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Bank accounts for poor is gateway to financial inclusion

Jan 04, 2008

Can an annual 9% plus growth in India be translated into reality for the 750 million living in extreme poverty? According to an editorial in the Economics Times, the solution may lie in access to bank accounts, where NREGA wages and payments for old age support can be the first step to financial inclusion.

How can the national goal of 9% per annum plus growth be translated into reality for the 250 million living below the poverty line and another 500 million who are barely above it? People have to work and make a living, either through self-employment or wage- employment.

Wage-employment opportunities have gone up with the National Rural Employment Guarantee Act (NREGA) programme, and an upsurge of urban construction and services. Self-employment requires access to credit.

Both wage-employed and self-employed persons need access to credit and many financial services, which are best enabled through a bank account.

Payment of wages workers employed NREGA works can be done with speed, reliability, low transaction costs and leakages, if each worker has a bank account in which wages are transferred periodically. Indeed, AP and Bihar have plans to make these payments through banks, and issuing biometric smart cards to each worker.

A ‘no-frills’ account, in which NREGA wages and payments like maternity and old age support are credited periodically, becomes the gateway for financial inclusion. A poor landless woman like Ashadevi in Serukahi village of Muzzafarpur district, Bihar, can draw cash, not only from the Axis Bank branch 30 kms away, but through much more accessible, mobile staff of BASIX, a microfinance institution (MFI), appointed by Axis Bank as a “business correspondent” under RBI guidelines.

Slowly, Ashadevi builds confidence in the system and starts to leave some amount behind in the account, and builds a savings deposit, which grows to Rs 4,400. When her husband is ill, she can draw Rs 1,000 and she does not need to get a loan from the moneylender at 60% pa interest.

As BASIX sees Ashadevi’s transaction record over a period in its computerised MIS, it offers her a micro-credit loan of Rs 6,000, with which Ashadevi buys a cow yielding two-and-a-half-litres of milk a day. Under IRDA’s micro-insurance guidelines, BASIX has tied up with insurance companies to cover the lives of its lakhs of borrowers like Ashadevi, and to provide health cover for critical illnesses requiring hospitalisation and to insure livestock like Ashadevi’s cow.

Ashadevi’s son, working as a factory hand in Shahadra, Delhi, has also been helped by BASIX to open a bank account there and is now able to remit Rs 500 to her every month. It is done using a technology package developed by a company called A Little World, so that using mobile phones and smart cards she can get money within half an hour of her husband sending it from Delhi. In a year’s time Ashadevi plans to buy a buffalo yielding 5 litres per day.

Her starting individual income of about Rs 9,000 per year goes up to Rs 11,200 due to NREGA, and further to about Rs 13,000 due to the cow. This will further rise to about Rs 16,600 next year when she gets the buffalo. That is a 22% compounded annual growth rate in two years.

It is only when incomes of people like Ashadevi grow at above 20% pa that we can get equitable 9% pa growth. And financial inclusion is a necessary condition for equitable growth, though not sufficient by itself. The gateway to financial inclusion for the poor is a bank account through the business correspondent model.

The use of mobile phones and IT is also necessary to enable remote transactions. Thus, to increase incomes and reduce vulnerability of its poor, not only does India have to commit capital but also offer a high level of regulatory, technological, and organisational support.

There is an interesting side-benefit of financial inclusion — it promotes stability of the financial system. For example, when the Asian currency crisis hit Indonesia in 1997, most of its banks suffered a huge erosion of deposits, and were hit by a high number of loans being defaulted. But one bank not only survived, it thrived in this crisis — the Unit Desa (rural division) of Bank Rakyat Indonesia saw an upsurge in deposits as well a slight increase in its 98% plus repayment rate.

This is because the people in the rural economy were largely dealing among themselves, so the effect of currency depreciation and inflation did not affect them much.

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