Tài liệu Cost –Benefit and Usage Behaviour Analysis of No Frills Accounts: A Study Report on

College of Agricultural Banking

&

Institute for Financial Management and Research

Centre for Micro Finance

December 2008

Cost –Benefit and Usage Behaviour

Analysis of No Frills Accounts:

A Study Report on Cuddalore District

S. Thyagarajan

Jayaram Venkatesan

S. Thyagarajan is a Member of Faculty at the College of Agricultural Banking, Reserve

Bank of India, Pune (http://cab.org.in). Jayaram Venkatesan is a Research Consultant at

the Centre for Microfinance (http://ifmr.ac.in/cmf/). The views expressed in this paper

are entirely those of the authors and do not in anyway reflect the views of the institutions

with which they are associated.

S. Thyagarajan & Jayaram Venkatesan: Cost –Benefit & Usage Behaviour Analysis of No Frills Accounts

2

Contents

Acknowledgements............................................................................................................. 3

Executive Summary............................................................................................................ 4

Introduction......................................................................................................................... 5

1. Literature Review............................................................................................................ 7

1.1 Notable Indian Initiatives.......................................................................................... 8

2: Financial Inclusion Project ........................................................................................... 12

2.1 Cuddalore District: A Profile.................................................................................. 12

3: Study Methodology....................................................................................................... 15

3.1 Financial Inclusion Project Results......................................................................... 15

3.1.1 Sources for Analysis ........................................................................................ 15

3.2 Account Usage Behaviour ...................................................................................... 16

3.2.1 Sources for Analysis ........................................................................................ 16

3.3 Cost and Break Even of No Frills Accounts........................................................... 16

3.3.1 Sources for Analysis ........................................................................................ 16

4. Financial Inclusion Project Results............................................................................... 17

4.1 New Accounts Opened: Coverage.......................................................................... 17

4.1.1 Variations in Willingness Reported by Banks:................................................ 20

4.2. Households’ Response: Analysis........................................................................... 22

4.2.1 Unwillingness of Households .......................................................................... 22

4.2.2 Willingness of Households .............................................................................. 24

4.3 Branch Manager Interviews.................................................................................... 26

5 Account Usage Behaviour ............................................................................................. 28

5.1 Analysis of Usage ................................................................................................... 28

5.1.1 Field Visit......................................................................................................... 30

5.2 Analysis of Balances Maintained............................................................................ 33

6. Cost and Break Even of No Frills Accounts................................................................. 39

6.1 Account Opening Cost............................................................................................ 39

6.2 Account Maintenance Cost..................................................................................... 42

6.3 Break Even Level.................................................................................................... 42

7. Conclusions and Recommendations ............................................................................. 46

7.1 Conclusions............................................................................................................. 46

7.2 Recommendations................................................................................................. 49

Bibliography: .................................................................................................................... 51

ANNEXES........................................................................................................................ 52

S. Thyagarajan & Jayaram Venkatesan: Cost –Benefit & Usage Behaviour Analysis of No Frills Accounts

3

Acknowledgements

First, we would like to thank Mr. Sandip Ghose, Chief General Manager and Principal,

College of Agricultural Banking, Ms. Annie Duflo (Former Executive Director, Center for

Microfinance) and Mr. Justin Oliver, Executive Director of Centre for Micro Finance for

having given us the support and space for the work that we have been doing. We would

also like to thank Mr. Doug Johnson and Ms. Minakshi Ramji for their constant inputs

and encouragement during the entire study.

We would like to express our gratitude to General Managers in charge of Priority Sector

and Micro Finance of Indian Bank and Indian Overseas Bank at Chennai for their

valuable guidance and involvement. We would also like to thank Regional Heads of

Indian Bank, State Bank of India, Indian Overseas Bank at Cuddalore, district coordina￾tors and branch managers of all the banks in Cuddalore district for their support and help

in providing with the requisite data, interaction and experience sharing during our field

trips. We are extremely grateful to Mr. Kabilan, Lead District Manager, Cuddalore and

Mr. K. Balasubramanian, District Development Manager, NABARD, Cuddalore for

valuable contribution through out the study.

Our special thanks are due to Mr. Rajendra Ratnoo, District Collector of Cuddalore Dis￾trict who has provided all support and help.

S. Thyagarajan & Jayaram Venkatesan: Cost –Benefit & Usage Behaviour Analysis of No Frills Accounts

4

Executive Summary

Financial inclusion is the delivery of financial services at an affordable cost to the vast

sections of disadvantaged and low income group of people who have been excluded

from it. In 2005-06, the RBI exhorted the banks to make available a basic banking no

frills savings account either with nil or very low minimum balances. The State Level

Bankers Committees (SLBC) identified districts in each state and the drive for opening

no frills accounts were completed in 155 districts as of November 2008. This study was

aimed to analyze the results of the no frills financial inclusion drive in Cuddalore district

of Tamil Nadu in terms of coverage by geographical and other categories, cost involved

in account opening and maintenance as also the transactional usage behaviour of such

accounts, which will facilitate in calculating the break even point after which the banks

would earn revenues.

The study highlighted some of the major gaps in the implementation of the drive. A sig￾nificant percentage of households (25 percent) were still left out of the banking net even

after the drive. The study also showed that only 15 percent of the customers were oper￾ating the accounts and bulk of the accounts hadn’t even operated once, one year after

the completion of the drive. An analysis on the operating accounts showed a steady

increase in balances over one year from their account opening date. The study also

highlighted that one of the main reasons behind the non operative accounts was the lack

of financial literacy apart from other reasons such as distance from branches, etc. The

average account opening and maintenance cost of no frills accounts were estimated to

be Rs. 50.45 and Rs. 13.40 respectively. At current levels of transaction and average

balances, it was shown that no frills will break even the maintenance cost but not the ac￾count opening costs.

Some of the recommendations from this study include the need of financial literacy at

the time of account opening, incentives for branch managers delivering on socially re￾sponsible schemes, documentation of best practices on such projects, etc.

S. Thyagarajan & Jayaram Venkatesan: Cost –Benefit & Usage Behaviour Analysis of No Frills Accounts

5

Introduction

Financial inclusion is the delivery of financial services at an affordable cost to the vast

sections of disadvantaged and low income group of people who have been excluded

from it. Financial exclusion is a problem that exists throughout the world and it arises as

a result of various social and economic factors. Achieving financial inclusion is seen

necessary to improve and achieve social inclusion. Countries around the world have

come up with different policies in order to achieve financial inclusion. In India, the

Government of India and the Reserve Bank of India (RBI) have taken various steps over

the years commencing from nationalization of banks in 1969/1980 to the recent ‘no frills’

savings account scheme.

In the budget speech of 2005-06, the Finance Minister stated that “the financial in￾clusion provides business opportunities to the financial institutions at the bottom of the

pyramid”. Reserve Bank of India, in its Annual Policy Statement for the year 2005-06,

urged banks to review their existing practices to align them with the objectives of

financial inclusion. In the Mid Term Review of the Policy (2005-06), the RBI exhorted the

banks to make available a basic banking no frills savings account either with nil or very

low minimum balances as well as charges that would make such accounts accessible to

vast section of population and in a transparent manner. The convenors of State Level

Bankers Committee (SLBC) were advised by the RBI in April 2006 to identify at least

one district in each State/Union Territory for achieving 100 per cent financial inclusion by

providing no frills account and issuing general purpose credit card. Pursuant to the

Annual Policy Statement for the year 2007-08, the banks were urged to scale up their

financial inclusion efforts by utilizing appropriate technology.

By November 2008, of the 342 districts identified, 155 districts in 19 States and 6 Union

Territories were declared to have achieved 100 per cent financial inclusion. As at end￾March 2008, 15788919 no-frills accounts have been opened in the country1

. The

initiative could have a significant bearing on a very large portion of the population since,

if executed properly, it has the capability to bring them into the banking net by offering

1

Report on Trend and Progress of Banking in India, 2007-08, Reserve Bank of India