Banking The Unbanked: Challenges & Opportunities For The Sector

Only 35 per cent of the country’s population has formal bank accounts as compared to an average of 41 per cent in the other developing economies.

A huge scam in a chit fund company based in the eastern part of India was unearthed a few months ago and lakhs of people lost crores of rupees in savings. What is disturbing is that most of the depositors were from low income groups who entrusted their hard earned money with this company with the expectation of higher returns. It is reported that at least 10 depositors have committed suicide after the company stopped paying its depositors. 

This is not the first of such scams that we are witnessing in India, and it will definitely not be the last. We have a long history of such scams, and the ‘80s and ‘90s are full of such Ponzi schemes that went bust and depositors saw their saving wiped out in the blink of an eye. The success of such schemes underscores the broader failure of India’s banking sector to bring a significant number of people under its fold. This shows that a lot more ground needs to be covered by the Indian banking industry.

The statistics reveal the real picture and speak of why such Ponzi schemes are still popular in India. The 2011 census shows that even after 65 years of independence, only 58.7 per cent of the population has access to bank accounts. This gets worse as we move to the rural areas and low income individuals. It is estimated that 54.4 per cent in rural areas and only five per cent among the low income group have access to banking services.

One of the reasons for such poor penetration is the lower number of branches in rural areas. Out of a total 2.46 crore of households in India, 68 per cent are from rural areas. Only 37 per cent of the total bank branches operate in the rural areas to cater to these households. If we remove the count of Regional Rural Banks (RRBs), this figure drops to 30 per cent. This reveals a yawning void in terms of channelising small savings. It is hardly any wonder then, that these groups make for easy prey for such schemes.

The other parameters do not paint a rosy picture either. As at the end of FY13, the average population that every bank branch serves in India is an abysmally high 12100 against that of less than 2500 in most developed nations. The phenomenal rise of ATMs in the country has also not been able to penetrate the rural areas on the expected lines. Out of the total ATMs in the country at the end of FY13, only 10 per cent are accounted for by the rural areas. 

Swarup Choudhury, Managing Director (India), Thomson Reuters expressed his views on lower penetration of financial services in India saying, “Only 35 per cent of the country’s population has formal bank accounts as compared to an average of 41 per cent in the other developing economies.” 

There are many reasons for such low penetration of banking services in rural areas. A large and scattered rural population remains one of the basic reasons why banks are not able to provide them with the most basic services. Apart from this, lower financial literacy and the technology lag makes the job of providing basic financial services even more difficult. The problem is compounded by inadequate infrastructure as regards power supply and internet connectivity. In addition, low savings balances, small transaction sizes and the large number of customers makes it financially unviable for banks to be physically present and serve them. 
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Nonetheless, these limitations should not stop us from coming out with innovative solutions to extend the reach of banking to those outside the formal banking system so far. According to a study done by Infosys a few years ago, if the unbanked in India, China and Brazil were to generate even 50 per cent of the revenues currently brought in by the banked, low-income consumers in these countries, the total amount of new revenues produced by 2015 in these markets could be above 20 billion Euros.

The rise in tele-density in India provides the opportunity to bring in the households (especially in the rural areas) which are still outside the formal fold of the banking system. Tele-density in rural India, where two-thirds of the total Indian population lives, grew from under one per cent in 2000 to around 39.89 per cent at the end of April 2013. Reduction in transaction costs, widening markets and the need to overcome infrastructure constraints are some of the main reasons why mobile phones have such a major impact. 

Beside this, the RBI has taken various initiatives to extend the reach of banking to those outside the formal banking system. Some of these are: 

Opening Bank Branches: Banks are advised to open branches in all habitations with a population of 5000 or more in underbanked districts and 10000 or more in other districts. 

Using Alternative Models: Banks are allowed to use the services of intermediaries in providing financial and banking services through the use of Business Facilitators (BFs) and Business Correspondents (BCs). 

Setting Up Of Ultra Small Branches (USBs): A USB would comprise a small area of 100-200 square feet where the officer designated by the bank would be available with a laptop on pre-determined days. While cash services would be offered by the Business Correspondent Agents (BCAs), the bank officer would offer other services, undertake field verification and follow up on banking transactions.

Opening Branches In Smaller Centres: The RBI has permitted domestic Scheduled Commercial Banks (excluding RRBs) to open branches in Tier II to Tier VI centres (with a population of upto 99999 as per the Census 2001) without the need to take permission from the RBI in each case, subject to reporting. 

Being a nation of over a billion people, with almost half of them outside the financial ecosphere surely dampens India’s growth potential. For India to make its mark in the global arena, it becomes imperative for the country to expedite the process of financial inclusion. 

This can be only achieved by the tweaking of banks’ business strategies and the optimal use of technology for the purpose. IT must become a key business enabler for streamlining, standardising and expanding the banking services portfolio. Information Communication Technology (ICT) must be utilised to provide solutions that capture customer data, ensure unique identification, and facilitate financial transactions remotely. Banks also need to work along with other stakeholders like the regulator, government, micro finance institutions and NGOs to bring more people under the net.