India's Next 300 Million Savers

Indiia could see some 300 million new savers entering the formal banking system in coming years. Creating the right `bottom of the pyramid' financial product portfolio for them should be a priority else we would have lost an opportunity.

Govindraj Ethiraj
Updated: Jun 19, 2012 10:34:47 AM UTC

A recent Time magazine column on getting rid of money pointed in turn to an interesting article titled: “5 Ways That Jim Yong Kim Can Save The World Bank”. Of the 5 prescriptions, the one (for the new United Nations Secretary General) that caught my attention stressed on the need to get rid of cash.

The piece was written by Vishnu Sridharan of the New America Foundation’s Global Assets Project:  It argued that cash-based economies harm the poor by heightening the risks they face when carrying money and fuel government corruption and inefficiency.  Sridharan also said the World Bank had been slow to embrace the concept of transferring cash. Many of the bank’s programs relied heavily on physical currency, for instance, child support and education in Pakistan & Bangaladesh.

There are of course two types of cash economies in India. The first is the kind discovered inside suitcases during Income Tax raids. The second centers around hundreds of millions of India’s poor who typically stash their savings under pillows and mattresses. This cash might briefly be transferred electronically or through India’s postal system in a urban to rural hop.

The arguments for taking cash out of the system are well known. Apart from the sheer efficiency it provides, cash in banks can also be made to work in many other ways, providing immediate security of cash and long term effect of savings. Incidentally, cash is used for over 65% of all retail transactions in India.

Yet, relatively little effort has gone into exploiting the advantages that ought to accrue from offering financial products and services to the next half a billion citizens. The reasons are fairly simple. First, most folks can’t even cross the first stage - opening a bank account. Try moving cities in India and opening one. And then, think of what the other half goes through.

Second and more importantly, there is no incentive to keep the money in the bank. In most cases, the bank account remains a route to convert an electronic payment into the familiar bundle of cash. Which is also the reason the banks push back when it comes to opening more accounts, despite pressure from the Government of India to do so. Technology may make more bank accounts cheaper but it still costs.

Interestingly, the number of no-frills bank account holders have doubled from 49.3 million in March 2010 to 103.2 million in March 2012. Moreover, the total number of banking outlets has grown to 147,534 from 54,258, according to the India’s central bank, the Reserve Bank of India. The gains are largely due to the mandatory financial inclusion targets set by the Ministry of Finance on the banks.

The numbers suggest that for all their reluctance, the banks have plodded on. Can this 103 million number grow further ? The answer is yes. A recent study led by Professor Arun Sundararajan of the NYU Stern School of Business showed that almost 56% of the now 200 million enrolees of the Unique Identification Authority of India (UIDAI) programme did not have portable identities before.

A portable identity can act as an access gateway to many resident benefits in future. For one, the UID or Aadhaar is now an accepted KYC document for opening a no-frills bank account. Its not yet clear how many residents are using their Aadhaars to open bank accounts. But the fact is that increasing numbers of residents will get bank accounts, either top down - because subsidies & benefits will be linked to them - or bottom up – because residents will line up as they see the benefits of commerce.

Here is the good news and the bad news. The good news is India’s banking reach is growing. Remember that there is no clear statistic on how many people actually have bank accounts India. Some estimates put it at 500 million. So, if 600 million Aadhaars are issued by 2014, it stands to reason that the combined push will result in at least 300 million or so new accounts. Give or take.

The flip side is that all this banking infrastructure will lose its relevance if the right `bottom of the pyramid’ products do not get created quickly. Imagine if you could split your domestic help's salary into three portions. First, the monthly salary. second, a Provident Fund (social security) account and third, a insurance contribution. So, Rs 4,000 for salary and Rs 100 for PF and Rs 100 for insurance contribution.

This is illustrative of course. Imagine further if some 300 million Indian migrant workers all had similar accounts which moved with them (and benefits) as they migrated from job to job or place to place. And they got life-long social security, insurance and similar benefits for the first time ever.

This sounds pipe-dreamish today because PF is not mobile and banks and insurance companies still have to create the linkages. The challenge however is the simple application of technology rather than anything else. This writer is convinced that with the right product offering, these new hundreds of millions of savers will increase the velocity of money flowing in the banking system as well as embark on new kinds of spending behaviour (which is a story for another post). And help part-fix other problems, like retail corruption.

The thoughts and opinions shared here are of the author.

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