Fighting challenges to transform banking in rural India
(Any opinions expressed here are those of the author, and not necessarily of Reuters)
India’s new program to transfer welfare payments directly to the nation’s poor has been touted as a near-revolutionary way to protect people from high-interest moneylenders, bureaucracy and bribes, and to help people improve their lives. Like many government programs designed to change the lives of millions of people, it has raised doubts about how well it would work.
I recently visited a couple of villages in Udaipur, the so-called city of lakes in Rajasthan. I wanted to see how the program is going in its early stages. My initial conclusion: it’s a big challenge.
Transferring cash directly means that the government wires money to people’s bank accounts. That avoids the traditional method of standing in endless lines at the post office, often making them easy pickings for corrupt bureaucrats looking to skim some of the cash off the top. Banks, despite what we have read, are often willing to venture into the hinterlands to set up accounts. Getting people to take them is another story.
Some officials of a government-owned bank went to survey a village in Udaipur, only to receive a rude shock — one family, petrified to see the bank officers, shut the door in their faces and wouldn’t deal with the officers until the village head man intervened.
“They feel insecure to see officers at their place, they fear we might rob them of their money,” said Praveen Kumar Agarwal, assistant general manager at State Bank of Bikaner and Jaipur, a subsidiary of State Bank of India, the country’s biggest lender. “It takes a lot to convince them, very difficult job.”
To help meet the stiff target, Agarwal cancelled annual leaves of his staff and worked late nights and on weekends in order to process the mounting pile of account opening forms. The effort, however, did not go in vain. About three months ago, only 30 percent of people who fell under the bank’s service area had an account. Now, after overcoming challenges, the bank has opened a bank account for every family in the district.
Other challenges presented themselves.
When banks set up small centres, or camps, for opening accounts, villagers thronged after hearing rumours that the government would give away money to account holders. Two pregnant women whom I met at a similar camp in another village in Udaipur said they were there only because they thought they would get money if they had a bank account.
“Such rumours will do no good,” said a junior officer at a State Bank of India branch in Udaipur. “People will open accounts hoping to get free money, which if they don’t get will make them feel cheated. They might think we banks robbed their money.”
Based on the time I spent in the villages, it seems like the challenge is surmountable. Although banks are working on low-cost technology models, the government can help. One idea: reimburse some of the transaction costs that banks incur in running the program. Right now, banks, both government-owned and private sector are not getting compensation of any kind for being roped into this. In fact, banks are staring at an additional cost burden of 250 rupees to 500 rupees per account annually and don’t expect profits for at least two years.
Then there is the question of basic education. According to rough industry estimates, a majority of bank accounts that were opened over the last few years for the poor are dormant due to inactivity and insufficient funds. Banks could help; some are encouraging people to open small recurring deposit accounts and take loans against gold, instead of turning to money lenders.
Banks also could set up training sessions to explain to villagers why holding an account is important, and how people can learn to save and invest money in various ways. They also could encourage villagers to look at possibilities for their small businesses that they might not have thought about before. For example, women in a village can make money by stitching and embroidery if they get funding for land and machinery. It’s the bank officers who can explain to people that these options exist. Otherwise, the villagers wouldn’t know.
Though the task might appear to be a daunting one, a joint effort by banks and government can make direct cash transfers and rural banking a success. “If we can do it in a generation, it would be wonderful. I don’t think we should look at early gains,” said Anil Jaggia, chief information officer at HDFC Bank. “This is a journey”.