Putting No-Frills Accounts to Work in India

Abstract

In a country like India; where there is high regional, social and economic disparity; where banking is reflective of an urban and a prosperous society; where the literacy rate is a mere number; and a photograph is the only identity one possesses; the Reserve Bank of India (RBI) has taken a remarkable initiative in introducing 'No-Frill Accounts' - a first step towards attaining true financial inclusion.

Through regional rural branches of banks, the business correspondent (BC) model, and other agent-based models, public sector and private banks have been able to open about 50 million no-frill accounts across the country, making 155 districts in 19 states, 100 percent financially included, or so, statistically, in the last 5 years.

Banks are not allowed to charge the customer for the No-Frill Accounts and find them intrinsically loss-making. Thus, banks are doing little to market their benefits or encourage their use. This has led to extremely high levels of inactivity in the No-Frill Accounts. In fact, less than 11 percent of the 50 million accounts opened, show even 1 transaction in 90 days, and the rest lay unused, underlining that the objective of financial inclusion has not really been met.

Does having a 'No-Frill Account' make an individual financially included? What makes an individual want to make it work?

To understand true financial inclusion, it is important to understand (a) the financial habits of the excluded society and (b) the reason behind their exclusion. Are they excluded because we haven’t been able to cater to them efficiently or have they themselves chosen to be excluded from the system?

In spite of having the KYC procedure and norms simplified by the RBI, people have kept themselves excluded from the formal financial society and have considered relying on informal patterns and other readily available avenues for savings. Why?

The answer lies in savings behavior; approach of people towards banking and savings; the patterns of formal & informal credit; and intermittent income. Having an account does not make an individual financially included, but having transactions in-or-around the no-frill accounts truly empowers the individual.

A common message through mass-awareness programs and campaigns therefore needs to elucidate the importance of savings through a banking channel and make people convert in-kind savings to in-cash savings.

Banks have a key role in financial deepening and in making No-Frill Accounts work. The government's recent plan of providing Rs.140 for every No-Frill Account opened will help incentivize the banks and make the banks improvise to market and steer the benefits of the products and services. And leveraging the BC model, banks will be able to cater to larger strata of the society without incurring higher costs.

But these measures will still be at policy and planning levels and far from what delivers on-the-ground. This paper takes up examples and case-studies of BC Operations and a spectrum of services that define a holistic product suite which saddles onto No-Frill Accounts to make them work.

Sub-K is one Business Correspondent that has developed the services-centric working model and demonstrated its viability in several districts with both public and private sector banks. This paper showcases its viability mechanism and bridges the road map between inactive no-frill accounts and active no-frill accounts at the last mile.

In conclusion, if one looks at a holistic solution catering to the entire eco-system, making No-Frill Accounts work will be a necessary and sufficient condition to pave the road map for true financial inclusion. It will create a liquidity based system by moving the populace from 'no-banking' to 'no-frills, transactions based' branchless banking to a 'cashless system that is driven by citizen needs beyond banking and saving'.