Financial Inclusion: Putting the Poor on the List

CHARAN SINGH, AKSHAY GOENKA and RITESH GARG
The Government is making intensive efforts to extend access to financial resources such as savings accounts, credit and insurance services to unbanked sections of our society, and the knowledge and freedom to leverage them to one’s benefit. The Budget has already mentioned that the Government considers financial inclusion as an important thrust area and the Prime Minister is expected to announce a slew of measures on August 15.

India is still lagging behind in providing financial services to the masses with nearly half the households remaining unbanked, and nearly 90 per cent villages not having bank branches. More importantly, the people in these reas do not fully appreciate why they need a bank account at all. The advantages of a financially inclusive model are many fold.

Illustratively, the unbanked and underprivileged could receive appropriate and timely payments for social benefit and employment schemes through the Direct Cash Transfer programme.

The Government and the Reserve Bank have been making concerted efforts since mid-1950s and with renewed vigour since 2005, but the success has been rather slow, due to lack of a strong network and financial instruments not suited to rural residents. 

Stamp of inclusion
The network of more than 1,55,000 post offices — with nearly 90 per cent of them in rural areas — can help to extend financial inclusion. Commercial banks and post offices can build a symbiotic relationship through various ways.

First, banks can tie-up with the India Post to utilise their extensive network by setting up small banking counters at each post office, especially rural branches. The post offices have sufficient space to set up such a counter with a computer and printer, to be operated by a commercial bank employee.

With existing arrangements at the post offices, these can be converted into extended banking counters. The post offices already have existing safe deposit boxes and these can be upgraded, if necessary, to cash vaults based on expected traffic.

Second, once banking extension counters are offered at the post offices, and then fresh opening of accounts in existing postal banking schemes can be discontinued, with a forward-looking approach for banks to spearhead the financial inclusion process, through deposit mobilisation.

As a large part of post office revenues comes from existing postal banking services, banks would need to pay a ‘rent fee’ to India Post for use of their facilities/premises — hence solving the high fixed cost issue for banks in establishing a new brick-and-mortar branch.

Third, to encourage banking habits amongst the unbanked masses, installation of audio-video-enabled ATMs to announce simple instructions in the local language to assist the customer in the unbanked areas could be considered.

In case such ATMs are installed in the premises of post offices, trained guards could facilitate withdrawals, deposits and also account opening forms. The issue of security can be addressed by installing inbuilt CCTV cameras in the ATM machine as well as the post office. 

Leveraging ties
Fourth, to capitalise on the existing relationship with post offices, banks could seek introduction to potential customers on payment of a stipulated fee. The business correspondent could accompany the post man to register deposits, withdrawals and request for opening accounts and loan requisitions with the exact amount and a thumbprint on the hand-held device to register a signature. This could serve as a KYC in many cases.

Fifth, to explore methods to attract potential customers to visit the post office with banking facilities, critical information could be provided by local language handouts or on big screens installed on the premises. This could constitute expected weather, crop and commodity prices, news of new farming techniques, business ideas and other rural innovation initiatives.

Finally, a key part of financial inclusion is financial literacy. There could be regular interactive training workshops organised in post offices on financial products suited to the rural sector. This will make take the process of financial inclusion much further with a focus on financial literacy and a reason to visit post offices on a regular basis.

The Government and policymakers are aware that the current system clearly needs improvement. There exists a redundant dichotomy in the financial system with banks and post offices both maintaining savings accounts. Through a symbiotic model as suggested here, post offices can provide another way forward in extending financial inclusion.

(Singh is RBI Chair Prof. of Economics, while Goenka and Garg are students at IIM B)