Is there more to financial inclusion than bank accounts? According to the formal definition of financial inclusion used by the Rangarajan Committee, financial inclusion is “the delivery of financial services at an affordable cost to the vast sections of the disadvantaged and low-income groups.” The idea from the beginning has been to bring the low income group within the fold of the organised financial system, not specifically banking. However, since we chose to go with a bank-led model, a large part of the financial inclusion policy so far has centred on bank branches, accounts, credit and savings. This emphasis over the last eight years has led to expanding presence of branches and banking correspondent networks with little headway in increasing the banking habit; it is only now that there is focus on the number and value of transactions in the financial inclusion plan.

While RBI continues to exhort banks to see the business opportunities in financial inclusion, banks do face serious challenges in the current model. For instance, in a culture where rural postings are not welcome by bank employees and the business correspondent agent not considered ‘one of us’, expansion of business in the hinterland has its own set of issues. It is perhaps unfair to expect the branch managers to be responsible for increasing the number of transactions in their circle, given the set-up under which they operate. Further, these markets had been left untapped precisely because they are unattractive to the present bank business model; banks, therefore, need to re-think strategies. Superimposing targets on this framework and continuous tinkering from multiple policy makers has made it difficult for banks to take a long-term view, as they run to keep up with the latest order.

Moreover, for any sustainable business model, the guideline should be ‘listen to the customer’. Given India’s heterogeneity, discovering client needs is not a simple process. What works in Bihar may not work in Kerala; making up volumes and scale, therefore, is quite a challenge. Since competition and innovation are encouraged when there are more players in the market, by keeping to the bank-led model with a top-heavy approach in targets, India may be losing out on creating this space for novel solutions. It is time now to change the discourse on inclusion in India, understand that this is a two-stage process—first to bring the unbanked into the formal sector by expanding digital payments and second to provide financial services of credit, savings, insurance, etc.

A Bank of International Settlements Working Paper by Dittus and Klein, “On Harnessing the Potential of Financial Inclusion”, therefore identifies four building blocks for financial inclusion: (1) exchange of different forms of money for one another, (2) storage of money for safe-keeping, (3) transfer of money from one owner to another, and (4) investment of money. Since it is difficult for regulators to keep pace with changing technology and new modes and models of service suppliers, the recommendation for regulators is to regulate the service and not the institution. In other words, regulate the sphere of payments, allow non-banks to participate freely in the first three building blocks, keeping intermediation out of their purview. This would allow for more competition and innovation in facilitating transactions, while leaving the core banking services of investment untouched. While RBI often speaks of the challenges of managing risks and allowing for innovation at the same time, the paper notes: “In the case of basic financial services for the poor, the danger seems not so much systemic repercussions that might impose large financial costs; the danger is more that such services do not emerge in the first place, and financial inclusion simply does not happen.”

There are innovations coming up slowly in India, though limited in nature. The Vodafone-ICICI venture in eastern India is bank-specific and the latest OxiCash wallet allows transfer between the wallet and any bank, but no cash out. What is left now is an open wallet that allows cash out. This is actually feasible in India, if we set in appropriate rules like other countries have done. For instance, EU Directive 2009/110/EC on e-money specifies that funds collected for the purpose of payments are not deposits, these are to be kept in supervised escrow accounts with no interest or credit granted, etc. This clears the air for appropriate regulation; fund isolation and safeguarding are the key principles being practised. In India, allowing low value cash out transactions can help bring in the scale that businesses are looking for now. This means setting in a detailed risk framework for payments and tightening the systems of supervision, keeping a level field for banks and non-banks. The world is moving onto new systems, are we?

The author is with the Indicus Centre for Financial Inclusion and can be contacted at sumita@indicus.net