Box 3: New banking institutions
In many countries, innovative institutions have been instituted in order to improve financial access. In the Philippines for example, entry into the banking system for microfinance units was liberalized, permitting the establishment of new banks that are licensed and regulated as regular banks but have to dedicate at least 50% of their loan portfolio to microfinance. In 2009, Mexico permitted the establishment of a new specialized intermediary — a so-called niche bank — that could gather funds from the public, access the payment system, and be subject to the same regulatory standards, but with lower minimum capital requirement. In India, besides new banks in the private sector and other such dedicated institutions, the Micro Units Development and Refinance Agency Bank (MUDRA) has been established in 2015. Beginning with a corpus of INR 200 crore, the entity will focus on lending to micro/small business entities engaged in manufacturing, trading, and service activities.
While all these technological developments can enable to leapfrog and provide financial solutions for the unbanked, it needs no gainsaying that there is always a critical need for a balance between embracing its advantages and maintaining the personal contact that is often vital to gaining customer trust, the exchange of information about unique customer needs, and the absorption of financial capability. A proactive focus on the Business Correspondent Model, addressing its weaknesses while buttressing its benefits, appears to hold considerable promise. The Reserve Bank is examining the modalities to ensure a certification program for BC in order to bring greater discipline in this sector.
Government-to-Person (G2P) Payments
World over, governments have been switching to G2P payments in order to reach the targeted beneficiaries in a cost-effective and less distortive manner. According to Pickens, Porteous, and Rotman (2009), as many as 49 social transfer scheme presently deliver payments in 33 countries for a total of 125 million recipients; the total gains to the government from such targeted transfers amount to US $12.6 million. The empirical evidence suggests that G2P payments entail significant development gains, as in case of Mexico (Babatz, 2013) and Argentina (Duryea and Schargrodsky, 2007).
In the Indian context, the government has begun exploiting the JAM trinity towards less distortive way of reaching out to intended beneficiaries. Payments under the flagship Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS) have since 2009 begun to be credited directly to the bank accounts. The PAHAL scheme of transferring LPG subsidies to the poor has already reduced leakages to a significant extent; the potential annual savings is expected to be of the order of INR 127 billion (Government of India, 2016). Empirical evidence conclusively suggests that G2P payments are able to better target the intended recipients and entail significant cost reduction. Using data for the Indian state of Andhra Pradesh, Muralidharan, Niehans, and Sukthankar (2016) find that digitizing social security transfers lower the demand for bribes and raise the payment in the beneficiaries account. Barnwal (2015) estimates that better targeting of LPG subsidies by the Indian government would entail a saving of about US $1 billion.
To examine the impact of MGNREGS on financial inclusion for India, following Ghosh (2016), we use the InterMedia data and exploit the staggered timing of implementation of MGNREGS across certain districts and estimate the following specification for household h in district d at time t as5:
In the equation above, SBFD (Savings Bank Fixed Deposit) is the outcome variable of interest, alternately defined in terms of financial access and use and X is a vector of individual and household determinants such as gender (female vs. male), location (rural vs. urban), income profile (based on the Progress out of Poverty Index, PPI)6, work status and education status, marital status, holding of Aadhaar card, and receiving G2P payments in the account. We control for the non-random rollout of the program by including the interaction of the ‘backwardness’ index (BI) as devised by the Planning Commission (Government of India, 2003) with year dummies (Dasgupta et al., 2017). The index served as a basis for allocating districts to different phases of the program rollout. The district-level controls (μ) include domestic product per capita (DDP) and number of bank branches per 1000 persons as a proxy for financial infrastructure.
Table 11:Impact of MGNREGS on financial access and use.
Notes: # An account is defined as active if the respondent has conducted any financial transactions in the past 90 days. Standard errors in brackets. *p < 0.01; **p < 0.10.
The variable MGNREGS equals 1 if the program was implemented in district d (d = 1, 2) at time t, else zero (Imbert and Papp, 2015). The coefficient of interest is β, which estimates the impact MGNREGS on financial inclusion.
Table 11 shows that access to SBFD account increases by 12.1 percentage points owing to the implementation of the MGNREGS in these districts. In addition, we find that MGNREGS did not perceptibly increase use; in fact, there is a decline in the likelihood of use of SBFD accounts.
We also consider the interaction of MGNREGS * Female to ascertain the differential impact. The results show that access to finance increases by 4.1 percentage points in districts where MGNREGS is introduced early. To understand its economic significance, we look at a change in the average proportion of females from 0.49 (as in case of Rajasthan, the lowest in the sample) to 0.66 (as in case of Uttarakhand, the highest in the sample). The estimates in column 2 indicate that such a change leads to an additional 140 percentage point increase in the probability of access to bank account, quite a significant jump. In case of use, the magnitudes are a tad higher.
Before we conclude, it would be worthwhile to mention two sets of studies which have a bearing on the G2P initiative. The first set of studies explore the relevance of public works program for financial inclusion in the presence of gender-related violence. To provide some examples, Amaral et al. (2016) show that Indian districts which implemented the MGNREGS program early witnessed an increase in domestic violence. Earlier to that, Chin (2012) had demonstrated that female labor force participation is associated with a reduction in domestic violence. More recently, Ghosh and Gunther (2018) showed that households in states with gender-related violence are less likely to own a bank account, notwithstanding the fact that districts in these states were early implementers of the public works program.
The second set of studies examines the interface between public works program and left-wing extremism (LWE) violence and its interplay with financial inclusion. Employing an OLS framework, Barooah (2008) finds that LWE-conflict violence across districts increases with poverty and declines with literacy. Dasgupta et al. (2017) find that the effect of LWE-violence is mitigated by the roll-out of a large public works program (MNREGS) in Maoist-affected states. Using survey data, Ghosh (2019) shows that MGNREGS leads to an improvement in financial inclusion, notwithstanding the deleterious effects of higher LWE-violence.
Our findings therefore suggest that public work programs do play a role in significantly influencing financial inclusion.
Financial Literacy and Customer Protection
Efforts at financial inclusion need to be strengthened on the demand side by