Does financial inclusion really include?

The Pradhan Mantri Jan Dhan Yojana (PMJDY) has seen more than 218 million new bank accounts opened and over 180 million debit cards activated as of May 2016, making it a massive exercise in financial inclusion.

However, the potential of these accounts to drive regular and consistent banking habits, key to achieving universal financial inclusion, is yet to be exploited. Dormancy, despite significant reductions from about 67 per cent in January 2015, remains at about 26 per cent in May 2016. While average balance in active accounts has doubled from ₹836 to ₹1,700 in this period, it has the potential to go higher as people start using their accounts more frequently. If the PMJDY is to realise its vision, it is important that we understand the reasons for the current situation.

We undertook a study to get insights into the reasons for generally low usage of bank accounts from a behavioural science perspective. The findings of the study conducted in Punjab, Assam, Uttar Pradesh, Gujarat, Madhya Pradesh, Maharashtra and Tamil Nadu, open up multiple, behavioural science-informed avenues that can have a large impact on savings behaviour.

The PMJDY bank account user is usually poor, mostly in debt and repaying a loan. Often this loan is taken from informal sources such as moneylenders, at a very high rate of interest.

The survey found that the primary motive for people to open a bank account (encouraged by the PMJDY) was to save. Surprisingly, most poor people have the ability to ‘manufacture’ a surplus from their meagre incomes by compromising on their daily needs to repay the high interest loans. However, this ability to create surplus and the intention to save is not translating into actual savings for three major reasons.

Present bias : During our interactions, we observed many instances of ‘present bias’. The focus on meeting short-term goals results in a behavioural inclination towards informal financial channels with high cost of funds, where the ease of getting a loan outweighs the long-term cost of servicing the loan. People are aware of this shortcoming and try to compensate by using commitment devices, especially during an important life event for which they need to save money. When presented with choices, the respondents selected savings products that put restrictions on withdrawals and provided no additional benefits, over the ones that allowed for withdrawals. One of the respondents explained this seemingly irrational behaviour as driven by the need to “protect the money from ourselves”.

Psychological barriers : Account-holders’ mental model is that banks are meant for saving large amounts, typically in excess of ₹10,000. This means infrequent interactions with the bank and low likelihood of small savings.

Relevance : Since low-income customers are likely to be in a cycle of debt, credit is always relevant to them. However, credit is usually required to meet an immediate short-term need, so convenience and ease of access are valued. Therefore, most people do not see banks as a reliable source of credit because they perceive a high degree of uncertainty in securing a loan (cumbersome processes, time-consuming approvals, etc). Hence their preference for more traditional sources. As one respondent put it, “I don’t risk going to the bank for loans when I am certain to get the money from my moneylender.”

Given these reasons, the challenge then arises in designing products, communication, literacy initiatives and last-mile engagements so that these are relevant to the PMJDY bank account-holder for immediate use, while keeping sight of the future.

The research points to four behavioural levers that can be useful.

First, design products that bridge the gap between current and future needs. Emotionally relevant products with an artificial barrier to withdraw and with a focus on people’s future such as children’s education and marriage gives them a goalpost to bank and save. Many people tend to leave the money from government subsidies untouched for future use. Automated transfers of such subsidies to a savings account or pension account can therefore translate into savings. Banks could design product concepts that are easily understood. The overdraft facility offered by PMJDY bank accounts, for instance, is not well understood by most low-income customers. Instead the bank could design communication to inform people that they can borrow small values against monthly inflows. Similarly, given the familiarity of customers with loan repayments it might help to bundle small savings into loan repayment plans.

Second, address the psychological distance. The Reserve Bank of India encourages banks to address physical distances to branches in villages through ‘Bank Mitras’ or banking correspondents who perform basic services for customers. However, banks also need to address the psychological distance in addition to the physical distance. Besides the core product curriculum, Bank Mitras need to be given soft-skills training to engage with low-income customers and help reduce their inhibitions and intimidation of accessing a bank.

Third, recalibrate financial literacy initiatives. The shift that needs to be made is to move to ‘process literacy’ from traditional financial literacy — how one needs to (for example, save or borrow) rather than why one needs to emerges as an important finding.

Fourth, address perceptions. PMJDY has been successful in getting bank accounts to millions. However, addressing people’s perceptions, that anything from the government is free, will be key. People apply reciprocal relations when they engage with commercial financial institutions. They have to pay back to borrow again in the future. Initiatives from PMJDY should be seen as coming from the financial institution so that it is not envisaged as free money.

Banking and saving can lead to healthier and productive lives for those coming into formal banking channels, provided these initiatives are aligned to the context of the customer. The good news is that we have some answers to the problems. It is all about matching the offerings with the goals, aspirations and anxieties of this audience.

Bakhshi is Senior Program Officer, Financial Services for the Poor, Bill and Melinda Gates Foundation; Parameswaran is Co-Founder, Finalmile Consulting