands to thank me for helping him open the account and then made the statement which I mentioned above in the first paragraph. I no more remember this fellow’s name, but his face and the look of gratitude in his eyes remain forever fresh in my mind. 

This experience also gave me a psychological boost to help open bank accounts of anyone who approached the bank or I met and felt would be able to make regular savings. Well, I had to make a little effort in streamlining the back-end operations to ensure that opening a large number of accounts would not overload or impair the branch’s normal functioning. But the more than enthusiastic support I got from my staff ensured that opening a new account was no more an issue at SBI, Kursela. The net result was that we were soon surpassing all our deposit budgets for which my Branch Manager promptly took all credit (same guy who had raised all kinds of objections for opening new accounts). These were the days when the concept of “financial inclusion” was not even a twinkle in the eyes of RBI or our mighty economists, leave alone poor, barely educated bankers like me.  

I was reminded of the above incident on reading RBI’s Press Release dated 1st July 2013 where they disclose that they have received 26 applications for issuance of new bank licenses. This was preceded by a nearly 2 year process of consultation with various experts on need and modalities for issuance of new banking licences. This, in turn was preceded by the report of the High Level Committee on Financial Sector reforms headed by Raghuram Rajan which gave its recommendations in April 2007 and, inter alia, recommended permitting more entry to private well governed deposit taking small finance banks.

In the initial discussion paper issued by RBI on 11th August 2010, in giving reasons why it would like to issue more banking licences, RBI had mentioned that “It is generally accepted that greater financial system depth, stability and soundness contribute to economic growth. But beyond that, for growth to be truly inclusive, requires broadening and deepening the reach of banking.  A wider distribution and access of financial services helps both consumers and producers raise their welfare and productivity. Such access is especially powerful for the poor as it provides them opportunities to build savings , make investments , avail credit , and more important, insure themselves against income shocks and emergencies”. Well, very noble intentions indeed! However, looking at the list of applicants, it is difficult to judge as to how well they are geared or would have interest in fulfilling RBI’s slated objective of bringing about financial inclusion.

Talk to any banker in India who may be from private, public sector, a foreign bank, or from a cooperative bank. The impression one would get is of extremely tough competition, long working hours, bad macro-economic conditions for lending etc etc. So are these 26 hopefuls trying to go where even angels fear to tread?

On the other hand statistics show that 65 out of 100 adult Indians do not have a bank account. Transferring money is difficult and expensive. There are virtually no established, safe channels for safe and secure small savings in India. In a study mentioned by Rutherford (in his book The Poor and Their Money), he talks about  Jyothi a deposit collector in Vijaywada working mainly with women collected her client’s surplus funds, held them securely, and returned the funds (less a fee) at the end of an agreed upon period.  The effective cost of her services was equivalent to an annual interest rates on deposits of roughly negative 30% per year. There are no reasons to believe that this was an isolated case or things have since improved. This fact is repeatedly brought into sharp public focus every time there is failure of one of those “blade” companies. Every human cluster, both in rural and urban areas, has evolved informal savings mechanism through chit funds, mutual savings societies etc. and, in spite of mushrooming of commercial bank branches, opening a deposit account is still a nightmare.  

I would like to add that RBI’s actions (inspite of its stated intentions) have not been very helpful in promoting financial inclusion. In a recent incident, I had to prove to my bank that I was me before they allowed me to continue operating my account which I had properly maintained for well over 30 years. Similarly, for a long time I could not operate my demat account since I could not provide a valid provide “Proof of Address” as mandated by SEBI through its 2 page circular. 

I did not lack many of the numerous pieces of paper and plastic which defines a person’s existence in India. But, unfortunately, all of them did not add up to any kind of real identification. I had a passport which gave my permanent address of the rented flat in Bangalore which I had vacated 7 years ago. I have a driving licence which was issued in Chapra and renewed in Hyderabad and carried the address of another rented flat in Hyderabad. My PAN card does not have an address. I have a few bank accounts - each lists the address of the place where I lived when I opened the account. But I, along with life, moved on with time from each of these addresses. I presently do not have a fixed telephone line in India. I don't remember ever having that fixer of all problems – a ration card. I am sure that I do not have a voter id card (though I had once registered as a voter in Bangalore and also voted in a Parliamentary election) or the latest rage – an Aadhar Card! 

What is required in Indian banking today is a kind of paradigm shift which occurred when shampoos started getting sold in Re 1 sachets or mobile companies started offering life time incoming free or Rs.25/- recharges. The market for shampoos and mobile phones exploded. Similarly, the banking market is sure to explode if we can use technology for bringing down transactions costs and simplifying and redesigning processes which do away with a host of anachronistic, wasteful traditional banking practices. Instead of just translating existing manual practices to an electronic platform, we should be using technology to redesign the entire banking interface with customers, the internal housekeeping processes, the appraisal and monitoring mechanism afresh for a new banking world. A lot of these skills are available but not with regular bankers. Rather these skills are presently available with the micro finance companies, the mobile phone industry, and the retail customer marketing industries. Sadly, none of the 26 applicants seem to have much exposure to these areas.

RBI’s expectation in offering new banking licences is that a larger number of banks would foster greater competition and thereby reduce costs and improve the quality of service, which in turn is expected to promote financial inclusion, and ultimately support inclusive economic growth, which is a key focus of public policy. Hopefully, the issuance of new banking licences would not increase the dog-eats-dog atmosphere in the already overcrowded traditional banking space while leaving out the “vast segments of the population , especially the underprivileged sections of the society , who still have no access to formal banking services”(the words in italics are RBI’s) apart from the great multitude of Small and Medium Business Enterprises, who provide the sheet anchor to the Indian Economy, but are still to come in from the cold.


  • At 6:07 AM , Blogger नीलोत्पल said...

    Straight from the heart and quite insightful. Right to financial services should be like RTI & RTE, one of the basic rights of citizen. Sadly it ranks very low in our socio-political discourse. While granting a banking license to players interested in financial inclusion is a step in the right direction - we need significant reforms in the banking sector. I must add that the names like Indian Posts and two large MFIs - Bandhan & Janalaxmi among the list of applicants do give me reasons to be happy. I hope they get the license too.

    My brush with rural banking happened in 2002-03 when I carried out a study for a consultative group of NABARD & RBI. Though it is dated, please have a look at the report whenever you have time ( The conclusions and recommendations are still relevant.

    Thanks a lot for sharing this. I genuinely believe that our political discussions should focus on issues like these ( & not the nonsensical eulogizing of a narrow-minded loud-mouth).

  • At 10:13 PM , Anonymous Surendra said...

    Sushil, very well inked thoughts on Financial Inclusion with real life experience. This gave me an insight on the other side of the fence. This will also be helpful to me next time when I am involved in any of the financial Inclusion related activity in RBI mainly in North East Region which is still far behind than the rest of the country.


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