RBI Can Bring the Horse to Water, But Only Financial Literacy can Make him Drink

RBI (Central Bank in India) can Bring the Horse to Water, But Only Financial Literacy can Make him Drink

Backdrop

The history of financial inclusion (FI) in India is actually much older than the formal adoption of the objective. The nationalization of banks, Lead Bank Scheme, Expansion of Cooperatives incorporation of RRBs, Post Offices, Service Area Approach and formation of Self-Help Groups - all these were initiatives aimed at taking banking services to the masses. The brick and mortar infrastructure expanded the number of bank branches ten-fold - from 8,000+ in 1969, when the first set of banks were nationalized, to 99,000+ today. Despite this wide network of bank branches spread across the length and breadth of the country, banking has still not reached a large section of the population. The extent of financial exclusion is staggering. Out of the 600,000 habitations in the country, only about 36,000+ had a commercial bank branch. Just about 40% of the population across the country has bank accounts.

Financial inclusion or inclusive financing is the delivery of financial services at affordable costs to sections of disadvantaged and low-income segments of society, in contrast to financial exclusion where those services are not available or affordable. Financial inclusion today is about financial markets that serve more people with more products at lower cost. An estimated 2.5 billion working-age adults globally have no access to the types of formal financial services delivered by regulated financial institutions. It is argued that as banking services are in the nature of public good; the availability of banking and payment services to the entire population without discrimination is the prime objective of financial inclusion public policy.

Issues

Issues have been raised around the mandate driven FI. Is FI a Political Agenda or a Regulatory one? Unlike the IRDA and PFRDA, the RBI as a Regulator does Not have a 'D' - the Developmental Role to play. So should be the FI drive be at the instance of the RBI or the GoI? The issue I am addressing is not banking inclusion of penetration, but that of using the existing banking accounts. The so called no frill / zero balance / basic bank accounts that lie on the Core Banking system have seldom been used by the account holders. Hundreds and Thousands of people in rural India have their banking accounts and most of them are NOT even aware of it, what to talk of using the same. The bankers can bring the Horse to Water, but can't make him Drink is proven by the fact that most of these category banking accounts remain without any transactions defeating the purpose as well as making the proposition unviable for the bank, their Bank correspondent network managers (BCNMS) and the customer service provider who actually opens the account and keep waiting for transactions to happen.

Fighting the Wrong Battle

We have always been 'fighting the wrong battle' - the battle from the 'supply side'. Who would do what FI and Why? What would be the norms and who would regulate it? What would be the role of each of the (supply side) player viz Banks, Post Office, Mobile Money, Cards etc. and What all product mix etc. etc. Development sector has innumerous examples where the supply side has only negatively dented  the structures and have seldom made any impression on the impact of the socioeconomics. Supply seldom creates its own Demand unless the consumers are aware of the benefits of the products and services.  Has anyone gone to the trenches and identified as to What do THEY Want?? And if they don't want but just Need it, then how do we get the 'Need' Converted into 'Demand'? For example, everyone on this planet need a 'Pension' to fight old age poverty, but what is the 'Demand' for such products.

Solutions lies at Grass-root Capacity Building and Financial Literacy

Financial Inclusion (FI) is Meaningless without Substantial Financial Literacy (FL) and Capacity Building at the Grass-root. However, FL should not be considered with a typical classroom approach, instead,most effectively and efficient use of 'Teachable Moments' - 'that moment when a unique, high interest situation arises that lends itself to discussion of a particular topic'. The time at which learning a particular topic or idea, say, opening and using banking account becomes possible or easiest.

While all the bankers headed by the regulator RBI have a mandate for financial inclusion and also have different agencies to deliver the same, a lot has to be taken up before it reaches to its logical culmination. There is also a strong need for an agency that could build the capacities of the rural India as regard financial inclusion and may range from financial literacy – the teachable moments to financial deepening that could attain a status of managing their own money using a regulated environment. Thus the solution lies not in the supple side, but in activating the ‘demand side’ of the FI.  There is a strong need to activate the 'demand side' for financial deepening - allow G2P in their bank accounts and let them use the liquidity, which is possible by creating awareness through 'teachable moments' and offer diversified products like Savings, Credit, Remittances, FD, RDs, NPS Lite (Swawalamban) etc. so that full advantage of the FI model could be utilized by the rural and urban workers.

Cash Transfers (Conditional / Unconditional)

People tend to forget fast and do not care unless they have their economic interests aligned to it. We open a bank account for them, achieve a banking inclusion target and then forget it. Instead, can we think of also putting some initial money into their accounts like the politically dead ‘Bhamashah’ scheme of the Rajasthan government?  Lets open their accounts, put some money in their account and permit them to use this money over next 12 months while also conditionally compelling them to credit their accounts atleast a couple of times in that period. Even a Debit and Credit of the same amount would do as long as they do. Meanwhile, can we start working towards channeling the Government to Person (G2P) payment into these bank accounts. Say, the MNREGA payments, social security pension, other subsidies of the Government etc. and also offer them simultaneously products like the NPS Lite with Swawalamban benefits. It would allow them open a pension account for themselves and invest Rs. Rs. 1000.oo pa so as to take the Swawalamban benefit of Rs. 1000.oo. Soon, they would see that their invested Rs. 1000.oo becomes more than Rs. 2000.oo (Own 1000 + GOI 1000 + Growth) as they receive the account statement from the NSDL against their own PRAN. During this period of 12 months lets keep them on their toes as regard managing their own money by budgeting etc, and teach them the ‘life cycle needs’ of money ranging from savings, RD / FDs, credit, remittances, insurance and pensions. At the end of the 12 months period, they would be happy to see their bank account grow, regular G2P in their bank accounts, their pension account grow and overall knowledge and experience of money handling. All the bankers including the RRBs are aggregators licensed by the PFRDA and receive Rs. 100.oo for opening and maintain a valid NPS pension account. This would also keep the BC / CSP above the break even as his remuneration is not only linked with the one-time opening of accounts, but also his regular earnings would depend on the frequency and quantum of transactions and the commission received for opening and maintaining a valid NPS Lite Swawalamban account. FI could turn out to be a win-win situation for all the stakeholders viz. the government by blocking the leakages in payment of G2P, the bankers of regular transaction in the accounts, the BC/CSP of earning reasonable fee based and commission based incomes and above all, the We the People – who have an understanding of using their money and banking, have access to knowledge and experience on finance, budgeting etc. including a portfolio of low cost regulated products and services, the G2P and the Co Contributions from the GoI in their pension accounts and a tension free pension for future and above all, Prosperity and Empowerment.