All Indians banked by 2012 - Completely possible or hopeless hype?

Blog Post
Aug. 2, 2010

At the Financial Inclusion Summit in Delhi, India’s Minister of Finance, Pranab Mukherjee stated that the Indian banking system must implement “urgent measures to reach the unbanked segment of society and unlock their savings and investment potentials.” Indeed, it seems politicians, financial institutions, and government officials alike are “banking on inclusion” to address social and economic challenges facing millions of India’s low-income households. And with the launch of the UID (Unique Identification) project, the government of India claims it will bring over 1 billion economically excluded and marginalized citizens into the financial mainstream by 2012. Can they do it? Well, maybe.

To be sure, reaching the unbanked in India will be no easy feat, with approximately 72 percent of India’s population, or 860 million people (2001 census) living across India’s villages, only 50,000 rural people have access to banking. The question then remains – can the Reserve Bank of India (RBI) realistically reach its 2012 goal, prompting public sector banks to extend banking facilities to all small towns and villages, even those that have a population size of about 2,000 people? Adding to that, not all banks serve low-income and minority groups in the friendliest fashion, which could make the road towards banking the unbanked and most vulnerable groups by the target date even more difficult than anticipated.

Mr. Mukherjee is looking to the UID project, particularly its tech guru chairman, former CEO of Infosys, Nandan Nilekhani, to figure out how to facilitate access to financial services for India’s unbanked. Beginning in August the government of India is launching a four-year nationwide campaign to assign identification numbers to the country’s 1.2 billion people. For the financially excluded, a UID number will allow them to meet banks’ “Know Your Customer Norm,” which has prevented millions from accessing formal financial services for lack of identifying documentation. Additionally, the UID project has an explicit financial inclusion component: the government plans to set up 50 million savings accounts for India’s rural population by next year and 100 million accounts over the next five years, with nominal amounts deposited in each. Undoubtedly, this has the potential to incentivize the rural poor to save, while encouraging major private sector banks like ICICI to expand their deposit base.

With an electronic database of identification numbers being put in place, part of the financial inclusion puzzle is being pieced together. Yet there are still significant infrastructure and technological shortfalls that banks face in India’s rural landscape. Here, the discussion needs to focus on 1) developing wireless and broadband connectivity to support rural banking, as Dr. Sinha with the Boston Consulting Group maintains, and 2) exploring the scope for mobile banking. India’s telecommunications and banking sectors need follow Kenya’s example of leveraging mobile technology to streamline financial services to the unbanked through M-PESA. In India, where 550 million people currently have mobile phones, there is great potential for customers in isolated rural areas Pop-outto carry out bank transactions without traveling miles and expending valuable savings in transportation costs to visit a bank.

With all the positive rhetoric floating around on the topic, one has to ask, can India realistically achieve its goals of financial inclusion by 2012, or is this really just a lot of hype? In the past, the sheer weight of the Indian bureaucracy was enough to hold back the timely and efficient attainment of the RBI’s goal. Over the last four years, a number of committees, advisory boards and institutions, ranging from the RBI to NABARD (National Bank for Agriculture and Rural Development), have tried to spearhead financial inclusion activities with little avail. Additionally, private banks have been discouraged by the amount of risk and operating costs of establishing bank branches throughout India’s rural areas. Between 2007 and 2009, 25 million no-frill savings accounts were opened, but today 89 percent of them are dormant.

This time though, things could be different. Policy makers and government officials like Mr. Mukherjee, are beginning to realize that India’s sustainable growth trajectory depends on the banking sector’s ability to include the bottom economic strata of Indian society. And the appointment of Nandan Nilekhani to head up the UID initiative demonstrates a bold commitment to and an honest understanding of what it will take to reach their 2012 financial inclusion goal: the need for ICT-based innovations to unlock the economic potential of India’s unbanked masses.