By Puneet Gupta & Jayshree Venkatesan
Though India has deep financial infrastructure comprising a large number of bank and post-office branches; agricultural cooperative societies; and, now, micro finance institutions; there still remain gaps that have prevented us from leveraging the full potential of this financial infrastructure.
Delivering financial services
Financial service delivery requires channels to play three very important roles, namely, provide a point for transactions; under-writing (in the case of credit and insurance); and act as a specialised customer services point on an ongoing basis.
Of the three, the current infrastructure has been able to provide transaction points, but has not been able to connect with all households. Even among those that are connected, it is not always at a convenient distance from the household.
Out of the 600,000 habitations in the country, only 30,000 have access to a commercial bank branch. Even the micro finance institutions that have a presence in some of the habitations, they have their field staff visiting them only once a week, that too largely for credit transactions.
While in urban geographies, transaction points have become ubiquitous for the banked population because of mobile banking, Internet banking, phone banking, and ATM, also allowing them to shift away from cash transactions; rural areas and most slum populations in the urban areas do not have access to such transaction points.
A key factor for this lack of access in rural areas is the absence of adequate infrastructure, particularly Internet connectivity. Currently, the tele-density (Internet, broadband and mobile) in rural India is 26 per cent.
Setting up transaction points alone is not enough. For, if we were to account for all the opportunity costs of time spent in transacting at these points, they are not only expensive to access, but are also not equipped to handle a broad range of financial services.
In the case of MFIs, these costs are recovered directly from the clients, while in the case of the SHG model, it is borne by clients who have to travel to banks.
While clients may be able and willing to bear such cost for credit products, even a 4 per cent transaction cost on savings, can turn return on saving products negative.
This means that it is indeed better for the household to keep surpluses at home rather than saving in the bank as not only is the return not negative in this case, it also saves the effort of going to a transactions point, apart from money being available for use at any time.
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