Banking For All By 2014, A Game-Changing Dream

There is a real possibility now that every household in India will have access to a bank account in the next few years. This has game-changing implications, both for delivery of hundreds of billions of dollars of Government subsidies but also bottom-of-the-pyramid financial innovation

Govindraj Ethiraj
Published: 28, Aug 2012

Govindraj Ethiraj is former Founder-Editor in Chief of Bloomberg UTV, a 24-hours business news service launched out of Mumbai in 2008. Prior that, he worked with Business Standard newspaper as Editor (New Media). Earlier, he spent five years with television channel CNBC-TV18 where he worked from near start-up point. Before CNBC-TV18, he worked with The Economic Times newspaper as Corporate Editor in Mumbai for five years, looking after the corporate and markets news bureau. He also worked with Business World for three years. He began his career with Business India magazine. He is a Fellow of The Aspen Institute, Colorado. He is presently co-authoring a book on India’s efforts to give over a billion residents a unique, biometric identity - after concluding a short, voluntary stint with the Unique Identification Authority of India (UIDAI) - before returning to full-time journalism shortly.

This is a favourite question of mine; among the domestic help you might have at home (including a chauffeur for definitional purposes), what are the chances they all have a bank account ?

The answer, in most cases, will be none. In some cases, one of two or three domestic help will have a bank account. Now, if this is the case in urban India, imagine what banking coverage would be like in rural India ? I'll come to the figures in a moment but most Indians, as we can safely assume, depend on and subsist in a cash economy all their lives. And many of us (individually or institutionally) contribute to this state of affairs by dispensing cash.

In his August 2012 Independence Day speech, Indian Prime Minister Manmohan Singh provided a series of status reports on ongoing Government schemes, like the Mahatma Gandhi National Rural Guarantee Scheme (MNRGS) which provided employment to 80 million in the last year and  the National Rural Health Mission (NRHM) now to be converted into a National Health Mission and cover all towns and cities.

He also spoke of the National Skill Development Council (a separate blog on this coming up later) which will train 80 million people in the next 5 years. And schooling; almost all children in the 6-14 year age group are being admitted into schools, from 93% five years ago. Some 51,000 schools were opened in the last 2 years and 0.7 million teachers appointed.

But the one specific target he announced concerned bank accounts. “It will be our endeavour to ensure all households benefit from bank accounts in the next 2 years,” he said. Putting aside the usual scepticism reserved for politically-motivated claims, is this target feasible? At current pace of bank account growth, the answer is a possible yes.

But this is not about the claim or the dream of total coverage in two years. Its about the fact that the ongoing efforts to open bank accounts will have far reaching consequences for hundreds of millions of savers, savings and the economy at large.

India's central bank, the Reserve Bank of India (RBI) says only about 40% of the country's population has access to banking facilities. 2011 Census figures put the number of households having access to banking at 58.7%. The PM in his speech said just 10 years ago, only 3 of every 10 households benefited from banking services. Today, more than half of rural households do.  But whichever way the figures criss-cross, the gap is huge.

It’s been clear to most policy makers that the lack of bank accounts – and thus financial identities - is one of the biggest reasons for leakages in government subsidies and benefits. But perhaps what has not been that clear is that the RBI and the Government have been pushing hard to achieve universal banking coverage in the last three or four years, via a multitude of 'financial inclusion’ initiatives.

Make no mistake about it. Banks, including the Government-owned lot, are not exactly the most willing partners. Most of them fail to see the value in opening millions of bank accounts which tend to lie dormant. Or see bursts of activity when funds get remitted or transferred and then instantly withdrawn. Not very profitable. And a matter of vociferous debate in India's Ministry of Finance in the last two or three years.

As if in response to the prevailing antagonistic mood, the RBI tightened the screws further two weeks ago when it issued a circular saying that “with a view to doing away with the stigma associated with the nomenclature “no-frills’ account” it was rechristening the facility and calling it a Basic Savings Bank Deposit Account”. Moreover, holders of such accounts would be given and be able to access ATMs free of cost.

But like it it or not, the banks have fallen in line. In just two years, as of March 2012, Indian banks had added 49.3 million no frill accounts (now Basic Savings Account) taking the total to 103.2 million. It would be safe to assume that this figure is closer to 120 million new accounts now. If you were now to extrapolate this figure to households, the number is significant.

I have argued in the past that a bank account is only the first step in a financial identity for hundreds of millions of Indians. In coming months and years, insurance and social security benefits can be tied to these millions through their bank accounts. With the right product and technology linkages – all of which is totally feasible - migratory workers, for instance, can have a lifelong buildup of pensions, social security and the like. Wherever they come from and wherever they go.

I also believe that utility of open bank accounts - the banking industry's biggest concern - will increase only when there are a plethora of product and services surrounding them. Though, to be fair to all, it is a classic chick and egg situation.

RBI Deputy Governor K C Chakrabarty in a speech three weeks ago pointed out, for instance, how the proportion of people having any kind of life insurance cover was as low as 10% and proportion having non-life cover was an 'abysmal 0.6%’. Moreover, he said, only 13% of the population has debit cards and 2% has credit cards. And finally, he quoted National Sample Survey data to say that nearly 51% of farmer households in India do not seek credit from either institutional or non-institutional sources of any kind.

The common thread for these seemingly disparate trends is a bank account or the lack of it. The benefits for banking for all are multi-fold. One is obviously to start plugging glaring leakages in hundreds of thousands of crores (hundreds of billions of dollars) subsidies and benefits delivered by both the Centre and states. Second, more importantly, is the sheer opportunity for bottom-of-the-pyramind financial innovation. Much less has been discussed or written in this context.

I go back to the original example, think how your domestic helps’ lives would improve if you could pay their salary electronically, open a small pension or insurance scheme for them. And they have life-long mobility with these services. And now think of the whole country.

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