Financially Included – In Reality Excluded!

By LEAD Research Team

Imagine paying almost a fifth of your monthly income in interest on a loan that has a higher cost per month than most formal loans have per year? This is Saraswati’s reality. A maid from Chennai, she was forced to borrow from a moneylender when her son fell sick ten months ago. She does not know when, if at all, she will be financially free. Does she have a bank account? Yes, she has a savings account with State Bank of India but she has never cared to use it. And why so? Because she thinks going to bank branches is complicated and she perceives that she does not save “enough” to use her savings account. Does she not save at all? She does save using informal sources; however, it is not an effective saving mechanism.

Fact is- there are thousands of Saraswati (s) that face many unexpected expenditures and probably relying on moneylenders despite having bank accounts. Our CMF studies show that a majority of households in rural areas and urban slums were forced to make a non-routine expenditure in the preceding six months (64% and 60% respectively).  The same studies found that 79% of rural households and 62% of urban slums had access to bank accounts. Yet, up to 67% of rural households and 63% of urban slums relied on informal sources to survive such shocks.
It is not that Indian Government has not done anything to increase access to savings accounts. The RBI has asked banks to make basic “no frills” accounts available for the poor by relaxing the Know your Customers (KYC) requirements for these accounts. In addition, Government encouraged that NREGA payment is done in participants’ savings accounts. However, has this drive for formal financial inclusion been successful? I really doubt… Our study shows that a high percentage (79%) of households in rural Andhra Pradesh had access to a savings account (okay they are financially included if we go by the definition); however, only 14% were opened for the purpose of savings– many were opened only to receive promised government benefits or loans (does this really mean that they are financially included?). Our study has found that the main reasons for the poor not to use formal savings accounts are complicated application procedures and a lack of awareness.
Encouraging the poor use their savings accounts does help them- and this has been verified by an impact evaluation conducted in Malawi. This particular study had two types of accounts- commitment savings and ordinary account.  Those farmers who opted for commitment savings had a 26% increase in agricultural input use, 22 % increase in value of crop output in subsequent harvest, 17 % increase in household total expenditure reported in the past 30 days and farmers who had access to only the ordinary account showed lower or non-significant impacts in terms of those same outcomes, suggesting the commitment device played an important role for these results. Likewise, poor were encouraged to save by sending letters (Peru) or SMS text messages (Bolivia and Philippines).The studies found that reminders increased average savings balances overall by 6%, but this impact increased substantially, to 16%, for the Peruvian savers when the reminder referred to a goal. Likewise, in Ghana clients were given the opportunity to open separate, parallel savings accounts labeled “education,” “business,” “housing.” Savers eligible to open parallel accounts saved 31% more on average than those in the comparison group, with the greatest benefit on the education label.
I am just using the above mentioned savings products as examples to highlight how well designed savings products have actually made a significant difference for the poor in other parts of the world. It is sad that we still have those so-called “financially included” poor who  are giving reasons such as complicated procedures and lack of awareness for not using formal banking system. Therefore greater awareness campaigns might be useful in promoting savings. There might be value in encouraging formal banking not as a means to “borrow” but as a means to “save.” Maybe we should graduate from the simplistic approach of just increasing access to financial institutions to a more holistic one of encouraging actual usage. Till it happens many Saraswati(s) will keep going to moneylenders despite having bank accounts.
1. CMF Report, Access to Finance in rural Andhra Pradesh
2. CMF Report, Rethinking RBI Regulations for MFIs
3. CGAP report, Latest Findings from Randomized Evaluations of Microfinance