Since 2005, banks in India have been directed to extend their services to ensure hundred per cent financial inclusion, at least in some selected districts to begin with. The Government of India constituted a committee on financial inclusion under the chairmanship of Dr. C Rangarajan and its final report was submitted in January 2008. For achieving financial exclusion in a holistic manner, it was considered necessary to ensure that a range of financial services should be made available to every individual. These services include: 'no-frills' banking account for making and receiving payments; a savings product suited to the pattern of cash flows of a poor household; money transfer facilities; small loans and overdrafts for productive, personal and other purposes and micro-insurance (life and non-life).

Banks embarked upon a massive programme for reaching out to the hitherto un-reached persons by opening their savings bank accounts. To hasten the process of enrolling new customers, banks relaxed the rules relating to the minimum amount of money to be initially deposited and also the stipulation pertaining to the minimum balance to be maintained in the account. Zero balance savings bank accounts were introduced by banks, some of which were mercilessly charging earlier a fine for defaults in maintaining minimum balance.

'No Frills' accounts

Though the rates of interest on deposits were de-regulated by the Reserve Bank of India, the interest rate on savings bank deposits was fixed by it at 3.5 per cent. Banks have no choice in altering this rate of interest. For making the savings bank accounts somewhat attractive, some of the banks started offering many add-on facilities like issue of credit cards to the account holder and additional credit cards to spouses, issuing ATM cards and a few other facilities. In many cases, such frills were offered on certain conditions like having larger deposit amounts.

As a part of the drive for reaching the target of 100 per cent financial inclusion to be achieved early, banks have started offering 'no frills' savings bank accounts to all and sundry. Very soon many banks rushed to the press to announce their achievement in covering 100 per cent of the households in some of their lead districts, chosen for this purpose. Their achievements indeed are quite visible. The number of 'no frills' accounts opened by the banking sector has increased from 4.89 lakh in 2005-06 to 157.89 lakh by the end of March 2008.

Public sector banks have the largest share, accounting for nearly 80 per cent of the total number of such accounts opened so far. Private sector banks also are expanding their share. Foreign banks, which were known for their reluctance to entertain small savings bank accounts by fixing the entry-level deposit amount very high, were also roped in to offer 'no frills' accounts. Their share, however, is negligible.

The banking sector in India has 37.35 crore savings bank accounts as on March 2007, according to the latest data available. The total number of deposit accounts is 51.92 crore. While the urban and metropolitan branches have 15.97 crore savings bank accounts, the rural and semi-urban branches handle 21.38 crore accounts. However, in terms of the volume of savings bank deposits mobilised, the share of the latter group of branches is nearly 60 per cent.

Cost of opening an account

"The operating cost of financial inclusion is perceived to be high as compared with returns from the services extended to low income groups. Banks, therefore, are generally averse to voluntarily extending financial services to such segments," the Report on Currency and Finance concedes in its lengthy chapter on financial inclusion. It goes further to provide some operational data to indicate that the extension of 'no frills' accounts may not necessarily have an adverse impact on the financial results of banks.

"While operating costs of 'no frills' accounts could appear to be high, an analysis of operations in totality for some banks suggests that they can open a large number of 'no frills' accounts and still maintain their performance level," the report explains. The successful example of Syndicate Bank is quoted for this purpose.

Syndicate Bank has opened the largest number of 'no frills' accounts - 12.5 lakh - during 2006-07, the largest number opened by any single bank. Its share in the total 'no frills' accounts is as high as 19 per cent. Serving such a large number of accounts, it is observed, has not made any negative impact on the top line of the Bank, as judged by one of the financial efficiency ratios, namely the return on assets. It is observed that the return on assets for the bank has remained unaffected at 0.91 per cent during 2005-06 and 2006-07. The average for the scheduled commercial banks was 0.90 per cent during 2006-07. Drawing the inference that opening 'no frills' accounts may not be a loss making proposition, the report strikes an optimistic note "it may also be noted that the average deposit size in the 'no frills' accounts has increased in recent years. This trend of increase in average deposit size is expected to gain further momentum in view of high economic growth."

Opening deposit accounts is only the beginning of financial inclusion. Banks have to assess the financial needs of the new account-holders in greater detail. Since households are targeted for opening deposit accounts, the financial needs of the households have to be estimated individually. A beginning in this direction is reported to be done by many banks.

The other side of the coin

It is creditable that banks are bringing to the banking fold a large number of new customers through the opening of savings bank accounts. The number of new savings bank accounts opened during the last two years is 5.36 crore, over the March 2005 level of 31.99 crore. Mere opening of new deposit accounts is not the final goal of financial inclusion. Much more needs to be done and the banks are becoming increasingly aware of this. One of the undesirable features of deposit mobilisation is the emergence of dormant accounts and unclaimed deposits. This feature has been in existence, perhaps, ever since banks have started massive deposit mobilisation campaigns, imposing very high branch-level targets in the past.

According to the available data as on December 2007 there are 77.28 lakh unclaimed savings bank deposit accounts involving an amount of Rs.654.67 crore,. The magnitude of the unclaimed deposits, when compared with the total savings bank deposits of the banking sector at Rs.679,060 crore, appears to be insignificant. But the losers are more likely to be the small depositors, who have opened these accounts, often persuaded by the branch staff desperately trying to reach their deposit targets.

Though there is no one-to-one correspondence between the current spurt in the number of 'no frills' accounts and the unclaimed savings bank deposits, it has ominous implications for the future growth of such accounts. The quantum of unclaimed savings bank deposits was Rs.222.79 crore in December 1996. More details of the ownership of unclaimed deposits and their originations, however, are not available.

In the total savings bank deposits, 13 per cent are farmers' deposits, 14 per cent are of wage-earners and 10 per cent are those of professionals, self-employed persons and traders. It is not possible to ascertain as to which occupational group has the largest volume of unclaimed deposits. Nor it is possible to trace the nature of their distribution between the rural and urban branches, based on the published data available. As the average amount of unclaimed deposit per account works out to be Rs.850, it is quite likely that most of the depositors would be of small means.

Achieving 100 per cent financial inclusion is certainly a laudable objective. Opening of 'no frills' accounts is only one of the means of reaching out to the hitherto un-reached sections of the population. It should not be merely an orchestrated drill. It requires more concerted planning at the village-level. It has to be made an integrated part of the District Credit Plan, going beyond the account opening exercise.

Reaching out at affordable cost

"The key to enhanced financial inclusion" the Report on Currency and Finance has concluded: "is the reduction in transaction costs. The operating cost of providing small accounts at times is a hindrance to the expansion of banking services to low income groups. The experience of some institutions in the country as well as in other countries, however, suggests that an appropriate use of technology could significantly reduce the operating cost of financial inclusion and make it a viable and sustainable activity."

During the last few years, some efforts have been made in improving the credit delivery system aimed at reaching out to the needy poor. The promotion of self help groups (SHG) is one of them, which have become a force to recon with. The cumulative number of SHGs linked to banks has gone up to 25.8 lakh with the total bank credit extended to them crossing over Rs.14,479 crore by February 2007. Encouraged by the performance of SHGs in extending credit facilities, an experiment is now being made to link them with post offices. The pilot project on SHG-Post Office Linkage Programme has been launched in five selected districts of Tamil Nadu - Pudukottai, Sivaganga, Tiruvannamalai, Thanjavur and Tiruvarur - to explore the feasibility of utilising the vast network of post offices in rural areas for the disbursement of credit to rural poor on agency basis. Subsequently the project was extended to Meghalaya. It is reported that cumulatively 2831 SHGs have opened zero interest savings accounts of which 371 SHGs have been credit linked by the participating post offices and loan amounting to Rs.88.23 lakh granted as on 31 March 2008.

Emergence of micro finance institutions is another important development in the rural credit scenario. A good number of them - whose authentic enumeration does not appear to have been made so far - are operating in many states. Charging very high rates of interest to their borrowers, they compete with the much maligned money lenders and profess to displace them. The interest rates are not regulated nor there appears to be any attempt to regulate their operations.

According to a Report on Costs and Margin of Microfinance Institutions prepared by the College of Agricultural Banking, Pune, the range of cost to the borrower from micro finance institutions varies widely among the states.

The cost of borrowing from micro finance institutions (mFI) ranges from 12 per cent to 40 per cent in Karnataka and in Andhra Pradesh it is 17 per cent to 32.5 per cent. Surprisingly, in Karnataka, where rural banking is fairly wide spread, the cost of borrowing goes up to 40 per cent. In Andhra Pradesh, another state where all districts are covered by gramin banks, the cost ranges from 17 per cent to 32.5 per cent. These two states have a good number of mFIs reported to be having large volume of advances made. Their achievements in recovering the advances were in the news recently. Andhra Pradesh in fact has the largest number of self help groups credit linked to banks. Borrowers in Rajastan are in a better position as it costs them only 16 per cent to borrow from mFIs. In Uttar Pradesh, the state having many backward districts, the cost of borrowing varies from the low level of 13 per cent to 26 per cent.

As a sequel to the global financial melt down, pressures on banks in India are building up for reducing the rate of interest in general. Housing loans from commercial banks have become very customer friendly at 8.5 to 9 per cent. Vehicle loans also are made cheaper to bail out the sagging demand for automobiles. Further reductions in the interest rates are awaited. But in the unregulated mFI segment, no attempt seems to be made to reduce the rate of interest. The voice of the micro-borrowers is too feeble to be heard in the corridors of power.