Access to Affordable Financial Services

For those of us who joined the banking industry in the early 1970s, what we see today represents a dream come true–India, aspiring to be a global player and leader in all fields, adopting and setting best practices in every way. I wonder how many of us imagined that we would see this happen during our career.  Having said that, I would hasten to add, as Robert Frost put it, there are miles to go before we sleep. In fact when dreams get fulfilled one begins to dream more and there is always the unfinished agenda–that truly represents the challenge of a banker’s job!

01 July, 2009 Opinion Finance
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For those of us who joined the banking industry in the early 1970s, what we see today represents a dream come true–India, aspiring to be a global player and leader in all fields, adopting and setting best practices in every way. I wonder how many of us imagined that we would see this happen during our career.  Having said that, I would hasten to add, as Robert Frost put it, there are miles to go before we sleep. In fact when dreams get fulfilled one begins to dream more and there is always the unfinished agenda–that truly represents the challenge of a banker’s job!

I often feel that being a banker is probably one of the most satisfying professions in the world–like being a doctor it gives you an opportunity to render service and make a difference to people and to society. It involves nurturing entrepreneurs, helping businesses grow to become large corporates; empowering people, helping them realise their goals by giving them loans to get educated and then to set up enterprises. Banking also involves operating the currency and payments system–the blood circulation system of the economy–all this and more. Secondly, a banker is a person of substance in society. Being a banker involves constant human and social interaction with a wide cross-section of public–an enriching and satisfying experience. The third most satisfying part is that one continues to learn about practically every field– marketing, IT, HRD, gender issues and so on. It is a profession where one can be creative and one that challenges the intelligence and wisdom of the best.

Reflecting on the Indian banking scene, I find that there are still a few areas where much needs to be done. For instance, opening a bank account is still quite a chore and full of hurdles for many; not every bank branch offers no-frills or basic banking accounts. How many branch staff are aware of the simplified KYC for accounts with low-level of transactions, i.e., where balances do not exceed Rs 50,000 and credits are not more that Rs 100,000 a year, where introduction by an existing customer will be sufficient? Similarly, how many branches provide cash exchange facilities and coins to walk-in customers?  Or, for that matter, provide this service even at currency chest branches? Like a post office, a bank  branch should offer some basic services such as currency remittances, and basic forex services (with core banking solutions now in place, this should not be a problem). When we license a branch, it is like providing a public good–and I feel the spirit of this license has to be respected.

Access to affordable financial services, especially credit and insurance, enlarges livelihood opportunities and empowers the poor to take charge of their lives. Such empowerment aids social and political stability. Apart from these benefits, financial inclusion imparts formal identity, provides access to the payments system and to the savings safety net, like deposit insurance. Hence, financial inclusion is critical for achieving inclusive growth; which itself is required for ensuring sustainable growth.

Financial inclusion can be thought of in two ways. One is exclusion from the payments system, i.e., not having access to a bank account. The second type of exclusion is from formal credit markets, requiring the excluded to approach informal and exploitative markets. The focus is now on establishing the right of every person to have access to affordable basic banking services.

There are a variety of reasons for financial exclusion. In remote, hilly and sparsely populated areas with poor infrastructure, physical access itself acts as a deterrent. From the demand side, lack of awareness, low incomes/assets, social exclusion, illiteracy act as barriers. From the supply side, distance from branch, its timings, cumbersome documentation and procedures, unsuitable products, language, staff attitudes are common reasons. All these result in higher transaction cost apart from procedural hassles.

The use of IT solutions for providing banking facilities at the doorstep holds the potential for scalability of FI initiatives.  Pilot projects have been initiated using smart cards for opening bank accounts with biometric identification. Link to mobile or hand-held connectivity devices ensure that the transactions are recorded in the bank’s books on real-time basis. Some State Governments are routing social security payments as also payments under the National Rural Employment Guarantee Scheme through such smart cards. The same delivery channel can be used to provide other financial services at low cost such as savings and loan products, remittances and insurance.

The use of IT also enables banks to handle the enormous increase in the volume of transactions for millions of households for processing, credit scoring, credit record and follow up. IT alone cannot provide the answer–the last mile issue is about cost of transaction, familiarity with the clientele, empathy and accessibility–banks have to use intermediaries and multiple channels of such intermediaries along with IT solutions to be able to extend outreach to all. Financial literacy, credit counselling, credit-plus activities for livelihood support and skill-building have to be integral part of any plan for financial inclusion.

Using IT solutions to provide facilities at the doorstep holds the potential for scalability of our financial inclusion initiatives.

Yet another issue that I often reflect upon is how much we need to do to make people aware of saving for their old age.  Surveys conducted by organisations, such as NCAER and Max Life, show that  higher rate of household savings at the macro level can be explained in terms of increasing concerns for social security, high cost of education, health and meeting other social commitments. Saving for old age is not found to be a dominant factor. At the same time, an overwhelming 96 per cent of households feel that they cannot survive for more than one year on their current savings in case they lose their major source of household income; yet 54 per cent households feel that they are financially secure. Finan-cially-at-risk urban Indians app-ear to be even more optimistic than their rural counterparts. This clearly indicates that Indians do not take a long-term view of their financial security.  There is, therefore, a pressing need for financial literacy for better understanding of risks. At the global level, Olivia Mitchell, Wharton professor of insurance and risk management, and chair professor at Singapore Manag-ement University, is also of the same view: “Global ageing makes for a much riskier world, inasmuch as people tend to retire too young, save and diversify too little, and outlive their assets.” Her research shows that many workers are underestimating retirement challenges, including the risk of outliving their assets, the future cost of healthcare and the erosive power of inflation and she too, therefore, stresses the importance of financial literacy.

 While focus on financial literacy can lead to informed and responsible citizens, it cannot by itself ensure consumer protection. There has to be “responsible” selling of products; especially to vulnerable sections of society, including, among others, senior citizens and low income groups. In particular, banks selling insurance, capital market and pension products have to be sensitive to the fact that the essence of financial services is trust. A bank accepts deposits on trust and assures a return. A bank-customer relationship is fiduciary and not based on a transaction–it is a long-standing relationship and there is every need for banks to act with responsibility. As a Penn study (2008) on financial literacy put it, “Nothing is inherently wrong with consumers or the modern, complex and ever-changing financial services marketplace, but the interaction between the two creates welfare-impairing outcomes. Potential approaches to improve that interaction include enhancing the resources with which consumers approach the market, changing the financial decision environment, or bringing seller incentives in line with consumer incentives.”

Various approaches suggested include providing affordable expert advice, akin to pro-bono legal services; having true transparency requiring simplified products, where benefits and costs are clearly understood and rules of thumb can be applied; having retirement savings rules with default rules that place consumers into higher welfare enhancing rates of retirement savings; and aligning incentives of sellers of financial products to bring them into closer alignment with consumers’ best interests. According to the study, regulatory interventions must navigate the heterogeneity of consumer knowledge, skills, and behavioural traits, taking care not hinder marketplace changes that will enhance consumer welfare.

In the area of customer service, cherished principles are transparency, reasonableness, truth in selling, confidentiality and assistance when needed, apart from an effective grievance redressal machinery. However, quite often, one comes across cases of complaints where these principles are not followed and the customer feels treated unfairly – for every one person who files a complaint, there are probably 99 others who do not. Indian Bankers’ Association, Banking Codes and Standards Board of India and Banking Ombudsmen’s Offices are the three pillars for ensuring better customer service by banks.

In conclusion, I wish to recount former RBI Governor, Dr Y V Reddy’s address at the Institute of Asian Studies in Singapore, when he referred to the ‘not easily quantifiable strengths’ which the Indian economy possesses. A vast pool of science and technology graduates and the millions of people who are familiar with the English language are a source of strength. The familiarity with multiple languages prepares the people–including bankers–to adapt better to multi-cultural situations, making it easier for them to fit into international systems smoothly. I believe that one of the strengths of Indian bankers and banking is the versatility in being able to undertake the most complex financial structures to simple products like gold loans and loans to self help groups–it is universal banking of a kind that is not so universal. In his speech, the Governor also referred to the “demographic dividend” seen as an inevitable advantage, provided pre-requisites such as skill-upgradation and sound governance to realise it are put in place. He said that perhaps we should track not only the addition to the number of billionaires in India but also the depletion in the number of millions of poor and unemployed.

Summing up his talk, he observed, “For some, Indian economic progress signifies the beginnings of a major economic powerhouse in the world. But for many of us, the optimism over the medium term is only the beginning of an arduous journey to ensure basic nutrition, clean water, safer sanitation, minimal housing, personal security and individual dignity for millions in India.” That sums up eloquently – and better than I can – my dream!

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