Month: May 2015

Too much praise, far too early

In the valedictory address at the International Conference on National Payments Schemes organised by NPCI, delivered by Mr. Mundra, Deputy Governor of the Reserve Bank of India, there was considerable focus on the linkage between payments systems and financial inclusion. (Full speech can be accessed here). While the Reserve Bank of India, in the past few years, has for the most been making policies that encourage financial inclusion, the speech delivered reveals that there continues a gap in understanding the complex lives of low income households and the role that banks, amongst other financial institutions can play, as opposed to the current role that they do play. The danger in not acknowledging this gap is implementation failure, yet again.

Myth 1: Financial inclusion in its simplest form refers to banking inclusion where the endeavour is to link the unbanked population with the formal banking system by opening their bank accounts

Financial inclusion, at its simplest form, could mean access to any financial product from the formal financial system. It is patronising to think that the point of entry has to be a bank account. While this might be desirable from a banker’s point of view, the reality is that several bank accounts continue to remain dormant. It is limiting to define financial inclusion as merely access to a bank account, when there could be multiple factors that prevent customers from using the account in their day to day lives.

Myth 2:  To inculcate the banking and savings habit amongst the people, it is important that all individuals have bank accounts where funds could be held – which initially could be through remittances in form of direct benefit transfers under the Central /State Government schemes.

Bankers assume that low income households do not save and the habit needs to be “inculcated”. Secondly, the statement assumes that DBT can help build a savings balance. Most DBTs are subsidies that are passed on by the government for essential services like LPG, scholarship, etc. It would be naive to believe that this is money that a low income household can afford to keep idle in a savings bank account.

Myth 3: The PMJDY scheme launched by the Government of India has achieved stupendous success in linking the unbanked with the banking system. Bank accounts have been opened for nearly 99.99 per cent of the households in India which has brought in 150 mn new customers coming into the banking system fold while nearly 135 mn RuPay debit cards have also been issued.

While the current government has been posting numbers on their website regarding number of accounts opened and cards issued, the PMJDY is beginning to show it’s weaknesses. (See article on this here, and here). One can call this skepticism, but the claim that 99.99% of the households in India now have a bank account is odd, when just six months ago, bankers were the biggest barriers to opening bank accounts as indicated by Amy Mowl and Camille Boudot in their barriers to banking paper in 2014. (Reference:

Second, the Financial Inclusion Insights study revealed that most individuals are not comfortable with digital inclusion and lack trust and most bank accounts continue to remain dormant. The study was released in December 2014, so the shift in sentiment in just 5 months is implausible.

Myth 4: Aadhaar based payments, through linkage of biometric identifier with bank accounts, is facilitating the benefit payments to bank accounts of millions of beneficiaries, and will have significant on financial inclusion efforts in the country.

The Supreme Court re-confirmed in March this year that citizens of India cannot be denied benefits if they lack an Aadhar card (see article here). Despite this ruling, financial institutions, seem to continue to see this as an important step to financial inclusion.

What strikes me as a challenge is that none of the above address operational issues faced by low income households, which can act as a higher barrier to use.

What actually needs to be done in the payments space?

Usage and uptake of any service improves when customers see the relevance of the service in their lives. For far too long, financial institutions have seen provision of services such as an ATM card as an add-on benefit. If one truly expects low income households to begin using payments platforms, the following steps need to be taken:

1) Allow withdrawal from any ATM without charging a fee

2) Remove/increase cap on ATM withdrawals for all accounts

3) Allow for multiple withdrawals without charging a fee, even if the amount withdrawn is small

4) Allow ATMs even in remote, rural India to be open 24×7. Anecdotal evidence suggests that in rural India, following a spate of crimes, ATMs operate at the same timings as banks

5) Engage customers , especially from low income households, in a manner that helps build their trust towards digital platforms: this could include providing clear and speedy recourse mechanisms when transactions fail, protecting the rights of the customers and assuring them of speedy service at all times.

The work done in the payments space is not even a complete foundation to ensure that it has an impact on financial inclusion. It would be fool hardy to provide praise far too early: that can be a sure indicator of impending failure.