Barriers to Basic Banking: Results from an Audit Study

In new study from NSE and IFMR, researchers use a “mystery shopping” approach where trained auditors, posing as low-income customers, attempt to open BSBDA (Basic Savings Bank Deposit Account) and low-cost accounts at banks in Chennai. The researchers rigorously document the barriers faced by potential customers, including complete recording of all interactions between auditors and bank staff. Their study finds that bank staff almost always refuse to offer the BSBDA, and aggressively discourage customers from opening other low-cost accounts. The researchers suggest immediate intervention to monitor ongoing financial inclusion policy implementation, and caution against driving G2P transfers until banks demonstrate capacity and willingness to meet basic standards of service and client protection.

From the abstract:

“We conducted an experiment in urban South India to examine the barriers faced by customers in purchasing a low-cost savings product. We found that banks have a high ability to influence financial access outcomes, even when product availability and eligibility rules are non-discretionary. Nearly all banks refused to market the regulator-mandated basic accounts, despite the customers being atypically persistent in asking for “basic accounts”. Additionally, in more than half (55%) of the bank branches visited, customers were turned away when they attempted to negotiate for an alternative, affordable savings product: in half of the cases, the bank refused to accept the customer’s valid identity or address proof, while in the other half of the cases, the bank refused to market an alternative low-cost product. For the accounts that were opened, the banks demanded excessive identity and address documents, withheld key information about the product’s terms and fees, and imposed significant time, effort, and incidental costs on the customers. Given the benefits of low-cost accounts and their linkage to the Indian government’s broader financial inclusion goals, our findings suggest a need for careful monitoring and targeted enforcement of India’s financial inclusion policy implementation.”

Amy Jensen Mowl and Camille Boudot (2014). Barriers to Banking: Results from an Audit Study in South India. NSE Working Paper Series No. WP-2014-1.

Read the full paper here: http://www.nseindia.com/research/content/NSE-IFMR_Paper_5.pdf


How Much Can Asset Portfolios of Rural Households Benefit from Formal Financial Services?

As part of the NSE-IFMR ‘Financial Inclusion’ Research Initiative, Vishnu Prasad, Anand Sahasranaman, Santadarshan Sadhu, and Rachit Khaitan of IFMR Finance Foundation have authored a working paper for the series. Using customer data from a financial services institution that operates in remote rural districts of India, the authors constructed stylised typologies of household asset portfolios based on primary and secondary sources of income. Despite a demonstrated demand for various financial services, this study finds that the asset portfolio of the average rural household in India is composed almost entirely of two physical assets—housing and jewellery. A comparison with a hypothetical portfolio of financial assets reveals that rural households could earn significantly higher levels of real returns, the increase ranging from 2.02% to 4.97%, at the extant levels of risk.

The results point to the urgent policy imperative to provide rural households with access to financial instruments that would allow them to construct a more diversified, tradable, and liquid portfolio offering higher yields and shelter from local market fluctuations.

Click here to read the full paper.


Sustainable Financing for Indian Cities

By Anand Sahasranaman & Vishnu Prasad, IFMR Finance Foundation

A version of this article was first published in the September 2014 edition of the monthly journal Yojana.

Municipal finances in India are characterised by the constant tension between the funds and functions of local governments. Cities in India have insufficient revenue tools to meet their expenditure requirements. While the 74th Constitutional Amendment Act (CAA) devolved a great deal of functional autonomy to local governments, a commensurate devolution of financial autonomy was absent. Out of the 18 functions to be performed by municipal bodies under the 74th CAA, less than half have a corresponding financing source. Furthermore, most local governments cannot set tax rates or change the bases of collection without the explicit concurrence of state governments. However, not all problems of municipal financing in India are attributable to the upper tiers of governments. Local governments have failed to utilize adequately even those tax and fee powers that they have been vested with, in particular by failing to put forth an adequate collection effort. The very low levels of own revenue generation in Indian cities have, thus, precluded them from providing even the most basic public services to their citizens.

While the thrust of urban policy in India has been on the metropolitan centres, the current state of public infrastructure and service delivery in India’s small and medium cities is, if anything, even more alarming than that in the larger ones. The central question that therefore confronts us, in the context of cities both big and small, is this: How can cities sustainably finance the development of public infrastructure to ensure service delivery that conforms to the laid-out benchmarks for all citizens in the next fifteen years? This article argues that in order to meet this challenge, Indian cities will need to increasingly generate higher levels of own source revenue and efficiently use market based financing mechanisms to ensure minimum levels of service delivery.

To read the full article please click here.


The Master Trainer Approach to Financial Education

Guest post by Karuna Krishnaswamy and Amit Arora, Rural Financial Institutions Programme, GIZ 

In recent years there has been rising interest among financial service providers, NGOs and policymakers in educating customers and potential customers to enable them to make informed decisions on taking up and using financial products. There is a view that knowledge gaps prevent optimal take-up and usage of financial products by the poor and that behavioural change could be effected by imparting appropriate education.

SEBI, RBI and NABARD have taken up the mandate to facilitate provisioning of financial education programmes and have issued enabling regulations. The Financial Stability and Development Council, set up by the Government of India, has come out with a ‘National Strategy on Financial Education’. The strategy recommends that product education should be provider-neutral and that the responsibility of educating the buyer about the suitability of the product should rest with the seller. In terms of policy, the new government is proposing that banks be mandated to open two savings account per household and that account holders undergo financial education training before they can avail of the credit facility. This implies potentially huge numbers of people to be trained in the next few years.

However, in spite of many years of efforts in consumer education and a trend of institutions increasing commitment to this cause, many questions still remain unanswered.

For one, it is unclear whether existing education efforts have brought about any substantive behavioural changes. A review of the global literature on the evaluation of financial education interventions reveals mixed results in terms of impact1. In India, although Calderone et al. (2014) found that financial education altered attitudes and increased amounts saved in Basic Savings Bank Deposit Accounts, there are few completed impact studies, especially where there is a bouquet of financial products on offer for the customer to exercise her choice if her behaviour has been influenced.

Secondly, existing interventions range all the way from short duration mass audience programmes to more expensive classroom courses and one-on-one interactions with the cost varying from less than INR 60 to INR 1500 per participant. It is unclear whether the benefits outweigh the costs and what the optimal mode of delivery is.

Thirdly, in NABARD’s and RBI’s FLC efforts, is there client value and a business case for a generic financial awareness counselling programme that does not endorse specific products as espoused by the regulator? If so, who should conduct the intervention – the financial service provider, a neutral organization or through a public-private partnership with the state? Who should pay for it? How can the considerable corpus of NABARD, RBI (Depositor Education and Awareness Fund), SEBI, the stock exchanges and other donor agencies be best utilized?

In a unique PPP, GIZ’s Rural Financial Institutions Programme (RFIP) partnered with IFMR Rural Channels (IRCS) through its Kshetriya Gramin Financial Services (KGFS) network on the ‘Master Trainer’ project, to answer some of these questions. While the evaluation is not completed, this post shares some early experiences.

The hypothesis
The hypothesis was that it would be feasible for a commercial financial services provider to conduct a product-neutral financial education programme with the intention of raising financial awareness in a sustained manner.

The intervention
Phase 1 of the project ran from October 2012 through 2013. The intervention consisted of a 45 minute presentation called the Community Connect Program (CCP). The CCPs are conducted by Master Trainers, handpicked, highly motivated and charismatic staff from the KGFS branches. They are not given incentives or business targets. They conducted the program for groups of 10 to 25 (largely) women in the villages.

IRCS found that a 45 minute presentation may not be sufficient to alter customer behaviour and that people still had a number of operational questions before they could translate interest into an informed decision to avail an appropriate product. Hence in Phase 2 in 2014, after the CCP, the Master Trainer started conducting individual household follow-up visits for those attendees that expressed interest in a particular product. The Master Trainer comes prepared to answer questions and to make suitable recommendations.

The CCP concept
The Master Trainer starts a CCP by clarifying that he is not here to sell products but to help them achieve their lives’ goals. He gets the audience to think about their households’ goals and how they would meet them, common risks that they face such as the death or unexpected loss of income of an earning member, coping with expense shocks and preparing for retirement in dignity. The Master Trainer then proceeds to discuss some of the mistakes they commit and provides simple suggestions such as:

  • Having clarity on monthly income and expenses
  • Using all available assets
  • Reducing unnecessary expenses
  • Not borrowing more than is needed

None of these ideas is unfamiliar to the audience, but it is not uncommon for a person living in economic uncertainty to turn a blind eye to her peccadilloes. The messages resonate well with some of the attendees because he has raised the salience of the risks, worries, inefficient practices and uncertainties that they face to the fore. As one participant said to us, “We were all blind then; at least we are awake to our issues now”.

The Master Trainer proceeds to suggest how using financial products such as taking insurance to protect income flows from disruptions due to perils and saving in a pension product could help. He also provides practical advice on implementing changes such as tips on comparing flat and declining interest rates in order to compare loans and hands out an accounts book. He then leaves without actively endorsing any products.

After this brief intervention, the audience may be none the wiser in terms of product literacy. They may not understand all the terms of an insurance or a pension product or how to compare a flat interest loan from a moneylender with KGFS’ declining rate loans. However, they trust that the Master Trainer’s advice is not motivated solely by sales interests and some are happy to try out the product after taking his help in figuring out operational questions such as:

  • Can they take policy on their spouse’s name?
  • What company should they take a policy from?
  • What amount should they insure themselves for?
  • What documents are needed for a loan application?

It helps that among the previously enrolled members (those whose financial profile has been assessed at the branch), both KGFS and the Master trainer are familiar to the audience. KGFS believes that the CCP helps to prepare the ground for sale of suitable financial services to customers in a one-on-one setting.

The CCP has reached out to more than 18,000 people, largely women, over the past 16 months.


Client feedback

A qualitative evaluation that GIZ conducted suggests that in the case of some of the participants, the concepts presented by the Master Trainer have been well received and implemented. Some illustrative anecdotes:

Saving and interest rates
“I am not literate but I want my children to have quality education and hence send them to a private school. The fees are high and I usually take a loan from my land owner. Now I understand I can plan and save through the year in regular instalments (recurring deposit). Not only do I save on the interest (paid to the moneylender), I earn an additional 4% interest on my deposits.” – Participant from Vellaaru.

“My husband is a cab driver besides being a farmer. He will make more money if we could invest in a second-hand car. I am going to discuss with the Wealth Manager to explore the possibility to take a loan if this will fall under ‘grow concept’. We have identified our goals, both individual and household, developed a business plan for us to purchase a vehicle of our own and thereafter expanding into a cab service with 5 – 6 cars in a few years.” – Member from Vellaaru

Financial diaries
“The financial diary will be very useful if we fill it regularly. It will help us understand how and on what our money is spent. I want to show my husband how much money he wastes because of his drinking habit. I don’t know the exact amount he spends as he usually keeps a certain portion of the money with him and gives me the balance for household expenses. I am going to ask my husband to fill this diary so he knows how much he is spending at the wine shop.” – A participant in Pudhuaaru.

Insurance against risks
Insurance expectedly was the most complicated concept to understand while pension was easier.
“I know a bit about loans but I did not know that I can plan for my future through the pension scheme and don’t have to depend on my children during my old age. Also, the insurance scheme for accidents will be very useful as most of the men folk in our community travel long distances on two wheelers and is fairly dangerous as we have too many trucks passing through these roads at high speed. A neighbour lost her son and their family could have benefited had they been insured.” – Enrolled customer from Vellaaru.

More details of the Master Trainer project are available here: Video & Project details.

Next steps

An evaluation is underway to answer the following questions:
a) What did the participants learn?
b) Is better learning correlated with improved financial management practices and product take-up and usage?
c) Has participation in CCPs led to improved product take-up and usage?
d) What is the business case for the provider?

1) Somasundaram, Usha. 2014. Mid-term evaluation of the Master Trainer Program, GIZ Report.
2) Margherita Calderone, Nathan Fiala, Florentina Mulaj, Santadarshan Sadhu, Leopold Sarr. 2014. When Can Financial Education Affect Savings Behaviour? Evidence from a Randomized Experiment among Low Income Clients of Branchless Banking in India
3) Address delivered by Dr. K. C. Chakrabarty, Deputy Governor, Reserve Bank of India at the 35th SKOCH Summit in New Delhi on March 21, 2014
4) NABARD Website

1 – Margaret Miller, Julia Reichelstein, Christian Salas, Bilal Zia.2014. Can you help someone become financially capable? A meta-analysis of the literature. World Bank Policy Research Working Paper 6745
Daniel Fernandes, John G. Lynch, Jr., Richard G. Netemeyer. 2013. The Effect of Financial Literacy and Financial Education on Downstream Financial Behaviors. retrieved from http://www.nefe.org/Portals/0/WhatWeProvide/PrimaryResearch/PDF/CU%20Final%20Report.pdf on September 2, 2014


Revisiting the core ideas of CCFS

By Vishnu Prasad, IFMR Finance Foundation

The Report of the Committee on Comprehensive Financial Services for Small Businesses and Low Income Households (CCFS) was submitted to the Reserve Bank of India (RBI) in January this year. In the eight months that have passed, the RBI has accepted a number of the report’s recommendations including publishing of draft guidelines on licencing of payments banks, extending the right to suitability to customers of financial services, relaxation of Know Your Customer (KYC) norms, and restoring permission of ND-NBFCs to act as BCs of a bank, among others. These steps, in sum, represent the renewed vigour and focus on the financial inclusion and financial deepening agenda in the country. As we see progress on individual recommendations, however, it is important to keep in mind some of the larger themes and directional shifts that the report had recommended and to view each recommendation within the context of these.

The starting point for the report, in many ways, was to take stock of the previous and existing efforts on financial inclusion in the country. Over the years, India has seen many big ideas on financial inclusion; from cooperative banks, nationalisation of banks, self-help groups, and regional rural banks to business correspondents, India has moved from one big idea to another in addressing the country’s financial inclusion puzzle. In examining these programs, the CCFS recognised that the key, common weakness of previous efforts on financial inclusion was their over-reliance on the one big idea as the key to financial inclusion. In this light, the recommendations of the CCFS mark a significant break from the trend of “magic-bullet” solutions. The report recognises that in a country as large and diverse as India, a reliance on any single approach to solve problems is bound to fail. While acknowledging that the country will need to constantly explore new ideas, learn from new technology and successful strategies of other nations, the report argues that the best regulatory strategy is not be to push the design of the financial system towards one central approach. Rather, the CCFS proceeds to define a clear set of vision statements and establish core design principles that would enable multiple institutional frameworks and models, new and old alike, to thrive or wither away, based on their inherent strengths and weaknesses. (Page 5, Preface, Report of the CCFS)

Design Principles

Keeping in with this strategy, the report presented a set of four principles that should guide the evolution of the financial system design in India – Stability, Transparency, Neutrality, and Responsibility. To elaborate, the principle of Stability argues that any approach that seeks to achieve the goals of financial inclusion and deepening must be evaluated based on its impact on overall systemic risk and stability and at no cost should the stability of the system be compromised. A well-functioning financial system must also mandate participants to build completely transparent balance sheets that are made visible in a high-frequency manner, accurately reflecting both the current status and the impact of stress situations on this status. Furthermore, the treatment of each participant in the financial system must be strictly neutral and entirely determined by the role it is expected to perform in the system and not its specific institutional character. Lastly, the financial system must maintain the principle that the provider is responsible for sale of suitable financial services to customers and ensure that providers are incentivised to make every effort to offer customers only welfare-enhancing products and not offer those that are not.

In articulating these design principles, the report argues that any institutional model for the delivery of financial services should be encouraged as long as it passes the litmus test of adhering to these principles.

Let a hundred flowers bloom

At its core, then, the CCFS recommends an approach that moves away from an exclusive focus on any one model of financial inclusion and financial deepening to an approach where new and specialised entrants are permitted and multiple models and partnerships are allowed to emerge between these specialised entities. The recommendation on allowing NBFCs and now, payments banks to act as BCs of banks, perhaps, best represents fruitful partnerships among specialists. Thus, instead of focussing only on generalist institutions that are required to deliver on all functions of finance, the report recommends developing a vertically differentiated banking structure, in which banks specialise in one or more of three functions- payments, credit delivery and retail deposit taking. The Committee, thus, recommended the licensing of new categories of specialised banks including Payments Banks and Wholesale Banks.

As the report mentions, India already has the elements for success in place – a wide range of institutional types, well-developed financial markets, a good regulatory framework, and large scale and high quality authentication and transaction platforms. The cause of financial inclusion and financial deepening would be better served if we could allow institutions to leverage on this and evolve naturally, in multiple directions.