Can banks help the informal sector move past the black money argument?

Lots of ink has been dedicated to dissecting the impact (or lack thereof) of demonetization on black money, so I won’t spend any more time on it. Instead, I’d like to focus on how – as an unintended or lesser intended consequence – financial inclusion could see a much needed boost. What’s more, for once it’s banks – rather than wallets, telecom players and cab aggregators – that could be at the forefront of this effort.

For once it’s banks – rather than wallets, telecom players and cab aggregators – that could be at the forefront of this effort.

I spent the last week trekking in Uttarakhand, a far cry from the chaos and financial bubble, that is Mumbai. While the cash crunch has been amplified in hilly terrains, where most establishments are a fair distance apart, I was quite stumped to observe the following:

a. Most people working in tourism – hotel employees, cab operators, guides and those employed by government departments – have bank accounts. They don’t use them for anything more than a place to keep some excess money and withdraw when required, but they’re certainly not ‘unbanked.’

b. Each and every one of the more than 30 people I met across four towns had an Aadhaar card. This makes me feel quite crappy about only just having applied for mine, but I digress.

c. All but two of the people I met had a smartphone on which they consume all their entertainment (music, movies), among other things.

In the post November 8th world, all of these people - hitherto paid entirely in cash – are now seeing their salaries transferred directly into their bank accounts.

In the post November 8th world, all of these people - hitherto paid entirely in cash – are now seeing their salaries transferred directly into their bank accounts. Here’s where their possible induction into the formal system starts. They’re leaving what Nandan Nilekani refers to as their own ‘digital trail.’ Thus far, millions of people like those I met have been transacting – i.e. paying, borrowing and saving – from everyone but their banks. They’re used to turning to friends, family, moneylenders, employers and now e-wallets when they need to make payments or secure loans. Chit funds and jewelers help them save for key family goals.

It’s time that banks helped the informal sector with the three things banks are supposed to do:

1.Payments

Now, such people can – and indeed have started to – use banks to pay bills and transfer money home. Can you imagine the time and effort saved when you can avoid a 10 km journey to pay a utility bill? Sure, wallets help with these but it’s time banks did too.

2. Borrowing

Until now, a bank wouldn’t lend to people with non-existent or ‘thin’ credit records. With no evidence of economic activity in their bank accounts, borrowing from banks was something of a non-starter. Suddenly, banks see regular credits and withdrawals in the account and this pattern gives financial institutions the confidence to lend to these people. I hope the day isn’t far when people currently borrowing at 3-5% a month (or well over 50% per annum) can get bank loans at less than half these rates.

3. Savings

Finally, one hopes that the logical next step of this participation in the formal economy will be for customers in the informal sector to generate enough savings over time. This should happen by investing in meaningful financial assets, rather than always having to depend on physical assets like land and gold for future goals.

Here’s to banks taking the lead in financial services for the next 400 million Indians!