Banking The Unbanked: Issues, Concerns & The Way Ahead - R K Dubey, CMD, Canara Bank

With competitively priced cutting-edge products/services, banks can enhance access to affordable financial services, for eg. savings, loan, remittance and insurance services. They can thus reach the underbanked, while exploiting business potential at the ‘bottom of the pyramid’ through a multi-channel approach.

According to the World Economic Outlook released by the International Monetary Fund (IMF) in April, the world economy is projected to grow by 3.3 per cent in 2013, a shade lower than that of 3.5 per cent estimated in January 2013 and marginally higher than 3.2 per cent in 2012. The world is recording a three-speed recovery, with strong growth in the emerging markets, slow growth in the US and negative growth in the Euro area. The projections for all the major countries except Germany and Japan have been lowered.

Prior to the global financial crisis of 2008, India grew at an impressive rate of over nine per cent for three consecutive years. The crisis caused a deceleration, but India managed to stage a recovery and post a healthy growth rate of 8.4 per cent in both FY10 and FY11. In FY12, however, growth came in lower at 6.2 per cent. The situation worsened in FY13, with five per cent YoY growth – the slowest annual rate in a decade. Despite this slowdown, driven by a 12 per cent nominal annual growth rate, the country’s GDP is set to quadruple over the next decade to reach USD 4.5 trillion by 2020.

The growth process, however, is not broad-based. The theme of the 12th Five Year Plan (2012-17) is ‘faster, sustainable and more inclusive growth’. In a paper on inclusive growth, a World Bank team noted that ‘the gap between the best and worst placed is growing’. This concern is validated by the findings of the National Sample Survey Organisation (NSSO). Unemployment is the highest among educated youth in the age group of 15-29. With less than 20 per cent of the GDP, agriculture accounts for about 65 per cent of the rural labour force.

The major challenges to be addressed for ensuring inclusive growth are:

• Providing essential services for the poor – education and health at affordable costs.
• Regaining agricultural dynamism – to ensure four per cent annual growth.
• Developing human resources.
• Protecting the environment and reversing environmental losses.
• Increasing competition in the manufacturing sector.
• Improving rehabilitation and resettlement practices.
• Improving governance.

These challenges are similar to the United Nations Millennium Development Goals.

What Does Financial Inclusion Entail?

Financial inclusion is the process of ensuring access to appropriate financial products and services needed by vulnerable groups such as weaker sections and low income groups at an affordable cost in a fair and transparent manner by mainstream institutional players.

Currently, only 40 per cent of the population across the country has bank accounts. Life insurance cover is 10 per cent and non-life insurance cover is abysmally low (0.6 per cent). Only 13 per cent of the people have debit cards and a paltry two per cent have credit cards. The National Sample Survey data has revealed that nearly 51 per cent of farmer households in the country did not seek credit from either institutional or non-institutional sources.

Banks can generate high volume business from the unbanked sector, where people are still dependent on non-banking sources for meeting their credit requirements. There is opportunity for banks to lend and generate interest income. Besides, banks can also get huge spin-off benefits by enlisting a large number of rural clients like the Mahatma Gandhi National Rural Employment Guarantee Act (MNREGA) payments commission, Direct Benefit Transfer (DBT) payments commission, etc.
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Various banking services to be provided to the excluded people include:

• Basic savings deposit (no-frills) account
• Micro credit
• Remittance facility
• Micro insurance
• Pension payments
• Transactions in bank accounts 

A Paradigm Shift

Meaningful development requires not a mere incremental tweaking of existing business models, but a paradigm shift to expand outreach while reducing the cost of service delivery.

The changing role of the state, the near-jobless growth in the primary sector, and the increasing informalisation of workforce in the secondary and tertiary sectors necessitate strong state action to redress poverty. C K Prahlad, in his seminal work ‘The Fortune At The Bottom of The Pyramid’, rightly stressed that, “Doing more of the same, by refining the solutions of the past is important and has a role to play, but has not redressed the problem of poverty”.

Innovative mechanisms of financial services delivery can transform poor households and can also be profitable for banks over the medium term. The synergy built in the programme comprising banks, government and development agencies needs to be fully exploited by the promotion of technological and institutional innovation to enhance access to the financial system. 

Banks, on their part, need to increasingly look at the larger picture in creating awareness about financial products, education, and advice on money management, debt counselling, savings and affordable credit.

Financial inclusion must be used as a business opportunity by leveraging technology to reduce overall cost and incremental cost of transactions. The adaptation of technologies and exploration of innovative mechanisms encompassing technology-driven delivery channels such as micro ATMs, biometric ATMs, mobile ATMs, smart cards, mobile banking, e-seva, etc. could provide alternative solutions in providing beneficial enduring outcomes for the poor and the disadvantaged in India.

India Post, which has an elaborate network of 155000 post offices (139000, i.e., 89 per cent in rural areas), can also significantly enhance financial inclusion. Aadhaar needs to be increasingly linked to bank accounts, delivery of cash at the doorstep and delivery of welfare services.

The major constraint is the low number of transactions and the low turnover volume. Hence, a paradigm shift from regulatory obligation to a profitable and viable business opportunity is needed to create a ‘financial inclusion breakthrough point’ by building a suitable technology infrastructure to empower the rural population through knowledge.

Related experience around the globe clearly reveals that mobile banking is eminently doable, as exemplified by the hugely successful 50000-plus retail ‘bank correspondents’ (stores offering deposit and withdrawal services on behalf of banks) in Brazil, the existence of such models in Philippines, South Africa, Peru and Colombia and pilot models in Africa.

With competitively priced cutting-edge products/services, banks can enhance access to affordable financial services, for eg. savings, loan, remittance and insurance services. They can thus reach the underbanked, while exploiting business potential at the ‘bottom of the pyramid’ through a multi-channel approach, viz. handheld devices, mobiles, cards, micro ATMs, branches and kiosks in a cost-effective and seamlessly integrated manner with Core Banking Solutions (CBS). Accelerating access to financial services for the poor using mobile phones and branchless banking business models could be a win-win situation for all stakeholders, viz. the agent network, telecoms, banks, the government and the unbanked.

The Gini index measures the extent to which the distribution of income (or, in some cases, consumption expenditure) among individuals or households within an economy deviates from a perfectly equal distribution. Thus, a Gini coefficient of 0 represents perfect equality (everyone in the country has the same income), while 100 implies absolute inequality (one person in the country has all the income). As of 2011, India had a Gini coefficient of 36.8 and a world ranking of 56.
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Canara Bank’s Initiatives

Canara Bank has been actively pursuing the agenda of financial inclusion, with key interventions in four groups, i.e. expanding banking infrastructure, offering appropriate financial products, making extensive and intensive use of technology and fostering advocacy and stakeholder participation.

The bank has made conscious efforts to supplement the supply-side effort by a demand-side effort by reaching out to people left behind, inspiring trust and confidence in the banking system through efforts towards financial literacy and supporting them in improving the quality of their lives by providing credit support for livelihood creation activities. We aim at both meaningful and holistic financial inclusion for the overall development of the allotted villages.

Opportunities Identified By The Bank

Canara Bank has opened 237 branches in unbanked villages since April 2011. These branches have generated business of more than Rs 1500 crore. The bank has opened more than 33.29 lakh basic savings bank deposit (BSBD) accounts during the last two years, of which 14.73 lakh are in unbanked villages. As on March 31, 2013, overall basic banking facility has been provided to 60.55 lakh customers across the country, and these accounts had an outstanding balance of Rs1143 crore.

Besides opening BSBD accounts, the bank endeavoured to provide a host of other facilities like In-Built Overdrafts (IODs), Kisan Credit Cards (KCCs), General Credit Cards (GCCs), the Differential Rate of Interest scheme (DRI), Self Help Groups (SHGs), Micro Credit Groups (MCGs), Micro Insurance and Micro Pension under the Canara Nayee Disha Scheme.

Our 275 branches covering unbanked villages have provided credit worth a total of Rs 1772 crore to 232595 customers, which includes KCC facility to 32274 farmers worth Rs 201.82 crore, GCC facility to 29862 farmers amounting to Rs 61.27 crore and coverage of 4204 SHGs with credit of Rs 55.52 crore. The bank has also provided Micro Insurance coverage to 50576 members during the last two years.

Besides these, Canara Bank has implemented the Women Self Help Group (WSHG) scheme in the Chitradurga district of Karnataka since March 2012, formed 5828 groups and credit-linked 3444 of them, disbursing Rs 17.39 crore. We have also initiated this scheme in the Palakkad and Wayanad districts of Kerala, where groups have been formed and the linkage is expected to start soon.

In addition, we have established Financial Literacy Centres in all our 26 lead districts. While financial inclusion is a supply-side mechanism, financial literacy addresses the demand side.

The Challenges Faced

Inadequate power supply: Lack of adequate power supply hinders last mile connectivity in rural areas. However, Canara Bank has sought to overcome this problem by installing generators and UPS in all its remote branches.

Low broadband penetration: Currently, broadband usage in India (with a penetration of less than one per cent) is among the lowest in the world. This can be largely attributed to low computer literacy and high cost of internet access. Canara Bank has overcome the problem by installing VSAT facility in all its remote branches and closely co-ordinating with BSNL to ensure connectivity.

Dearth of trained manpower: Canara Bank has helped in providing education and skill development to local population and creation of trained manpower by providing education loans, financial literacy initiatives and also by opening training institutes.

Low literacy rates: The bank has assisted the literacy drive of the government by providing timely education loans to all needy. In fact, we are the nodal bank for administering the Central Sector Interest Subsidy Scheme for educational loans for students belonging to economically weaker sections.

Resistance to change: Employees in government ministries/departments, banks, etc. lack awareness about the significance of e-service delivery.
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The Way Forward

Banks are required to cover all villages allotted irrespective of population and ensure extension of banking activity in all villages by extending need-based finance. Aadhaar being the enabler for DBT, banks have to ensure that beneficiaries have the Aadhaar number and the number is seeded with their bank account. Banks also have to ensure extension of the Micro Insurance scheme for all the no-frills account holders whereby they can get adequate life insurance cover by paying a nominal premium.

Business Correspondent agents are an important link but they have been ignored and they have not been receiving proper remuneration. Banks have to plan a fixed component and a variable component to the BC agents so that they have the motivation to work.

Holistic Village Adoption Scheme

It is proposed to engage the services of Business Facilitators (BF). BFs would be trained by the bank and would work as an extended hand of the Branch Manager. The BF would help villagers in opening accounts, forming and linking SHGs, creating awareness for the bank’s products and would identify borrowers and assist in the recovery of loans.

Canara Bank will take up the upgradation of the physical environment/facilities of the adopted village, construction of community sheds/library halls or any infrastructure essential for the village and identified by the Village Development Committee. The bank will provide benches/water filters, etc. for schools or solar lights, as identified by the Village Development Committee. It will arrange for education on best farming practices and sanitation, provide seeds/seedlings for a kitchen garden in every house and also assist in the formation of Village Development Committees.

62 villages will be adopted in 31 circles of the bank under the scheme.

Final Observations

Various inclusive growth strategies from the banking system coupled with the support structure and framework provided by the state can enhance inclusive growth. The success of inclusive growth can be seen in the double bottomline of financial profitability and social welfare. As C K Prahlad said, “The real source of market power is not the wealthy few in the developing world or even the emerging middle-income consumers. It is the billion of aspiring poor who are joining the market economy for the first time”. Hence, all stakeholders must ensure that inclusive growth works as a real engine of jobs and services for the poor.