How it is done is critical, though costs are not high
Given how just 40% of India’s villages even have a banking correspondent network, it is not surprising that Prime Minister Narendra Modi—and several others before him—should be urging greater financial inclusion. Intuitively, it is obvious there will be benefits if more people have bank accounts, but this benefit has to be weighed against likely costs—this is the reason why the progress of ‘no frills accounts’ has been so poor; while the accounts have been set up, there is little transacting that takes place through them. A Barclays analysis puts some numbers to the likely costs and benefits. The numbers make pushing financial inclusion a no-brainer.
According to Barclays, achieving complete financial inclusion requires setting up of around 6 lakh customer service points. Done the conventional way, this would cost a bomb, but doing this using the banking correspondent method would cost around a tenth. Manning and supervising this infrastructure, the estimate is, would involve a capex of just around R3,000 crore and a recurring opex of around R8,000 crore. In other words, the sums involved are really quite modest. Juxtapose this against the benefits, and you wonder why financial inclusion was not pushed earlier. Just pushing food subsidy payments through Aadhaar-based cash transfers, for instance, would result in savings of around 0.2-0.3% of GDP; in addition, there is the possible movement of savings away from gold into financial products which, Barclays estimates, could add another 0.2% to annual growth as more financial savings help lower interest rates; linking high-value transactions to Aadhaar would make tracking them easier and add another 0.4% of GDP by way of minimising tax evasion. While these numbers in themselves make financial inclusion a viable exercise, banks can even earn healthy fee incomes. A 2% service charge on transferring cash equivalent to the annual subsidy bill—around 3% of GDP—can give the banks a tidy sum, as can the earnings on the float the banks get to keep before customers withdraw their subsidy payments. If financial inclusion doesn’t happen under such propitious circumstances, it never will.