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What is the issue?

In the mid-2000s, India rolled out a set of ambitious policies to ensure all households are served by financial institutions. In the past two years alone, more than 210 million bank accounts have been opened, linking households to the formal financial sector even in India’s most remote rural areas. An extensive network of more than 100,000 business correspondents (BCs) has helped drive this unprecedented increase in access to banks. BCs are assigned to villages and are generally residents of the villages they serve. Through mobile devices, they allow families to undertake any financial transaction otherwise available at a bank, ranging from simple deposits and withdrawals to insurance purchases and pension services.

However, many accounts are inactive or duplicates with zero balances. It is widely believed that many bank accounts were opened in response to political pressure on banks to achieve program targets. Others were opened to enable direct payment of wages through the government’s work-fare program, the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) or to enable transfers from other welfare programs such as the central government’s maternity benefit scheme.

SCID India Program Director Anjini Kochar evaluated whether India's branchless banking program can help households save.  (Kochar is pictured above conducting interviews for her research.)

Background

In 2009, the Reserve Bank of India required major banks to ensure financial services for all “unbanked” areas either through a business correspondent or through a bank branch, beginning with villages with a population of 2,000 or more.

Kochar studied household savings as the program was being phased in. She compared households in areas covered by a BC to those in uncovered areas. Data comes from household surveys, conducted prior to and a few years after the introduction of the policy, sampling approximately 7,000 households in the southwestern state of Karnataka.

Historically, the biggest problem in making banking available to the poor was the high costs of serving a community that lived far from large villages and small towns where bank branches are located. And many of the poor are day laborers who have smaller but more frequent deposits/withdrawals than those with steady, better paying jobs.

Branchless banking holds huge potential benefits for the rural poor. The use of mobile technology means people don’t have to spend money travelling to a bank or take the time away from work, which could require the loss of a day’s wages.  BCs also allows banks to extend their reach more quickly and cheaply than building brick-and-mortar branches.

BCs also provide an important and influential human touch, encouraging families to save and helping them with transactions.

The potential of branchless banking is even larger because of the involvement of India’s primary welfare program (MGNREGA), which guarantees 100 days of employment for rural households. The Indian government requires wages earned through MGNREGA to be deposited directly in households’ bank account, giving poor households a strong motivation to open savings accounts.

Findings

Kochar finds that BCs increased the total savings of households by approximately Rs. 15,500 (US$231). BCs had a larger effect on those who do not own land, increasing the savings of the landless more than the savings of landowning households.

The larger savings for the landless is likely due to the MGNREGA connection, as landowning households tend to work on family farms rather than earn income through MGNREGA.

With easy and timely access to funds in their bank accounts thanks to doorstep visits by BCs, Kochar’s findings suggest that BC coverage resulted in more cash on hand for workers. Kochar also finds that more people sought work through MGNREGA, particularly women who were otherwise not employed.

But even though the MGNREGA portion of wage earnings is directly credited to banks accounts, Kochar finds that savings are not primarily held in bank accounts. Rather households in villages covered by BCs tend to withdraw the funds and hold larger grain inventories as assets instead.

In many cases, households withdraw the entire deposit and use it to pay down high interest loans from moneylenders.

Kochar also finds that BCs have a larger impact on savings in larger and more concentrated villages. As BCs earn a commission on each transaction, lower transportation and time costs in dense, populous villages make those areas more profitable for BCs. But this bias toward larger villages can exacerbate the geographical inequalities that “last-mile” financial inclusion policies seek to remedy.

Policy implications

This research shows that BCs are encouraging more people to use bank accounts and set aside savings. But given that households often withdraw the entire account balance to pay down debt, significant increases in savings are only likely if the government also addresses why so many people rely on high-interest loans from the informal sector. Current surveys show that health expenses account for half of moneylender loans.

The fact that BCs tend to favor large and densely populated villages suggests that even when BCs have assigned service areas, some households are likely to be excluded. But disbursing subsidies, pension payments, and other welfare entitlements directly to bank accounts could help counteract adverse effects on inequality. As BCs earn a commission on each transaction, directly depositing government benefits would make serving poorer and less densely populated areas a more sustainable endeavor.

Photo courtesy, Anjini Kochar