This is the first blog post in a series focusing on India, where InterMedia conducted a nationally representative survey of 45,024 adults, ages 15 and older, from Oct. 15, 2013, to Jan. 8, 2014, to understand their financial behavior, and their access and use of digital financial services. We also conducted a qualitative study in the state of Maharashtra on the potential for digitized government payments to expand financial inclusion.

Moving Beyond the First Step to Financial Inclusion (Part 1 of 2)

While the number of new bank accounts opened may measure the “first step” to financial inclusion in India, many bank accounts have not been used in more than three months.

India’s financial inclusion strategy has focused on expanding access to banking services for poorer and rural populations. In recent years, the Reserve Bank of India (RBI)[1] and the Indian government have advanced three initiatives aimed at expanding India’s use of banking services:

Basic savings bank accounts: Open basic savings bank accounts for as many unbanked individuals as possible and increase the number of bank branches in rural areas.

The business correspondent (BC) model: Expand branchless banking, through an external agent network, also known as customer service points (CSPs) using digital technologies such as micro-ATMs and kiosks, and, more recently, through mobile-phone and mobile-money services.[2]

Digitized government payments: Drive bank account use among the poor by directly depositing social welfare payments into beneficiaries’ bank accounts. Initiated by both central and state governments and alternatively known as direct benefit transfer (DBT) or electronic benefit transfer (EBT) programs.

InterMedia’s recently released report, India: Financial Services Use and Emerging Digital Pathways, addresses the extent to which these initiatives have helped expand access and use of banking services. The report draws from the data produced by the Financial Inclusion Insights (FII) India Tracker Survey, and a qualitative study focusing on the potential for digitized government benefits payments to expand financial inclusion.

The focus of this blog is on basic savings bank accounts, and a key finding from the research that suggests being “banked” doesn’t necessarily mean being financially included.

The increase in the number of bank accounts and bank branches isn’t translating into active use

In 2005, the RBI directed all banks to open “basic savings bank accounts” (previously known as no-frills accounts) for unbanked individuals. According to the 2011 India census, the proportion of banked households rose by 23 percentage points over the last decade (2001-11), and the increase was higher in the rural sector.[3]

At first glance, the push to open new bank accounts has garnered results. InterMedia’s Tracker Survey shows almost half of all Indian adults (15+) have their own bank account, including more than 40 percent of poor, rural adults.

But zoom into how frequently these bank accounts are used, and the story gets complicated. Nearly half of India’s bank accounts are essentially inactive. Only 54 percent of those with bank accounts have used them actively (defined by InterMedia as using an account in the past 90 days). Among poor, rural bank-account holders, only 46 percent have used their accounts actively.

Even the group of active bank-account holders uses their accounts mainly for basic withdrawals and deposits. Very few use their bank accounts for receiving wages through direct deposit (9 percent), sending or receiving money from family (2 to 3 percent) or paying a utility bill (5 percent).

The government’s financial inclusion policy has also focused on increasing access to banking infrastructure (i.e., physical branches that will drive higher bank use), especially in rural areas. The Department of Financial Services in the Ministry of Finance reports that 63 percent of new bank branches in the last five years were set up in rural and semi-urban areas to ensure access to banking services.[4]

Corroborating these gains, most rural bank-account holders in the Tracker Survey who use bank branches and ATMs said they are less than 5 kilometers away from where they live.

But active use is dependent on more than physical proximity to bank branches and ATMs, especially for women in rural areas. Both rural women and men are far less likely to use their bank accounts actively than their urban counterparts (rural women – 42 percent, rural men – 52 percent; urban women – 53 percent and urban men 70 percent).

The number of bank accounts and proximity to bank branches may measure the first steps to financial inclusion, but these measures are less meaningful if they are not followed by measuring active account use.

The reasons for wide demographic differences need to be defined

State analysis of active bank-account use reveals there are significant gaps in active use that often mirror socio-economic differences in India.

India’s megacities – Mumbai, Ahmedabad, Bangalore, Kolkata and Hyderabad – show high, active bank-account use, but this has not spread to the rest of their respective states. There is high disparity in active use between urban and rural populations (see Figure 2) in Maharashtra (contains Mumbai), Gujarat (contains Ahmedabad), Karnataka (contains Bangalore), West Bengal (contains Kolkata), and Andhra Pradesh (contains Hyderabad).

In some states, such as Punjab, Rajasthan and Jharkhand, female bank-account holders lag well behind their male counterparts in rates of active account use (see Figure 3).

Active use of bank accounts (and all financial services) is fundamental to meaningful financial inclusion. The barriers causing these gaps in active use — in certain states between men and women, and between urban and rural respondents — will need to be better understood and addressed to ensure financial inclusion reaches everyone.

Next, we’ll discuss what the Tracker Survey data says about branchless banking and digitized government payments.

[1] India’s central bank
[2] Recently, mobile money providers have been allowed to partner with banks, as their BCs, to offer full service mobile money bank accounts. 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.
[3] According to Microfinance India State of the Sector Report 2012, the number of basic savings bank accounts (previously known as no-frills savings accounts) increased from 1.3 million in 2010 to 1.52 million in 2012.
[4] In total, India has 102,343 bank branches. Government of India. 2013. An Overview of Financial Inclusion, Department of Financial Services, New Delhi.