Any kind of growth cannot be sustainable until it is inclusive, that is to say, every section of the society is prospering. It was with this realisation that the concept of financial inclusion (FI) dawned in India. FI is often misunderstood to be limited to banking but it is much more than that.

To begin with, it is about reaching out to every household with three banking services – savings, remittances, and loans – and once a strong network is established we can piggy-ride on this success with micro-insurance and micro-pensions.

In the first stage, we are targeting to cover the entire geography through the sub-service area (SSA) approach. After discussions with the RBI we have decided that banks should set up facilities – branches, ultra-small branches (USBs) or appoint business correspondents (BCs) – even in villages with a population of around 1,000-1,500. Banks have been suggested to appoint fixed-point BCs who apart from operating in their own areas can visit the nearby areas at least once in 15 days so that the other areas are also covered.

This model also brings in trustworthiness among people because villagers know that the BC can be approached any time. Also, wherever there is assurance of a withdrawal facility people start keeping some money in their accounts. For example, in Madhya Pradesh, where the number of such banking outlets has gone up, average savings in bank accounts of MNREGA workers is Rs 1,164 – earlier they always withdrew all the money they deposited.

This is a significant change and is very good for the banking system because things are finally coming to shape.

Under the direct benefit transfer (DBT) scheme in the 121 districts, in the initial phase we found that there were 30,870 SSAs in these districts and out of that 30,660 SSAs have been covered, which is a major achievement.

Now with the systems and banking outlets largely in place, the next part includes opening a bank account for every family and encouraging them to transact in these accounts with the electronic cards issued to them for remittances and savings. After some significant success has been achieved on these two fronts, we will start focussing on credit. By March, once we are through with setting up facilities in the remaining DBT districts, we will immediately start looking at other districts after seeking approval from the government.

In the DBT districts there are about 44 lakh beneficiaries who have been identified by the state governments but banks have been given a list of only 38 lakh beneficiaries, of whom accounts of only around 1 percent remain to be opened because banks were unable to trace them. In these cases, the names of beneficiaries have been referred back to the district officials so that they can check if they still live in the area or have migrated to other places. In addition, the seeding of accounts of these beneficiaries with their Aadhaar numbers has also been completed. For the rest, we are trying to ensure that they are quickly issued Aadhaar numbers.

For example, certain states were being covered by the National Population Register (NPR) and the pace there was very slow. In order to fast-track things, the cabinet decided to take away certain states and give them to UIDAI. Also, DBT-L (that is, DBT for LPG) was a reasonably huge success with over 4.6 crore transactions and around Rs 3,200 crore subsidies transferred under it. So the whole infrastructure has been tested and it is only a question of administrative decision as to when they want to take this forward.

As far as credit is concerned, it is happening at a slightly slower pace because it involves assessment of creditworthiness of individuals. When we talk about credit, agriculture lending, which takes the largest share of lending in rural areas, is growing at a very healthy pace of 18-20 percent year-on-year. However, we are aware that this is not enough and we need to come out with innovative products for general purpose credit, and because of the limits on these credit facilities gullible customers have no option but to go to moneylenders, where they are exploited.

Coming to the performance of banks, I believe most of the work in financial inclusion has been done by public sector banks. Whether it is reaching out to remote interior places, meeting targets and also coordinating with all other banks and other stakeholders as state-level bankers committee (SLBC) conveners, most of the PSBs have been able to juggle between all these activities well. While private banks have been true to achieving their targets, it is mostly the PSBs whose presence is greater in remote areas. Intense competition for FI, though, is still lacking.

While things are moving faster now, there are two main problems which continue to bother banks – BC attrition and internet connectivity. I believe that to a great extent the problem of attrition will be solved with the SSA approach because BCs can concentrate on a limited area and if they are enterprising enough then their earnings will certainly improve. The proposition of making BC agents a bank’s employees is dangerous because there will then be the problem of unions, strikes, etc. In any case, the problem of sustainability remains. So the contractual model is better and we need to focus on increasing the revenue stream of these BC agents so that attrition levels come down.

The other major hurdle for banks is internet connectivity in rural areas. In order to solve this problem, we have facilitated dialogues between BSNL and the PSBs for setting up proper infrastructure wherever there is a requirement/gap. We have also entered into a dialogue with the department of IT and telecom for rollout of the national optic fibre network (NOFN) because we do see this as a much needed catalyst for enhancing FI.

Once sound internet connectivity is in place, rural operations of banks will become more of an income generating activity and will also boost employment since more and more banks would want to open up outlets in these areas.

Of late, there has been a lot of talk about the idea of setting up additional institutions for boosting the FI agenda. As far as the idea of payments banks is concerned I don’t see a need for them in the current system of things. Setting up payment access points at a 15-minute walking distance (which works out to about half a kilometre) is just not suitable for villages because half a kilometre means nothing there.

Also, I don’t believe that mobiles will win the trust of people as far as monetary transactions are concerned. I believe that fixed-point BCs also covering nearby areas, which makes their operations viable, is the real way forward.

Africa’s mobile banking phenomenon is a frequently quoted success story and people are now talking about doing something similar in India where mobile penetration is very deep. But we need to understand two things here. First, of 800 million mobile subscribers in India, at least 300 million have two connections and so the actual figure for single mobile connections will come down to around 500 million. And majority of these 500 million people already have access to banking services as well. So in that sense, people who are unbanked are also without mobile phones because even telcos, barring BSNL, have not made too many inroads in remote villages, for example, those in tribal areas. In other areas where there are telcos, people largely have banking facilities but if they still don’t have an account it is because they probably don’t want one. (So) even if we begin mobile banking, we are not likely to include these people.

Also, mobile banking is a success in Africa because they don’t have a very strong banking structure like we have in India. In any case, we have taken certain initiatives to leverage mobile technology and this includes the unstructured supplementary service data (USSD) facility started by the National Payments Corporation of India (NPCI), which enables all kinds of mobiles, including the low-cost ones, to transfer money.

In addition, the Telecom Regulatory Authority of India (TRAI) has directed all telcos to extend this facility at Rs 1.50 for each outgoing USSD-based mobile banking session which I am sure will go down as there is expansion of services and more competitors come in.

So we do have a tall task in hand when we say all of India should be financially included but then with the current scheme of things and systems in place we will definitely make this goal into a reality in the longer run. For the short run, by 2016 if we are able to reach out to the entire geography through the SSA approach and open bank accounts we will have done a tremendous job. Other things – like credit, insurance, etc – will automatically follow.

(As told to Srishti Pandey)

(This column first appeared in the magazine's March 16-31, 2014 print edition)