The Indian government is promoting the Jan Dhan Yojana, Aadhaar and mobile banking – or the “JAM trinity” — as the pathway to financial inclusion. But are banks capable or even willing take on their role in this ambitious agenda? Based on a field study in Chennai, this column highlights the range of costs and constraints imposed by banks on customers attempting to enter the formal financial sector.
Having entered a commercial bank branch on a main street in central Chennai on a hot summer day, a neatly dressed man introduces himself to the front-desk bank officer. He works as an assistant in a nearby office, he says. He would like to open a “basic” account for savings purposes. The banker, while busily stacking and stapling several documents, and without looking up at the customer, replies curtly “Normal Savings Account”. The customer asks the banker for more specific account details, such as “Can I open an account with zero balance or a small minimum deposit?” The reply: “We don’t have that at all.” The customer insists that his friend told him about such an account, but the banker disagrees. A basic savings account is not available in this bank. Instead, the banker offers him a “normal” savings account which will require a minimum balance of Rs. 1,000. The customer relents and requests a pamphlet with some information for him to take home. This isn’t available. He then prompts the banker on what documents he will need to submit for opening this account. “PAN card is mandatory”, is the response. Knowing he does not have this form of identity (ID), the customer asks whether he could use his Voter ID Card. But the banker has had enough, “Don’t disturb me by continuing to ask questions. It’s difficult for me to work. As I’m speaking to you my work is getting spoiled”. The customer leaves the branch, unbanked1.
Since the 1960s, India has made continuous efforts towards an ambitious financial inclusion agenda. Yet according to a 2011 national survey, only 35% of adults held an account at a formal financial institution and only 12% had saved at a formal institution in the previous 12 months (Demirguc-Kunt and Klapper 2012)2 . The question of why individuals and households do not save with formal institutions, and the prevalence of hidden costs, stigma and other barriers to banking, is the subject of a broad, global research and policy agenda.
Analysing barriers to basic banking in India
In 2014, we conducted a research study of India’s previous flagship attempt to universalise low-cost accounts (Boudot and Mowl 2014). We focus on the “Basic Savings Bank Deposit Account” (BSBDA), as this product was designed as a financial inclusion tool by removing all cost barriers (required no minimum balance or initial deposit) and guaranteeing limitless supply (all banks were advised to offer this product). We sampled 27 banks in two geographical zones of Chennai, with mixed residential and enterprise activity, ensuring that all types of banks (nationalised, private, foreign, regional rural, and State Bank of India (SBI) and Associates) were adequately represented. Our approach included both: (i) inquiring about opening a savings account in 42 branches, and (ii) undertaking the full process of opening an account in 20 of the branches. All interactions were conducted by a team of field investigators who were given specific scripts in order to request a BSBDA account (if this had not been initially marketed by the bank staff) and trained to be polite, firm and atypically persistent in negotiating for the BSBDA or an account with similar features. If the BSBDA was refused by the bank agent, the investigator would then opt for the account requiring the smallest initial deposit. Data from all bank visits were coded and classified for analysis, all marketing materials offered were collected, and the complete interactions were audio-recorded for a qualitative analysis of verbal exchanges3.
Bank representatives discourage low-income customers from banking
The most shocking finding from this study is the extent to which bank representatives misrepresent both product availability and client eligibility, effectively denying financial access to low-income customers solely upon their discretion. We observe that none of the 42 bank branches voluntarily offered a zero-balance account when initially approached by a low-income customer, and 12 out of 42 banks (28%) excluded potential clients by initially marketing unaffordable accounts (requiring initial deposits ranging from Rs. 1000 to Rs. 300,000). When our investigators specifically requested the BSBDA and banks acknowledged the existence of this account, this was usually followed by misrepresentation of the customer’s eligibility as well as strong verbal disincentives to open such an account. For instance, bank officers would tell the investigators: “The zero balance account may be offered……. only for exceptional cases like students, delivery cases (of government welfare schemes). Then for “ATP”4, blind persons, deaf persons, other special categories."
Secondly, bank representatives were observed to exaggerate and misrepresent Know Your Customer (KYC) documentation requirements. We find that 83% of banks required the investigator to bring his PAN Card as primary ID proof, despite the fact that only formal sector employees tend to possess such documentation and that a PAN card is only one of the six acceptable ID proof under KYC norms at the time of the survey. Furthermore, our investigators were required to submit a letter of introduction from a current account-holder in 11 out of the 42 banks (26%), despite presenting complete identity and address proof. This misrepresentation of account features and documentation requirements is further exacerbated by the complete absence of written information made available to the customer, even upon request.
Direct and indirect costs to customers for basic banking
Thirdly, the accumulation of both direct (transport and documentation costs) and indirect costs (customer time spent travelling, waiting at the bank and collecting documents) also represent a significant barrier to financial inclusion. We note that before having a functioning account, investigators had to visit the bank a minimum of three times. Over these visits, the investigators dedicated a total of 7 hours on average to opening each account. The majority of this time (5.5 hours) was spent travelling5 to-and-fro for bank visits and collecting the required documentation, as well as at least half an hour spent simply waiting for a bank staff to agree to meet them. It is important to note that this waiting time is not necessarily related to the level of work activity in the bank, as our investigators reported at least one bank representative being free in almost half of the cases. Maximising the customer time and effort required may appear to be a deliberate strategy to eventually discourage low-income customers (Nichols, Smolensky and Tideman 1971). This hypothesis is further supported by the verbal hostility (Lipsky 2010) that we observed in a qualitative analysis of statements by the bank representatives. Even when investigators returned to open accounts with their paperwork complete, they often faced unpredictable time costs (see Table 1).
Table 1. Waiting time
Customer : “Good Morning madam. A few days before I have collected information to open a savings account. Here is my application.”
Banker : “You wait. I will call you.” [Note: Customer waits for half-hour]
Customer : “Hello madam, I am waiting for 30 minutes. I am getting late for my office."
Banker : “Actually we are also busy. Otherwise come tomorrow."
Customer : “Shall I wait for 5 minutes?"
Banker : “I cannot give you 5 minutes. You wait. I’ll call you."
Lack of accountability and service failure constrains financial inclusion initiatives
There is much to celebrate in India’s latest push to scale financial inclusion, the Prime Minister’s Jan Dhan Yojana (PMJDY), not least of which is the high-level enthusiasm and unparalleled commitment to scale. As of May 2015, 156 million accounts are announced by the government to have been opened under the programme, which likely represents a major achievement in closing India’s access gap with regard to financial inclusion. But meaningful financial inclusion requires more than just a simple account, proof of ID, and a mobile phone. It starts with providers who are willing to serve low-income customers. Our findings suggest that the PMJDY’s rapid-rollout, high-tech, and high-stakes approach may not provide a remedy for the deeper ills of lack of accountability and service failure that have been the downfall of previous financial inclusion initiatives.
- All conversations within the quotes are taken from audio-records during live interactions with bankers during the study.
- Institutional Review Board (IRB) review was conducted and approval granted.
- The term ATP or Alternate Talent Pool was used this bank manager to refer to persons with disabilities.
- Our sampling methodology and protocols for investigation account for some main assumptions related to travelling costs, including
- sampling in mixed residential and enterprise zones of the city as we assume most customers will visit banks closest to their home/ office,
- all branches were located on main high streets, assuming that customers will visit the more easily accessible branches,
- all travelling was done solely using public transport.
- Boudot, C and AJ Mowl (2014), ‘Barriers to Basic Banking: Results from an Audit Study in South India’, NSE Working Paper Series No. WP-2014-1.
- Demirguc-Kunt, A and L Klapper (2012), ‘Measuring financial inclusion: the Global Findex Database’, The World Bank.
- Nichols, Don, Eugene Smolensky and Nicolaus Tideman (1971), “Discrimination in Waiting Time in Merit Goods”, American Economic Review, 61(3), pp. 312-323.
- Lipsky, M (2010), Street-Level Bureaucracy, Russell Sage Foundation.