Savings bump

Savings bump

A State Bank of India study says that determined effort to take formal banking services to the entire country may have catalysed positive behavioural change. An increase in savings at the household level is one such change evident on the heels of the spread of banking services. This should encourage everyone to double down on the spread of the formal financial sector, to completely transform the relationship between the state and the citizen.

Spread of banking into India's rural hinterland has been stymied by the relatively high cost of establishing a bank branch. Over the last decade, the solution to the problem has come in the form of advances in communication technology and regulatory permission to banks to use business correspondents to cover the last mile. By the end of the last financial year, if 50,860 villages were covered by physical bank branches, business correspondents managed to penetrate 5.43 lakh villages. These developments on the supply side were supplemented by Prime Minister Narendra Modi's emphasis on bringing the unbanked into the formal system through the Pradhan Mantri Jan Dhan Yojana (PMJDY).

The transformational potential of these developments becomes apparent when juxtaposed with the prevailing system where welfare benefits are distributed in kind and through multiple intermediaries. This system, aptly designated `mai baap sarkar', is prone to abuse of power, denies choice and has a tendency to infantilise people. Experiments in both Africa and Asia suggest cash transfers lead to more positive welfare outcomes ¬ which can be enhanced further if transfers are channelised specifically to women in the household. As welfare bypasses traditional structures and goes straight to the intended recipient, the influence of patronage politics will wane. Spread of the banking sector's reach across the country is also welcome in this context.

The success of this transformation depends in large part on the quality of India's digital infrastructure. Government therefore will have to redouble its effort to enhance the spread and quality of internet connectivity . Along with these supply side changes, government can nudge people to use bank accounts more by expanding the Direct Benefits Transfer (DBT) programme. The banking sector, through both traditional banks and variants such as payments banks, can also help people access a full range of financial products that many of the middle class take for granted. Recent evidence suggests the process is underway