Financial Inclusion: The need of the hour

There is no one magic wand that will take financial inclusion to the poor across all of India. Various reforms, ideas and innovations are floating in the air. Here are a few that need to be given immediate attention to.

No-Frills Banking

Basic bank accounts with negligible minimum deposit and a set number of free transactions.

India has a dismal record with its no-frill account plan. It did manage to get 25 million people to sign up for such accounts from various banks, but today only 2.77 million of them, or a mere 11 percent, are active. The scheme will begin to work better when more friendly avenues of banking such as kiosks and mobile phones reach a large number of people. Also, the country should encourage a transaction-led model.

Branchless Banking

Spread access to banking through agents called banking correspondents (BCs).

India had tried out pygmy deposit agents in the 1970s but the experience was not good. These agents went about claiming to be bank employees and that led to a lot of disputes and litigation. In India, there is a very large informal system for transactions that authorities have failed to bring into the banking system so far. There is a need for the authorities to establish a strong viable business line for BCs rather than treating it as a mere CSR activity.

Bank without a Bank

Do away with the need to have a bank account. Use the mobile phone company as a conduit for keeping and transacting money.

In India, the RBI doesn’t allow mobile phone companies to operate as banking channels. I agree that there will be security issues but maybe limiting the number of players who are trying to provide financial inclusion seems a bit counter-productive. Think mobile, think M-PESA.

A Super Efficient Lending Mission

Focus on micro credit and allied products. Build enormous scale with supreme efficiency and the power of private capital.

The profit-led model is here to stay. In India, there are over 1,000 MFIs. The long-term success of MFIs rests on being seen as socially helpful. They can’t afford to antagonize the various stakeholders.