Reserve Bank of India releases report on financial inclusion

RBI committee has noted that there has been a significant jump in financial inclusion-related activities

A committee set up by the Reserve Bank of India (RBI) to prepare a five-year financial inclusion strategy has suggested that all credit accounts be linked to a unique biometric identifier such as the Aadhaar unique identity number to help identify multiple loan accounts and prevent borrowers from becoming over-indebted.

The committee, in a report released on Monday, also recommended that short-term interest rate subvention, or subsidies, on crop loans be phased out and replaced with a crop insurance scheme for small and marginal farmers.

The panel, headed by RBI executive director Deepak Mohanty, was set up in July to come up with a measurable plan for financial inclusion. The committee found that while some indicators of inclusion have improved, a large number of people remain reliant on informal channels such as money lenders.

One key recommendation of the committee is to link all credit accounts with a biometric identifier such as Aadhaar and the information shared with credit information companies.

“This will not only be useful in identifying multiple accounts, but will also help in mitigating the overall indebtedness of individuals who are often lured into multiple borrowings without being aware of its consequences,” the committee has recommended.

An allegation levelled at the government’s flagship Jan Dhan Yojana has been that the sharp rise in savings accounts could be because of multiple accounts opened by individuals rather than a larger proportion of the population entering the banking system. Linking each account to a unique identity number will help stem such a phenomenon.

In assessing the progress of financial inclusion initiatives, the committee noted that there had been improvement in some indicators.

The average number of branches per 100,000 individuals in India had jumped to 9.7 by June 2015, compared with 7.2 in 2010. The growth in branch penetration has also resulted in an improvement in the number of savings bank accounts in rural and semi-urban locations in India, the report said.

It added that the compounded annual growth rate (CAGR) in the number of savings bank accounts opened between 2006 and 2015 in rural and semi-urban areas has been 15.6% and 15.9%, respectively. This compares with a CAGR of 11.8% and 10.9% in urban and metropolitan areas, respectively, the report noted.

“The recently announced Jan Dhan Yojana by the government marks a landmark in the quest for universal financial access. The government is also focusing on paying benefits directly into these accounts. This will ensure that a big chunk of the accounts opened under various schemes, which are presently dormant, witness ‘movement’, thereby integrating access with use. These are very heartening developments,” said the preface to the report.

Worryingly, despite the leap in the number of accounts, the share of unorganized lenders such as money lenders has not reduced over time. Out of every 1,000 households of marginal farmers, more than 600 are in debt to money lenders. The share of banks is just 129 households.

Alok Prasad, an independent expert on financial inclusion said that the report does not propose the nuts and bolts of how financial inclusion can be furthered over the intended five-year period.

Instead of measurable and concrete actions, the committee has made a “mishmash” of recommendations without clear milestones, said Prasad.

Among the committee’s more contentious recommendations is a suggestion to do away with the interest rate subvention offered on short term crop loans. They suggest that this be replaced with a universal crop insurance scheme for small and marginal farmers.

At present, the government mandates banks to offer 2% interest subsidy on short-term farm loans to small and marginal farmers.

The centre compensates banks for the subsidy that they extend while giving farm loans at 7%.

The report notes that interest subsidy only increases misuse and does not go to the intended beneficiary. Since the subsidy is only for short-term loans, it does not encourage capital formation in agriculture as long-term loans continue to be expensive.

“Phasing out of interest subvention will make the credit culture more healthy and the process more transparent. The goal of the RBI has been to do away with all sorts of subsidies in order to strengthen the credit culture as the subsidy in many cases doesn’t reach the intended beneficiary,” said Kalpesh Mehta, a partner at Deloitte Haskins and Sells.

Focussing on the role of technology in financial inclusion, the RBI committee suggested low-cost mobile solutions for last-mile delivery of banking products and proposed that the government marry mobile technology with Jan Dhan Yojana.

The committee has recommended the use of application-based mobile phones as points of sale for creating necessary infrastructure to support the large number of new accounts and cards issued under the Jan Dhan Yojana.

“One would have liked to see much more emphasis on how technology can be the game-changer; how financial inclusion can also make business sense for banks,” said Prasad.

The report recommended that complete digitization of land records be taken up by the states on a priority basis to improve credit flow to agriculture.

“This would enhance the use of mechanisation and reduce input costs and prices,” the report says.

The Mohanty committee has warned against taking the competence of business correspondents (BCs), who provide last-mile delivery of banking services, for granted. It recommended a graded system of certification of BCs, from basic to advanced training.

“BCs with a good track record and advanced training can be trusted with more complex financial tasks such as credit products that go beyond deposit and remittance,” the recommendations said.

It should be left to the banks to decide how much they should depend on BCs, said Bindu Ananth, chairperson of IFMR Trust, a private trust involved in financial inclusion. .

“Banks are smart enough to figure out which BCs they are tying up with, since they act as agents of banks and do not take up any of the liabilities,” Ananth said.

Other recommendations include one to allow banks to open specialized interest-free windows with simple products such as demand deposits.

The committee consisted of officials from public and private banks, officials from payment networks, a representative from the World Bank, a representative from the Bill and Melinda Gates Foundation and central bankers

The true picture of financial inclusion

Many new bank accounts have been opened, but the report points out that 40% of accounts did not see any deposits or withdrawals in 2014

The two accompanying charts, culled from the Reserve Bank of India’s (RBI’s) report on financial inclusion, show the true picture of financial inclusion in the country. Chart 1 shows the increasing importance of moneylenders in the rural economy. The data is till 2012 but the report says, “the Committee is of the view that this scenario may not have changed materially in the last couple of years.” Chart 2 shows how the poorest borrowers, those with smaller landholdings, have to rely more on moneylenders. Sure, many new bank accounts have been opened, but the report points out that 40% of accounts did not see any deposits or withdrawals in 2014