> Posted by Alexandra Rizzi, Deputy Director, the Smart Campaign

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India’s new Prime Minister Narendra Modi created much fanfare and excitement upon the launch of a financial inclusion plan for the millions of unbanked Indians (currently estimated at 40 percent of the entire population). The Jan-Dhan Yojana (Scheme for People’s Wealth) will provide a free, zero-balance bank account and a debit card allowing for electronic payments, coupled with accident insurance and overdraft protection. Indian media went wild for the aggressive first day of the program wherein 15 million bank accounts were opened.

While all should cheer the intention of Prime Minister Modi to build a more inclusive financial system, there are some cautionary tales, both old and new, that the scheme should learn from. The tool of a basic savings account has been touted for close to a decade in India where, in 2005, the RBI promoted a ‘no-frills’ account scheme. While millions of new bank accounts where opened under this scheme, researchers found that many of the accounts were dormant, underutilized, and hence ineffective at ushering the formally excluded into the formal system. Even in districts dubbed 100 percent included, the reality on the ground was far less exemplary in terms of enrollment and usage of accounts.

Prime Minister Modi might also take heed of a much more recent cautionary tale added by researchers at IFMR, a business school in Chennai. Co-authors Amy Mowl and Camille Boudot wanted to understand whether there were hidden barriers to individuals interested in savings and investing using a basic savings account. That savings account, formerly called no-frills, and now called a BSBDA (Basic Savings Bank Deposit Account), are mandated by the Reserve Bank of India to be offered by all banks. Mowl and Boudot hired and trained a group of mystery shoppers to pose as low-income customers interested in opening a BSBDA at 42 branches of 27 large banks in metropolitan Chennai. The experiences of these mystery auditors was tracked, recorded, and analyzed by the researchers. The results were stark.

None of the 42 bank branches visited offered a BSBDA as a first suggestion to the mystery shoppers. And even after the auditors pressed further, using key verbal prompts such as ‘basic’, ‘an account with no charges’, etc., only 14 percent of banks revealed the existence of BSBDA. Bank employees instead often offered products that had high initial deposits, other inappropriate features for the client’s stated needs, misrepresented RBI regulation and added unnecessary KYC requirements. Some bank staff even actively discouraged clients from enrolling, and there were no written materials or policies in the local language, Tamil. Clearly the amount of time and energy required to access BSBDAs is quite high for potential clients and likely acts as a strong barrier to access. One early exchange with an auditor unfolded as follows:

Client: My colleagues told me about the basic savings account and that I could open one without minimum balance.

Manager: There’s nothing like that here sir, in [NAME OF BANK]. Maybe banks like [NAME OF LARGE PRIVATE SECTOR BANK] offer. We don’t have like that.

Client: Can you open for me an account with a zero balance or a small deposit?

Manager: We don’t have a zero balance account at all.

Client: Really?

Manager: You can check with [NAME OF SBI AND ASSOC. BANK]. It may be available there.

Client : Have you offered it here before?

Manager: We’ve never had it.

Note: At the entrance of the bank, hanging over the threshold, there was a prominently displayed banner advertising the host of savings products available, including the basic savings deposit account (BSBDA).1

This research is an important line of inquiry into the practicalities of how a national financial inclusion policy trickles down (or doesn’t) to ordinary Indian citizens.  Banks might only give lip-service to BSBDAs because of financial unviability. In addition, it is difficult to generalize whether staff misinformation to potential clients is due to a systematic effort to deceive, the behavior of front-line staff or the results of poor staff education. Either way, the results have startling implications for the goal of full financial inclusion in India and raise important challenges for Prime Minister’s new scheme.

Photo Credit: LiuTao via Compfight cc

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1. Amy Jensen Mowl and Camille Boudot, “Barriers to Banking: Results from an Audit Study in South India,” NSE Working Paper Series No. WP-2014-1 (2014).