Moving Beyond the First Step to Financial Inclusion in India (Part 2 of 2)


In a previous post we discussed the Reserve Bank of India (RBI) and the Indian government’s focus on the opening of basic savings bank accounts. The InterMedia FII India Tracker Survey showed that the increase in the number of bank accounts and bank branches isn’t translating into active use among poor, rural adults. In this post, we focus on survey results relating to two separate, targeted initiatives that also aim to drive greater bank account use among poorer and rural populations:

• Digitized government payments: In recent years, both central and state governments in India have sought to drive bank account use among the poor by directly depositing social welfare payments into beneficiaries’ bank accounts. These programs are alternatively known as direct benefit transfer (DBT) or electronic benefit transfer (EBT) programs. Through these programs, a variety of payments, ranging from pensions, scholarships and wages through the National Rural Employment Guarantee Scheme (NREGS), are beginning to be delivered electronically.

• The business correspondent (BC) model: In 2006, the RBI passed regulation allowing banks to expand their branchless banking services through external distribution partners. Generally, banks work with these distribution partners, or BCs, and, in turn, BCs work with their agents (also known as customer service points CSPs) to provide banking services at customer’s doorsteps in rural areas, where physical branches might be far away. Agents connect customers to their bank accounts using digital technologies such as micro-ATMs, kiosks, mobile phone and mobile money services.[1] Recently, mobile money providers have been allowed to act as banks’ BCs, to offer full-service mobile money bank accounts, which are considered bank accounts.

Welfare beneficiaries have adopted digitized payments, but they haven’t deepened their bank account use

Government welfare payments do seem to be a catalyst for opening a bank account – the InterMedia FII India Tracker Survey showed 35 percent of all beneficiaries receive their payments via direct deposit to their bank accounts; and 35 percent of all payment recipients with bank accounts said they opened them primarily to receive payments from a government agency. Not surprisingly, there are differences across states: A state like Maharashtra, for example, has a high proportion of direct-deposit beneficiaries, whereas payments are largely collected in person in the state of Bihar.

To further investigate the potential of digitized government payments, InterMedia conducted a qualitative study with government-payment beneficiaries across four districts in the state of Maharashtra, focusing on the central government’s Direct Benefit Transfer (DBT) program. The primary question: Are those who receive digitized payments also beginning to use their bank accounts, electronically or otherwise, for additional transactions and services? The answer: Not yet.


Payments, particularly pensions, have not been indexed to inflation, and the study shows that these payments typically amount to considerably less than beneficiaries’ monthly expenses.[2] In many cases, payments cover only one utility bill or provide extra money for unexpected expenses. As a result, most beneficiaries do one of two things. They either withdraw their entire payment when it is received and use it to pay for groceries or utility bills, in cash, or they let their payments sit in the basic savings account (often with little or no interest earned) for future expenses such as marriage and further education.

The study shows that there is very little direct communication from government officials or banks to these beneficiaries about the benefits of moving to digitized payments. In the Indian media and in public statements from the government, digitized government payments are presented as a means to not only ensure payments reach beneficiaries efficiently, but also to deepen financial inclusion through the added use of digital financial services.

However, on-the-ground communication between the local governments and beneficiaries is lacking. When they move to the digitized payment method, most beneficiaries are not informed about the reasons for this change. Often, they are simply told to switch to DBT, or their payments will stop. They switch, not because they know their payments will be received more efficiently, but because they fear their payments may be stopped if they don’t. But even after opening bank accounts, banks rarely take the opportunity to deepen their customers’ use of digital financial services through tie-in products such as mobile banking, bill-payments or even high-interest earning term deposits.

The incentive question: Banks need incentives to spend resources on communicating with beneficiary customers, who generally have low-value accounts. Research conducted by MicroSave suggests banks are inadequately compensated by the government for managing payments and agent networks, and marketing to beneficiaries. A proposal to pay banks a 3.14 percent fee (of total cash disbursed) for delivering these payments has been suggested, but has not been implemented yet. Currently, some state governments pay 2 percent while others pay 0-1 percent.[3]

Further, many rural beneficiaries say they cannot use electronic payments or mobile money for their daily purchases, and that only cash is accepted at their points of purchases, such as grocery stores and bookstores, and paying for school fees. If utility bills can be linked to their bank accounts, they are not aware of it. In addition to a lack of awareness about digital financial services, this points to the infancy of the digital financial ecosystem in these rural environments. Even if banks were incentivized appropriately, standard banking products offered in high-income, urban segments may not apply to these customers. Understanding the financial behavior of the rural segment and the current infrastructure available to them is necessary so banks can target limited resources to developing tailored, piloted products.

Despite these hurdles, the good news is most beneficiaries make the switch to digitized payments smoothly. Though initially unclear about the benefits of receiving payments via this method, many see its advantages after switching —fewer payment delays, consistent payment amounts and fewer payment errors. Although very few know about transacting and saving through formal financial institutions, they are interested to learn more. If issues relating to communication and appropriate incentivizing can be addressed, the research shows that beneficiaries are interested in in using more such services if they are designed to suit their needs and current environment.

The business correspondent (BC) model is in the early stages of use and awareness is low

According to the RBI, in March 2013, there were 221,341 villages in India that had a BC or an agent (roughly a third of Indian villages). But recent studies have shown that many agents present in a village on paper are either not physically present, or not able to conduct transactions regularly for their customers.[4]

The FII India Tracker Survey shows that not only are levels of trust in BCs and mobile money services low (see Figure 1), but a large number of “don’t know/refused” responses relate to a lack of awareness about these services. In fact, only 6 percent of Indians interviewed had heard about mobile money services – both through prompted and spontaneous recall. Low levels of trust and awareness of the BC model may also be related to a high turnover in agents, leading to a sporadic and interrupted connection with customers. Recent research by CGAP and MicroSave found that low commissions for agents, and very low profit margins for BCs, lead to a high turnover of agents.[5]

Further, BCs are not a common point of access for bank account holders. Only 0.2 percent of rural, active bank-account holders accessed their accounts[6] through an agent or business correspondent and only 0.3 percent have ever accessed mobile money services. Most in this group of rural, active bank-account holders said their preferred method of accessing their account was at a bank branch (82 percent); 18 percent chose ATMs. Further, bank branches and ATMs are preferred by these respondents because they are “safe,” and safety is preferred over “easy” or “fast” access.

Active customers believe brick-and-mortar bank branches and ATMs provide a level of transaction security that is valuable to them. So, along with increasing awareness about BCs and the banking services they can offer, banks will need to invest in building trust for these services among low-income and rural segments. Potential customers need to be assured transactions through BCs are secure; if not, uptake will be slow.

[1] Mobile money services include 1) non-bank semi-closed mobile money accounts/wallets and 2) full-service, mobile-money bank accounts that allow for cash withdrawals. Semi-closed mobile wallets are not considered to be bank accounts, while full service mobile money bank accounts are considered bank accounts.
[2] Based on analysis of beneficiaries’ descriptions of their monthly expenses and their benefit payment amounts.
[4] In the states of Uttar Pradesh and Bihar, only 7 percent of the villages reported having transaction-ready agents; only 4 percent have agents available to transact every day.
[5] MicroSave India Focus Note 105, “The Curious Case of Missing Agents in Rural India,” and “IFC Mobile Money Scoping Study 2013.”
[6] Active bank account holder—An individual who has a registered bank account and has used it in the last 90 days