How can we put an ATM in every Indian village?

Smack in the middle of national elections whose results will decide the economic revival of India, its central bank took a simple yet dramatic decision to grant new bank licences this month.

After a decade of wrangling, these licences are aimed at opening up the banking sector and improving financial inclusion in India, where only one-third of villages have access to formal financial services. Put another way, only about half of the 1.2 billion Indians can open a bank account. Most depend on shady, unregistered outfits or the good old local money lender.

The Reserve Bank of India granted only two licences to address this crying need, though at least 10 are expected. These were given to IDFC, an infrastructure finance firm, and Bandhan Financial Services, a microfinance company. In a mature decision, the RBI resisted the temptation to grant licences to corporate giants eager to expand, and instead chose two entities focused on the development sector.

India already has 27 government-owned banks and 22 private banks. Most of these operate in urban areas where consumers enjoy facilities like ATMs and internet banking. It is only in recent years that these banks have increased their focus on rural banking. The high cost of reaching out to remote areas is being mitigated by rapid technological and policy innovation.

Allowing banks to use an independent network of banking correspondents (BCs) has helped the cause of reaching out to the unbanked. BCs are independent entities that make the “last mile” connection between rural communities and banks, letting banks reach remote locations without investing in non-viable branches. In the last few years, BCs have extended banking services to over 260,000 villages. While this is no mean feat, it is still inadequate. India needs more banks that reach out to rural consumers. The BC outreach of existing banks is simply not enough. New banks that get licences will add to the momentum created by existing entities.

Offering saving, credit and insurance services to customers in areas without basic facilities like electricity is not easy. BCs have to walk up to village homes, speak to the residents, reiterate the need for using banking facilities, understand their needs and then, finally, register their accounts with the bank.

These BCs are using technology as a key tool for opening such accounts. Many depend on mobile phones while others use SIM-enabled, hand-held devices that use biometric information. Smart cards store all credit related information of the consumers to ensure transparency and record keeping in a least cost effort.

Of all the challenges banks face, the biggest is of educating rural folks about financial services. Most people in rural India remain illiterate about the need and importance of a formal financial system. Financial literacy is a big gap even in urban India, but easy access to banks mitigates that problem. Rural India does not have that advantage.

Mobile banking and microfinance institutions are gaining traction, while local moneylenders are channelling their opposition through regional political leaders.

Despite the valiant efforts of the central bank, BCs and microfinance institutions, serious gaps remain in the war for financial inclusion. There is virtually no cohesive framework for assessing the spread of financial inclusion. RBI and other institutions have not been able to adequately assess the impact of the efforts. Equally worrying is the weak sharing of best practices by banks and BCs: there is not enough comparative analysis of successful models or the technologies being deployed. Most players are working in silos and the RBI has yet to connect them to extract valuable learning from individual experiences.

Meanwhile, some fundamental questions about financial inclusion remain. Do banks feel there is a business case for them to support financial inclusion? Is it better for banks to employ thousands of BCs directly or work through organized entities? Are corporate BCs separating marketing of products from general education on financial literacy? Are BCs appropriately compensated and trained?

According to estimates, 80%-90% of accounts opened by BCs remain dormant. After all the effort made to reach out to rural consumers and help them open accounts, most don’t use them. Again, not enough research has been done to explain this. Does the opening of an account by itself help financial inclusion? Shouldn’t the BCs do a more comprehensive assessment of the needs of rural consumers before opening an account?

India will have to address these questions and ensure the commitment of private players as the process of new licences for banks increases. Applicants have to realize that new licences are for the unbanked, not for making higher profits from rich urban consumers. New banks have the responsibility to ensure that rural consumers have as much access to ATMs as urban clients.

Author: Pranjal Sharma is a consulting editor at Businessworld in India and a Member of the World Economic Forum’s Global Agenda Council on India. Follow Sharma on Twitter @pranjalsharma

Image: A customer uses his card to withdraw money from an ATM in Jammu October 14, 2008. REUTERS/Amit Gupta