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Gates Foundation study: Gujarat a poor performer in financial inclusion

By Rajiv Shah
Supported by the Bill & Melinda Gates Foundation, InterMedia, Washington, conducted an India-wide survey of 45,024 adults, ages 15 and older, from October 15, 2013, to January 8, 2014, to understand their financial behaviour and their access and use of digital financial services. Results of the survey show in Gujarat in poor light. They suggest that Gujarat’s 45 per cent of adults have ever had access to a bank account, which is worse than 10 major states out of 19 states. The survey results further reveal that 26 per cent of the adults in Gujarat have active digital accounts as of today, which again is worse than several major states, including Maharashtra (35 per cent), Tamil Nadu (34 per cent), Kerala (33 per cent), Himachal Pradesh (32 per cent), Andhra Pradesh (29 per cent), Karnataka (31 per cent), and Uttarakhand (29 per cent).
What is even more appalling for Gujarat in is that the state’s just 13 per cent below poverty line (BPL) adults have access to digital accounts, which is the worst than all Indian states. While comparable states such as Himachal Pradesh (32 per cent), Tamil Nadu (30 per cent), Andhra Pradesh (25 per cent) and Karnataka (24 per cent) have performed much better in providing active digital bank account services, with facility for digital transfer of funds, the poorer states are not far behind. Thus, even the poorest states Bihar’s 14 per cent of BPL adult population has digital account, while is it 17 per cent for Jharkhand, Chhattisgarh and Rajasthan, and 19 per cent each for Uttar Pradesh and Madhya Pradesh. It suggests that the Gujarat officialdom has failed to stir financial inclusion among its poorer sections to open and use bank accounts, despite the hype around it.
The Gujarat situation is particularly appalling in the rural areas, if the survey is any guide. Thus, Gujarat’s 19 per cent of the adult rural males own digital account, which is worse than all states, except Bihar (18 per cent). The best performers are Kerala and Tamil Nadu with 34 per cent of the rural males having digital accounts. The figure for Chhattisgarh, a poor state, is an appreciable 26 per cent, while it is 25 per cent for West Bengal, and 23 per cent each for Madhya Pradesh and Rajasthan. Worse, Gujarat’s just about 8 per cent rural female population has active digital bank account, and here too all states, without exception, are found to have performed better. The best performer as far as rural females with active bank account is Tamil Nadu (34 per cent), followed by Kerala (25 per cent).
The study point out, in India, “increase in the number of bank accounts and bank branches isn’t translating into active use.” While according to the 2011 India census, the proportion of banked households rose by 23 percentage points over the last decade (2001-11), and the increase was higher in the rural sector, when one inquires into how frequently these bank accounts are used, “the story gets complicated”. The study says, “Nearly half of India’s bank accounts are essentially inactive. Only 54 percent of those with bank accounts have used them actively (defined by InterMedia as using an account in the past 90 days). Among poor, rural bank-account holders, only 46 percent have used their accounts actively.”
The study further says, “Even the group of active bank-account holders uses their accounts mainly for basic withdrawals and deposits. Very few use their bank accounts for receiving wages through direct deposit (9 percent), sending or receiving money from family (2 to 3 percent) or paying a utility bill (5 percent).” While agreeing that the Government of India’s financial inclusion policy has focused on increasing access to banking infrastructure, especially in rural areas, with 63 percent of new bank branches in the last five years having been set up in rural and semi-urban areas to ensure access to banking services, the study says, “Both rural women and men are far less likely to use their bank accounts actively than their urban counterparts (rural women – 42 percent, rural men – 52 percent; urban women – 53 percent and urban men 70 percent).”
The study, whose analysis was carried out by Gayatri Murthy of InterMedia’s digital financial inclusion programme, particularly underlines, “India’s megacities – Mumbai, Ahmedabad, Bangalore, Kolkata and Hyderabad – show high, active bank-account use, but this has not spread to the rest of their respective states. There is high disparity in active use between urban and rural populations in Maharashtra (contains Mumbai), Gujarat (contains Ahmedabad), Karnataka (contains Bangalore), West Bengal (contains Kolkata), and Andhra Pradesh (contains Hyderabad).” Singling out Gujarat here, it says, “In Gujarat, urban bank account holders are almost twice as likely as their rural counterparts to use these accounts actively.”
Despite horizontal growth in banking services, the study regrets, “The financial services market in India is characterized by a high reliance on cash. Across all demographic groups, the majority of people use cash for a range of transactions including grocery payments, paying utility bills and school fees, buying airtime top-ups for mobile phones, and sending and receiving money for support and allowances. More than 90 percent of those who receive remittances and wages for a job do so through cash. Direct deposits to bank accounts and checks are more common in urban centers and among wealthier respondents.”
Pointing out that 70 per cent of those who save money do so in a bank and 35 percent save at home, the study says, “Nationally, 3 per cent save through village-level savings groups. However, village-level savings groups are relatively more popular in states such as Andhra Pradesh (23 percent), Chhattisgarh (18 percent) and Maharashtra (14 percent).” It adds, “Most borrowers rely on those within their personal networks, including relatives, neighbors and friends (67 per cent). Eleven per cent of borrowers borrow from a bank, 12 percent borrow from a private money lender and four percent borrow within their savings group.”
Supporting the Government of India view about the need for Direct Benefit Transfer (DBT) – which was put afloat by the previous UPA government and has continued under the NDA government – of all subsidies, the study believes: 
Digitized government payments have the potential to help drive greater use of digital financial services but challenges remain. Beneficiaries see advantages of using the DBT method to receive payments into their bank accounts, including fewer delays and full receipt of payment. But the process of switching to DBT needs to be easier and more efficient. Recommendation: Registration and payment tracking services should be linked to UID numbers.
Benefit payments are small, sometimes infrequent, and do not currently help to expand digital transactions. Awareness of digital financial services (DFS) is low, but many are interested in learning more about conducting electronic transactions, including savings. Recommendation: The use of voice-based applications can help raise financial awareness among mobile phone owners with low literacy and low digital skills.
Beneficiaries have to be incentivized to reduce payment cash-outs and to use linked digital products. Banks also need incentives to design and market products to DBT account holders. Recommendation: Interest-bearing savings products and bill payment services should be added on to beneficiary bank accounts to encourage digital financial services uptake.

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