The conditions attached to exchanging old
notes that came with the notebandi
from November 8th 2016, the subsequent scarcity of cash, and the current
government campaign for cashless transactions have put intense pressure on the
unbanked to open bank accounts and transact with banks.
Bringing the working poor into the fold of banking - presented as a welfare initiative with its terminology of “financial inclusion” - has been an ongoing project in India. In the current phase, it has become extremely coercive.
The standard narrative (see for example a recent
Live Mint piece titled “How
moving money to the bank helps the poor”) is that certain obstacles prevent
the working poor from accessing banks, but once these are removed, they will be
able to save more, derive additional income and avail of credit on favorable
terms.
The problem of access
The biggest obstacle – the problem of
access to a bank for rural customers - has been acknowledged by the government
for many years. The Regional Rural Banks (RRB’s) – focused on rural geographies - were
first thought to be the answer. With their limitations becoming apparent, the
idea of banking correspondents (BC’s) was put forward in 2006. Including BC’s, there are still too few banking outlets in rural
India, particularly in less developed districts.
Take Karnataka for example. While in urban Bengaluru,
there are 24 bank branches and 77 ATM’s per lakh population, when it comes to districts
such as Yadgir, Bidar and Koppal, this falls to 9-11 branches, 6-8 ATM’s and
5-8 banking correspondents per lakh population (Data culled from the RBI,
a
report in the The Hindu and the State Level Bankers Committee, Karnataka). Given
that population density is much lower in these districts compared to Bengaluru,
people have to travel much longer distances than their urban counterparts to
avail of banking and the bank offices that service them deal with far too many customers.
Access to banking is not only about
physical access.
The working poor in both rural and urban
areas are often illiterate or versed in only the local language. They have to
contend with the complexities of banking in the presence of unsympathetic bank
officials. The recent incident of demonetized notes being deposited and then
withdrawn the same day from the accounts of 250
MNREGA workers in Rajo Majra village of Punjab, all without their knowledge
shows how the poor can be exploited. The workers apparently expected government
transfers into their accounts and signed bank forms that they could not read.
A large number of the working poor are migrants
who move from one work site to another. Accessing their accounts – which would
be with a bank branch near home – presents many problems for these workers;
opening multiple bank accounts also makes no sense.
Leaving aside the obstacles in accessing
formal banking services, will the poor reap benefits once forced (as in the
current situation) into the formal financial system?
Do bank deposits make sense?
Take the question of savings. A recent
large sample national household survey reported
in Live Mint shows that the
difference between income and routine consumption expenditure of households in
the bottom two quintiles of income is under Rs 2000. This is the monthly saving
potential of 40% of households in India. In case of unforeseen expenses such as
a medical emergency, this money will have to be accessed quickly. How would it
make economic sense for these households to deposit these savings in a bank?
The paltry interest that can be earned will not justify the costs of banking –
the time and expenses on travel.
The lack of savings potential in the poor
is ironically demonstrated by the “Jan Dhan Yojana” (JDY), a scheme promoted by
the government to bring the unbanked into the fold of banking. Under this
program 266 million accounts had been opened till the first week of Jan 2017
with the help of some inducements such as free insurance, free debit card and
some overdraft facility.
About a quarter of these accounts, 65
million, still have zero balance. The average deposit
in the accounts with money was less than Rs 2300 before notebandi. By the first week of January (after the
expiry of the deadline for depositing old notes) this had gone up to Rs 3400.
Most JDY account holders who have been brought recently into the banking system
clearly did not have much in the nature of financial assets in cash.
Bank accounts then do not make sense as a
savings instrument for the poor not only because of the difficulties of
accessing a bank but also because the poor hardly have any savings.
The false promise of credit
What about access to credit? Banks with
their commercial objectives can obviously provide credit only to those with
predictable earnings or having assets such as land or housing that can serve as
collateral. The reserve
bank statistics on the credit extended by banks is revealing.
There were a total of 137 million
individual credit accounts in the Indian banking system in 2015. Individuals
could have more than one credit account – for example one for a vehicle loan
and another for a housing loan. So the number of people with access to credit
from the banking system is lower. For comparison, the number of
eligible voters in 2014 was about 814 million.
These 137 million borrowers can be divided
into petty borrowers whose credit limit is 2 lakhs and large borrowers with a
higher credit limit. There were 29 million large borrowers and their average
borrowing was nearly Rs 6 lakhs each. These borrowers would typically belong to
the top quintile of household income earners and avail credit for housing,
vehicles, education, etc.
On the other hand, the average borrowing of
108 million petty borrowers was only Rs 50,000. These would be typically farmers
and self other employed persons. These numbers show up the limits of access to
credit from the banking system for poor households.
Anecdotal evidence suggests that even the farmers
who have access to credit borrow from informal channels as the institutional
credit available does not meet their requirements. For the self employed
without assets and for informal wage workers, credit from informal sources at
high interest is the only recourse. For the typical vegetable cart vendor who
requires credit on a daily basis, the wholesaler in the mandi serves the function as no bank would be able to fulfill his
need.
The real motivation for “financial inclusion”
The poor when provided access to banking
save little and can avail of only limited credit small; they cannot be
important for the profits of the banks. In the words of the
former RBI governor Raghuram Rajan, banking is not easily available to the
poor “not
just because the financial system is underdeveloped, but because they are hard
to service profitably”.
The economic non-viability of making the poor transact with banks -
the BC model too may have run its course as recent studies reported in The Wire indicate - has
pushed the government to promote ever newer models of service providers to
carry forward the financial inclusion project, the latest being the Payments
Bank. The latter can open accounts, hold small deposits and process payments
but is barred from providing credit. The thinking behind the Payments Bank
concept is that with relaxed regulatory requirements, it will be able to make
profits from transactions of poor account holders where regular banks are
unable to.
What accounts for the persistence of the
government with financial inclusion when neither the banks nor the poor account
holders benefit?
The answer could lie in the fact that a
bank account for every worker is an essential requirement for moving India’s
massive informal economy - that supports 90% of livelihoods - in the direction
of formalism. The informal economy effectively shuts out corporate India from a
large part of the domestic market and the government from potential revenue.
Government policy has long favored the growth of the formal/corporate economy.
“Financial inclusion” then is not so much
about benefiting the poor as it is about creating the infrastructure for
formalizing the informal economy. In this project, if the poor have to bear
some costs, that is just collateral damage.
