For the poor, unorganised lending seems more approachable; expanding the reach of formal banking may need the revival of the banking correspondent model
By Arindam Gupta
For effective financial inclusion, banks need to reach out to the poor, not the other way round. No, the business of banks won’t be negatively impacted. The volume of deposits the poor can make is enormous. Rural poverty and financial exclusion are correlated. A report of the NSO on consumption expenditure, withdrawn the government in November 2019 on the ground of data quality, suggests that rural poverty rose nearly 4 percentage points in the country between 2011-12 and 2017-18, to 30%. It noted that urban poverty fell 5 percentage points over the same period to 9%. As of March 2019, India had more than 1,20,000 branches and a little over 2 lakh ATMs. Banks consider economic activities of a region before opening brick-and-mortar branches. Hence one need not be critical of banks to locate 35,649 branches in rural areas (rural areas with two-thirds of the population have only about one-third of bank branches).
Close to ATM kiosks emerged the next best alternative to real bank branches—the banking (or business) correspondent model was floated in 2006 to reach the unbanked. They were given the responsibility to collect deposits (complementing ATMs as used for withdrawing money). But ATMs are not only concentrated in places where banks find business, those are mostly attached with bank branches. For security reasons, ATMs have been closed at many unguarded locations, which could have otherwise served people partially in unbanked areas. In April 2013, considering the importance of intermediaries, RBI issued a guideline that bank mitras will be attached to specific bank branchs. It also stated that the distance between the place of business of a bank mitra and the base branch, ordinarily, should not exceed 15 km in rural, semi-urban and urban areas, whereas in metropolitan centres it could be up to 5 km. But the model didn’t work out.
Banking correspondents were appointed again by banks to cater to the increasing demand of opening new Jan-Dhan accounts during the initial phase of the lockdown.
An IIM Calcutta study covering 1,000 sample Jan-Dhan accountholders from five districts of West Bengal a year ago (before the pandemic) observes the frequency of bank visits by poor accountholders—when a bank branch is close by (within 1 km), only 7.5% respondents visit the branch once a month and about 21% don’t visit even once in more than three months. Only 6% visit the branch once in a fortnight (if the distance is beyond 2 km), and about half of them are infrequent visitors as visits take place on a need basis. The unorganised segment (moneylenders) is approachable beyond any stipulated hours and thus is popular amongst the poor (even though they charge exorbitant interest rates).
Thus, door-step banking may be the only solution to get the poor interested in formal banking. Also, to get back the unemployed educated youth as banking correspondents, their remuneration has to be made more acceptable combining one fixed (monthly, time-bound) and another variable (based on number of customers) component. Further, experts believe that one bank mitra may not be able to handle more than 1,500 households (roughly 8,000 population), and so with an estimated current population of 5,40,000 banking correspondents in the country, the revival of the model should be on the cards.
The author is professor of commerce, Vidyasagar University, Midnapore