Between the state of Access and Use in India: Some observations from the Global Findex

The recently released round of the Global Findex Survey[1] notes that almost all individuals find that there is a need for bank accounts and basic financial services in India. It also notes that 80% of individuals have an account at a financial institution[2]. These figures are quite encouraging, yet we doubt if they paint the complete picture. In this post, we explore the data from the India sample of the Findex 2017 and make three basic observations:

• Access to bank accounts has not increased the active use of financial services
• There is an immediate need for the expansion in formal insurance coverage
• The incidence of the use of digital mediums to access financial services remains very low

Access to financial services has not increased the active use of financial services

The expansive policy efforts taken by the Government have resulted in a high degree of access to basic banking services. Yet, this round of the Findex provides a sobering picture suggesting that access to services has not necessarily translated to active use of financial services. The proportion of respondents that had neither deposited nor withdrew from a financial institution in the past year rose from 22% in 2014 to 39% in 2017. Individuals might have decided against using bank accounts either voluntarily, or because opportunity costs are too high[3].

A salient feature driving the limited use of bank accounts could be to receive government transfers rather than to avail the financial services offered by formal financial institutions. About 57% of respondents to the survey reported receiving government payments into an account. A third of whom reported that one of the primary reasons to open an account was to receive direct benefit transfers from the government. While these initiatives have wider benefits such as preventing any potential leakage, usage limited to receiving benefits may not guarantee active use of other financial services and products.

There is an immediate need for the expansion in formal insurance coverage

According to the Global Findex, the overall incidence of borrowing and saving amongst individuals has reduced over the last three years. While 23% of the sample reported dipping into their accumulated savings to quell emergency expenses, the common source is borrowing from family and friends. The reliance on family and friends for generating emergency funds has also increased from 36% in 2014 to 48% in 2017. If we consider only the poorest 40% of the sample, the dependence on the social networks for emergency funds has doubled in the last 3 years.

More than half of the respondents have claimed that coming up with emergency funds has not been possible. The Report of Committee on Household Finance[4] which was published last year claimed that “loans from formal financial institutions are virtually irrelevant as a coping mechanism, which suggests that the financial system fails to achieve one of its most important goals of helping households smooth cash flows and consumption patterns”. A reason for this difficulty in funding emergency spending could be due to the lack of adequate insurance markets. The report also made an important observation that households deal with emergencies through borrowing ex-post as opposed to insuring against such risks ex-ante. Data suggests that the most commonly cited reason for limited participation in insurance markets has been affordability. About half of the population indicates insurance products as unaffordable, and only 16% state a lack of awareness[5].

The incidence of the use of digital mediums to access financial services remains very low

There has been an increased emphasis on the use of mobile phones and the internet towards financial inclusion. In India, about 30% of the people surveyed, report having used digital payments at least once in the last year. It refers to respondents who reported using a debit or credit card, or a mobile phone or the internet for paying bills, sending or receiving remittances, receiving payments for agricultural products, receiving government transfers, receiving wages, or receiving a public-sector pension directly from or into a financial institution account in the past 12 months.

A closer look at the data suggests that the relatively high usage of digital payments may have been skewed by the high incidence of receiving payments digitally or using debit or credit cards. The number of respondents making digital payments is much higher among the richest 60% at 26%, while it dwindles to 11% among the poorest 40%. The use of mobile phones for accessing financial services remains negligible. With almost 70% of Indians owning mobiles phones[6], only 3% of the respondents above the age of 15 have used the internet to pay bills in the past year. There has been an increase in receiving and sending of domestic remittances, but mobile phones are barely being used for the same and there has been no increase in the use over the past 3 years. With reference to utility bills, only 1% of the respondents resorted to mobile phones to make these payments.  Whereas only 5% of the people above the age of 15 have used a mobile phone or the internet to access a financial institution account over the past one year.

A better understanding of what is limiting the use of financial services is crucial to moving forward

When defining financial inclusion or complete access to financial services, we refer to the state of absence of price or nonprice barriers in the use of financial services[7]. While limited use of financial services could be voluntary, there are certain factors that deem it unviable for the public. Research suggests that there are typically three types of barriers[8] to active use:

• Geographic limitations – the absence of bank branches or delivery points in remote and sparsely populated rural areas that are costlier to service.
• Socio-economic limitations—financial services appear inaccessible to specific income, social or ethnic groups either because of high costs, rationing or discrimination.
• Limitations of opportunity – services most needed by certain groups are not available.

While we have come a long way in bringing down physical barriers to the access of financial services through some proactive policymaking and innovative service delivery aided by technology, there is still a long way to go to enable use.

It is fundamental for us to better understand the reasons for such ineffective transmission from access to use and thus design better, more suitable products for consumers.

In our next post, we share our learnings from our on-going research study which aims to understand this transmission amongst the “newly-banked” segment or first-time users of financial services.

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[1] The Global Findex Database 2017, The World Bank

[2] Financial institution here refers to either a bank, credit union, a microfinance institution, a cooperative, or the post office

[3] Beck, T., Demirguc-Kunt, A., & Peria, M. S. M. (2007). Reaching out: Access to and use of banking services across countries. Journal of Financial Economics, 85(1), 234-266.

[4] Report of Household Finance Committee (2017), Reserve Bank of India

[5] Badarinza, C., Balasubramaniam, V., & Ramadorai, T. (2016, July). The Indian Household Savings Landscape. In India Policy forum.

[6] Report on the Global Findex Database 2017, The World Bank

[7] Beck, T., & De la Torre, A. (2007). The basic analytics of access to financial services. Financial markets, institutions & instruments, 16(2), 79-117

[8] ibid