Formal banking comes to the fore

Number of new bank accounts has increased but using the accounts for two-way transactions still have gaps

As the Inclusive Finance India Report gets into its tenth year, there are exciting developments. The discourse of inclusion is moving beyond specialized interventions (such as microfinance). In India, the policy discourse has moved from replacing the “evil and oppressive money lender” to provision of services from the formal financial system.

According to the Global Findex report, India is home to 21% of the world’s and two-thirds of South Asia’s unbanked population (Demirgüç-Kunt et al: 2014). Findex also notes significant progress achieved between 2011 and 2014 where 18% of the adult Indian population was brought into the banking system. With initiatives such as Pradhan Mantri Jan Dhan Yojana, some of these numbers are expected to rise significantly.

The select parameters of the Global Findex database show progress in account opening, while showing gaps in borrowings from the formal sector, access to technology-enabled banking and the usage of the technology products when available. (See table 1)

From the data, it is evident that even while the penetration of banking, in terms of opening accounts, could be deep, using the accounts for two-way transactions—both receiving payments and making payments— have gaps, indicating that there is only that much a “push” strategy can do: that is help people open accounts.

Some of the recent developments in India of “pushing” direct benefit transfers (DBT) into the accounts of the beneficiaries could ensure that the usage of accounts could potentially be habit forming. India does not feature in the top countries of the world that have taken to mobile money.

The 11 new payments banks expected in the next 18 months may fill the gap on mobile-based transactions.

A measure of financial inclusion by Crisil Ltd defined as “The extent of access by all sections of the society to formal financial services, such as credit, deposit, insurance and pension services” (CRISIL:2015) indicates significant progress, partly explained by inclusion of data on microfinance.

With the new initiatives launched this year, the index is expected to further strengthen and also contribute toward reduction of regional disparity. The data on post offices as well as cooperative societies is not included in the Inclusix.

Microfinance adds to one side of the inclusion story by adding to the measure of both branch penetration as well as credit penetration. India Post adds richness on number of outlets and deposits. Postal savings have limitations on the size of deposit and those deposits could well be treated as “small deposit accounts”. Postal network also shows the evenness in regional spread. The contribution of the postal network in offering savings and insurance services to the unbanked has not been highlighted enough in the policy discourse and the literature on inclusion. (See table 2)

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The inclusion scores broken up region-wise shows that the penetration of financial services is deeper in the south. While the south has high scores on all parameters, the scores for credit penetration is higher than the scores for branch and deposit penetration, indicating a more evolved credit market addressing both consumption smoothening and enterprise finance needs.

In all the other regions, the branch and deposit penetration numbers are higher than credit penetration.

The microfinance data adds significant improvement to the low penetration regions between 2012 and 2013, but there is much more catching up to do.

If Inclusix incorporates the savings data from the postal system, the difference between the deposit and credit penetration levels would be sharper.

Going beyond Inclusix numbers, if we add all the touch points, the network is formidable. There is a formal sector touch point for every 4,100 persons and an self-help group (SHG) for every 156 persons.

However, the quality and the range of services that these touch points offer vary widely. For instance, more than half the formal sector touch points are those of the postal network which offer savings, remittance and insurance services, but not banking and credit.

Similarly, microfinance institutions offer only some types of loans. Most SHGs do not offer scale. However, it is important to recognize the way the network is penetrated and how it could be leveraged for meaningful financial inclusion. (See table 3)

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Considering all the touch points, the regional spread does not significantly change.

The south has almost 50% of the formal sector touch points. If the SHGs are added, the skew is sharper. A strategy that focuses on the regional penetration is urgently needed. While the new generation players like MFIs are marking their presence in the east and north-east regions, their impact is not significant in comparison to the residual exclusion. (See chart 1)

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This residual exclusion, it is hoped, will be addressed by the new institutions that have been given an “in-principle” licence to operate as small finance banks and payments banks.

It is expected that these entities will contribute to disruptive innovation. Adding to this is the policy push of direct benefit transfers, with Aadhaar being the technological backbone, to bridge not only residual penetration, but also the regional disparity. The banking correspondents and the power of the last-mile touch point architecture is what will be tested in the years to come and there are indications that we are ready in terms of technology.