In a welcome move, the Odisha government is set to ‘bank’ the 4,597 unbanked gram panchayats (GPs) of the state. This is a great step towards financial inclusion, which simply put, is the delivery of financial services at affordable costs to large populations of disadvantaged and low income groups.
In the past, at the RBI level, the report by the Committee on Comprehensive Financial Services for Small Businesses and Low Income Households had recommended that by January 1, 2016, each resident in India, above the age of 18, would have an individual, full-service, safe and secure electronic bank account. This would come with the facility for withdrawal, payment and deposit, which should be set up within a 15-minute walking distance anywhere in the country.
The Committee also recommended the setting up of specialised ‘Payments Banks’ to “provide payment services and deposit products to small businesses and low-income households” with a maximum balance of Rs 50,000 per customer. These banks can be set up with a minimum capital requirement of Rs 50 crore, which is a meagre 10% of the Rs 500 crore required for establishing a full-service bank.
To ease the process, an Aadhaar card can be used to automatically open a bank account. Every resident should be issued a Universal Electronic Bank Account (UEBA) automatically at the time of receiving his/her Aadhaar number. An instruction to open the bank account should be initiated by the Unique Identification Authority of India (UIDAI) upon issuance of an Aadhaar number to an individual over the age of 18. It (UEBA) should have no account opening fee. The bank, however, would be at will to charge for all transactions.
The committee had also recommended that under RBI instructions, no bank could refuse to open an account for a customer, who had adequately fulfilled KYC (know your customer) requirements. But opening of accounts need not be the be all and end all of financial inclusion.
This proposal to have banks in each Panchayat in Odisha should enable each low-income household and small business to be provided with convenient access to formally regulated lenders who have the ability to assess and meet their credit needs and offer a full range of suitable credit products at an affordable price. Besides depending on government subsidies, schemes, the low income people should be able to better manage their risks, uncertainties and accidents too. What is wrong in giving every citizen access to a range of insurance and risk management products at reasonable charges?
This will allow them to manage risks related to commodity price movements, longevity, disability and death of human beings, of livestock, rainfall and damage to property. But at the same time, every bank would look at the feasibility of providing uninterrupted services and by January 1, 2016, each district would have a total deposits and investments to GDP ratio of at least 15 per cent.
Further, the target is to give each district a total term life insurance sum assured to GDP ratio of at least 30 per cent. This ratio should increase every year by 12.5 per cent with the goal of reaching 80 per cent by January 1, 2020.
This move to ‘bank the unbanked’ is not a debut effort at the national level. There have been schemes, rules and directives to help expand banking coverage and ensure services to the unbanked. Ranging from services including ‘pre-emptive lending’ like imposing quotas for agricultural credit and other defined ‘priority sector’ lending, to the current mandatory requirement for all banking license holders to provide ‘no frills’ account to anybody who demands one, the RBI has been directing banks to achieve social objectives.
But in spite of early moves to include low income communities in the baking system, the extent of penetration of banking services put India at a low rank of 50 out of 100 countries in a study to index Financial Inclusion (FI). A common measure of FI is the percentage of adult population having bank accounts. Going by the available data on the number of savings bank accounts and assuming that one person has only one account, just a little over one-third, about 34 per cent of the population has access to banking services.
The exclusion is primarily due to the lack of reach, inability to meet the basic ‘know your customer’ (KYC) norms insisted upon by banks and lack of collateral. The unbanked population continues to be higher in the North Eastern and Eastern regions.
The Government of Odisha, in a brilliant move, has set a timeline of five years till March 31, 2019 to work on a mission mode to cover all the unbanked GPs. This reflects the swiftness with which the government aims to achieve universal coverage in banking. This is workable because the state government has proactively suggested that the banks use data of the Panchayati Raj (PR) Department for opening bank accounts. This saves a lot of time and resources for the banks.
One of the reasons why the banks have not proliferated in the rural areas of Odisha is the high cost of operations, which includes difficulty in reaching the people and the cost involved. The argument has been that the cost and the efforts are never remunerated adequately and hence the infeasibility. But with data being easily available, the government has ensured that the banks start their operations in time and with ratified, solid data and also that there is no duplication in the effort of data collation.
Further, the government has come up with a detailed action plan. The public sector banks will open their branches in 3,048 Panchayats, while private banks will cover 861 unbanked GPs, totalling 4,597 unbanked GPs. This kind of detailed planning ensures a successful mission. Apart from data, the government has also extended its support to the banks in terms of infrastructure – in the rural areas, they can use the Panchayat buildings and various Seva Kendras at no cost for the next five years. This is good use of surplus public infrastructure and at the same time encouragement to the banks. Otherwise, they would have spent half their time and resources in scouting for a habitable infrastructure.
Amidst the landmark policy move, we need to remember that the purpose of financial inclusion is not served by only opening bank accounts. The poor and rural population should also have access to other financial products like insurance and mutual funds. There is a need to develop a hybrid model where banks’ services are supported by business correspondents (BCs) and micro-lenders.
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