Putting No Frill Accounts to Work

When Reserve Bank of India asked banks to make available ‘no-frill’ accounts to vast sections of population in the last quarter of 2005 as part of its annual policy statement, the raison d’être was that around 85 per cent of people in the country did not have access to financial services in a cost-effective, transparent and fair manner and 60 per cent households did not have a bank account and only 21 per cent had access to credit from a formal source. Moreover, only 9,000 out of 6,34,321 villages had more than one bank branch and over 70 per cent of marginal farmers had no deposits.

The advisory was considered a watershed development in the banking history of India as the minimum balance maintenance account with ‘simplified KYC norms’ was expected to pave the way for financial inclusion of those who had no access to banking. It was supposed to make credit available to marginal farmers, landless labourers, oral lessees, self employed, urorganised sector enterprises, urban slum dwellers, migrants, ethnic minorities, socially excluded groups, senior citizens, women and people from north east.

But even over half a decade later, the situation has not changed much with only 4.2 million (0.18 per cent) out of 74.3 million no frill accounts having over draft facility. Even in 4.2 million no frill accounts with overdraft, the amount available for credit totaled to just Rs 1.98 billion. Since the total deposit in the no frill accounts in 2010-11 aggregated to Rs 65.65 billion and the MGNREGS wages added to Rs 58.30 billion in the same period, it is apparent that the accounts are mainly used to receive the employment wages.

Since the total deposit in the no frill accounts in 2010-11 aggregated to Rs 65.65 billion and the MNREGS wages added to Rs 58.30 billion in the same period, it is apparent that the accounts are mainly used to receive the employment wages.

Banking correspondents (BCs), Self Help Groups (SHGs), State Cooperative Banks, agricultural credit, Kisan Credit Cards (KCCs) and General Credit Cards (GCCs), which have a direct or indirect bearing on no-frill accounts and are linked to financial inclusion have exhibited an adverse growth. The number of BCs, whose availability and mobility impact directly on viability of no frill accounts, for instance, is increasingly becoming an urban phenomenon. Between March 2010 and 2011, the number of urban CSPs (Consumer Service Points) amplified by over 700 per cent vis-àvis the rural CSPs which grew by only about 67 per cent. The credit growth to agriculture decelerated to 10.6 per cent during 2010-11 from 22.9 per cent in the previous year. The number of KCCs and GCCs issued in last financial year is negligible. Identical is the story of Cooperatives, SHGs and the agricultural credit.

It is obvious that the no frill accounts have failed to achieve the objective for which they were opened (make credit available to unbanked). “What is the purpose of no-frill account? A poor person, a farmer will open as many no fill accounts as the number of operators who will approach him. Overdraft (OD) facility is very-very essential and that is why our board has decided to make it necessary,” says R K Dubey, Executive Director, Central Bank of India.

During his outreach visits to villages allotted to his bank in West Bengal, Bihar and Madhya Pradesh, Dubey found that the banks were opening no frill accounts even of people who already had bank accounts and were getting MGNREGS payments through them. According to Dubey, Central Bank has now demanded integration of these accounts. “While the MGNREGS payment is going through other bank accounts, we are opening no frill accounts. The two accounts should be integrated. We have raised this issue in various district level meetings. Overlapping is a big issue. It has to be addressed,” he claims.

The other issue, which has pegged back no-frill accounts is the fact that it is a supply side initiative and there has been no attempt either on the part of the banking industry, government or non-government agencies to build on it to create a demand for it. There has been no effort to educate the account holder about saving, using the account to make utility payment or doing small purchases. “He (no-frill account holder) is a new customer. He is a poor person and has never done banking. We have opened an account for him. Now tell him what he can do with this. Tell him this is how he will benefit and he will start doing more,” suggests Manish Khera, Chief Executive Officer, Financial Inclusion Network & Operations (FINO). M Narendra, Chairman & Managing Director, Indian Overseas Bank (IOB), echoes Khera when he asks government, nongovernment, semi-government agencies to join hands with banks to spread financial literacy. “Financial inclusion is something banks alone are doing. There should be a total linkage.”

What further limits the no-frill accounts’ role in financial inclusion is the availability of business correspondent to the account holder. The problem is most of the BCs the banks have appointed are rooted at a particular place. They are not mobile. They do not reach the account holder. Rather the latter has to traverse a distance to reach him. “The general belief in the banks is that they will create banking correspondents who are fixed like a branch in some grocery shop in a particular village. The problem is that the person who comes to work for MGNREGS is not necessarily living in the village where the BC has his grocery store. The person will need to walk a few kilometers to reach the BC,” points out Arvind Mayaram, Additional Secretary, Ministry of Rural Development.

The need of the hour is that the BC should be mobile. He should be available to the account holder preferably 24×7. “We will require business correspondents who are available closer to the place where people live and therefore, they need to be mobile,” Mayaram says. Narendra also bats for making the BC mobile: “He should be completely mobile and be at the door step of the person who needs him. It is not merely about deposit. It is also about the withdrawal and credit facilities as well.”

There is also a need to make BC operation more viable so that the BC contributes to promotion of no frill accounts. He should be used for other services – insurance, SHGs formation etc as well. He needs to be incentivised for the services he performs. Since Ministry of Rural Development has agreed to pay Rs 80 per account per no frill account and every MGNREGS worker who puts in 15 days of work is entitled to Jeevan Beema Yojana (Life Insurance), it is hoped that it would translate into BC’s profits too.

“BC should have some kind of incentive. He also expects certain payment and this operation is little difficult on a standalone basis. The challenge is to make inactive accounts active and also give other things to the unbanked.” Jayanta K Sinha, Chief General Manager (Rural Business), State Bank of India

“BC should have some kind of incentive. He also expects certain payment and this operation is little difficult on a standalone basis. (After all) the challenge is to make inactive accounts active and also give other things to the unbanked,” says Jayanta K Sinha, Chief General Manager (Rural Business), State Bank of India. Since roughly 120 million households in the country are linked to SHGs and their deposits and outstanding loans exceed Rs 100 billion and Rs 300 billion respectively, it may be a good idea to transfer this business to the SHGs. Not only will it help the SHG members to cut down their frequent travels to banks in the city but also turn the business correspondent model viable.

“Just by transferring the business of SHGs to the business correspondents you will transfer income earning business of ` 300 billion to them. And the entire business correspondent model becomes viable.” Prakash Bakshi, Chairman, NABARD

“The no-frill account holder is a poor person and has never done banking. We need to tell him what he can do with this and how he will benefit.” Manish Khera, Chief Executive Officer, Financial Inclusion Network & Operations (FINO)

“Just by transferring the business of SHGs to the business correspondents you will transfer income earning business of Rs 300 billion to them. And the entire business correspondent model becomes viable,” suggests Prakash Bakshi, Chairman, NABARD. Bakshi also advises banks to be flexible in their working hours to attract the small businesses. He cites the example of Ela Bhatt’s SEWA bank in Gujarat which opens late at night to facilitate business transactions of people like vegetable venders.

Bakshi counsels the banks to be innovative and adjust their working hours according to the farming community’s schedule. He recollects how a Regional Rural Bank manager in Tamil Nadu had changed his branch’s timings (6 am to 9 am and 5 pm to 9 pm) to suit the farmers’ routine.

But it is no secret that since the banking correspondents are private persons and have no institutional branding behind them, they do face credibility questions and can’t altogether replace brick and mortar. People always have trust issues with them, which are not there when it comes to banking with a branch. “BCs still have to establish their credibility in the eyes of the farmers. Farmer does not feel comfortable in parting with his money to a BC. We need to have more branches in the rural areas,” discloses Dubey.

We will require business correspondents who are available closer to the place where people live and therefore, they need to be mobile. They have to be like mobile ATMs working with handheld devices.

The banks need to adopt villages and get involved in other things – providing library, scholarships to rural students, medical assistance to senior citizens etc – to be part of the village community and look more attractive to it. Indian Overseas Bank (IOB) adopted 75 villages when it celebrated its platinum jubilee and recently adopted Nilgiri tribals for integrated development.

More than this, the banks need to be patient when it comes to working out profitability of an account. There is a possibility that developmental activities in rural sector may take care of the non-viability factors. “No-frill account per se is a very profitable proposition. We are not charging anything because we know that it has a lot of potentiality to grow into an economic activity,” Narendra reveals. Central Bank found that the 38 satellite offices it opened some years ago have now become fit to support branch business.

Since the banking correspondents are private persons and have no institutional branding behind them, they do face credibility questions and can’t altogether replace brick and mortar.

Bakshi stresses on promotion of financial literacy on a long-term basis. There is every likelihood that the proposed cash transfers of subsidies to BPL families will give a boost to no-frill accounts as the unconditional transfers will empower the common man to exercise choices. “This has worked very well in countries like Brazil and I think in India it can work very well due to the biometric platform which is being created,” Mayaram claims.

The other imperative is to build linkages between the urban and rural financial inclusion and between the no-frill accounts and the regular bank accounts. Because there are no linkages between the no-frill and the regular, the migrant labourers currently have to go to Post Office, which is very expensive or wait for their friends or relatives to send money to their families in rural area.