Introduction

1. Cost –Benefit and Usage Behaviour Analysis of No Frills Accounts: A Study Report on Cuddalore District- S.Thyagarajan, CAB-RBI- Jayaram Venkatesan, CMF-IFMR

2. 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. • Achieving financial inclusion is seen necessary to improve and achieve social inclusion. • In 2005-06, the RBI urged the banks to make available a basic banking no frills savings account either with nil or very low minimum balances • By Nov 2008, 155 districts in 19 States and 6 Union Territories were declared to have achieved 100% financial inclusion. As of March 2008, 1.57 crore no-frills accounts have been opened in the country.

3. Objective of the study The no frills 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 variety of financial services at affordable costs. However, it also involves a huge cost in terms of account opening and maintenance for the banks and also requires careful implementation in phases This study was aimed to analyze the results of the financial inclusion drive in Cuddalore district to monitor the gap between the scheme’s objective and what has happened on the ground. The study will cover three aspects of the drive namely • Coverage of the drive by geographical and other categories • Transactional usage behaviour of no frills accounts • Cost involved for the banks in account opening and maintenance which will facilitate in calculating the break even point after which the banks would earn revenues.

4. Study Methodology • Financial Inclusion Results: • This section of the study focuses on the analysis of the results of financial inclusion project when the district was declared as 100 percent financially included. • Data Source: Booklet on ‘Financial Inclusion Project in Cuddalore District’ published by the lead bank, survey forms from few branches and questionnaire data from random visit to few households in districts • Account Usage Behaviour: • The section concentrates on operative accounts to see the trend of their account usage in terms of number of transactions and balance. Some of the reasons behind non usage of accounts are also covered • Sample transaction data from 15 branches cutting across geographical and bank categories. Total sample of around 560 accounts were used for the analysis • Cost and Break Even of No Frills Accounts: • Finally, the study focused on the cost of the scheme from account opening and maintenance perspective as well as the benefits that the scheme has brought to the banks as they spent enormous resources in implementing the project. • Data Source: Based on interviews with few branch managers and prevailing market rates

5. Financial Inclusion Process Banking Statistics Total number of branches – 173 Total number of villages per branch – 5 Total households – 5.1 Lakhs Total Villages and wards - 1254

6. Financial Inclusion Drive - Background • Lead bank – Indian Bank with 30 branches • Started the drive in July 2006 • Each branch was alloted a set of villages based on service area concept • Public sector, private sector, Cooperatives and RRBs participated in the drive • Lead bank collected household survey information and then gave it to branches • All the households in the district were surveyed by the branches and no frills account opened for all willing persons. • Progress reviewed based on number of households covered • The drive was completed in September and Cuddalore was declared 100 % Financially Included

7. Financial Inclusion Drive Results Total Number of Households in Cuddalore - 511465 Total Number of No frills account opened – 186935 Total households for which No frills account opened - 144975

8. Variation in Unwillingness Across Banks • ICICI Bank has reported highest percentage of unwillingness. Out of 12288 customer who did not have a bank account, accounts were opened for only 2911 (24 %) customers. Rest of them has been reported as unwilling. • Canara Bank has reported highest percentage (65%) of people already having bank account • Indian Bank has reported the highest percentage of willingness (70 % of households which did not have a bank account) in the district. Given that, they are the lead bank with 30 branches, it had a big impact on the district’s achievement.

9. Unwillingness - Reasons • Possible reasons for unwillingness could be • Distance from banks • Not enough money to save • Other post office/ chit fund accounts. • A small survey on around 20 households who have expressed unwillingess were surveyed within 1 Km of the bank branch in Kumaratchi & Vadalur village. The branches had reported high unwillingness (more than 70%) in these villages • Not a single household said that they had expressed unwillingness. Given a chance now, most of them were ready to open accounts. • In two more bank branches which has reported high unwillingess in Sethiathope and Chidambaram, either most of the survey forms were unfilled / accounts were not opened for willing customers. • Unwillingness to open accounts seems to be for the banks rather than the customers

10. Account Usage • 85 to 90 % of the accounts were inoperative • Only 7 % of all the no frills customers had balances greater than Rs 500 • Small surveys in Vadalur and Reddiyur villages revealed that most of the households are not aware that this passbook can be used to save money • Most of them opened accounts because they thought it will help them get a loan or other government schemes

11. No frills Account Usage for operative accounts Average balance per account for customers (with balances less than Rs 30000) had increased from Rs. 533 when they opened the account to Rs. 1195 after 12 months. Sample size – 560 accounts Roughly 30 to 60 accounts from 15 branches

12. No Frills Balance per account by Account age

13. Balance distribution – Account opened (vs) today The percentage of customers with balance less than Rs. 500 had come down drastically from 78 per cent to 46 percent. This indicated that at least 32 percent of the operating customers had increased their savings over the year.

14. Case Study • Name • Ms Kaliammal • Village • Reddiyur • Occupation • Agricultural labourer • Savings: • Rs 4000 in one year

15. Account opening cost • Account opening cost is tough to estimate due to various dynamics. Most bankers carried no frills account opening as part time over the entire period. Few banks like Indian bank and Punjab National bank had special officers for opening accounts. • On the average, banks have opened around 150 accounts / village • Estimated based on the information from few branch managers and bankers regarding the time involved in account opening, • Account opening has the following costs • Survey time cost • Account opening time cost • Passbook distribution time cost • Passbook cost • Outsourcing cost • Misc cost

16. Account opening cost Estimate • Survey cost: • Cost of a bank officer spending time in a village for survey. For an average village, it takes 2 to 3 days for completing survey. On the average 408 households were surveyed per village or ward. • Computer time cost: • This is the time taken to open account in a computer. It typically takes 10 minutes to open each account and 2 minutes to write in the passbook • Passbook distribution cost: • Passbook has to be distributed back to the customers. It takes one day to go back to the village and distribute it. • Outsourcing cost: • Generally SHG s/ other NGO s help in getting the survey done. They are paid Rs 1 to 2 / account opened • Passbook cost: • Some banks outsource passbook data entries (Rs 1 / account). • Cost per passbook printing assumed as Rs 3 • Misc cost: • This could include passbook cost, survey form cost and other misc expenses. Assumed Rs 3 / account

17. Account opening cost estimation • Account opening cost estimated to be Rs 50.45 • For cooperative banks, where salaries are low compared to others, the account opening cost will be lower. • But it looks possible for banks to keep the account opening cost on the lower end if they plan and allocate resources properly. • The cost of account opening has been borne by the banks entirely. • Canara bank has estimated its cost of opening no frills to be Rs 48

18. Account Maintenance cost • For estimating the cost of maintenance of accounts, it is necessary to calculate the cost per transaction of these accounts. • Inputs into the cost per transaction include the salary cost of the officer handling the cash deposit / withdrawal transactions, along with the passbook entry time cost. The overhead cost in the branch was not taken into account. • It was estimated by the branch managers that it took 5 minutes for a cash deposit / withdrawal transaction and passbook entry took 2 minutes. • Cost per transaction in the no frill account was estimated to be Rs. 13.40. • Canara Bank had reported a cost per transaction of Rs. 10 for no frills account. • Given the cost per transaction at Rs. 13.40, the average number of transactions up to 13 would entail break even for the branches. To have break even in these no frills account with more number of transactions, say, 20, 24, 36 or 48 per annum, the accounts should have higher balances. • It might be safely premised that the no frills accounts would definitely break even the maintenance cost, even with far higher number of transactions, in near future with more savings and bring in revenues for the bank. • Banks cannot break even for all accounts opened taking into account the account opening cost and current level of usage. Account usage has to improve significantly for banks to break even all the costs. Break Even

19. Break Even Table

20. Break Even Table

21. Conclusion • Financial drive still left more than 25 % of the households in Cuddalore district outside the banking net • Reasons for Unwillingness of households have not been obvious. Small surveys of households near the bank and visit to bank branches reveals unwillingness to be untrue. • Usage of accounts opened is near 15 % leaving bulk of the accounts unutilized • Lack of Financial literacy seems to be one of the main reasons for such low usage. • Among the operative accounts, there is a positive trend overall with respect to balance per account and a significant percentage of people have increased their balances from the time of opening their accounts. • Account opening cost was estimated to be Rs 50.45 and account maintenance cost has been estimated as Rs 13.40. • At current level of operations, banks can break even maintenance cost but not account opening cost. Usage percentage has to improve significantly to break even account opening cost.

22. Recommendations • Financial Literacy has to go hand in hand with account opening. Also since people’s memory is short lived, education has to be continuous atleast until they get into the habit of savings. Low cost solutions of financial literacy campaigns might be a good option to look into. • Some of the best practices of account opening with 100 % willingness needs to be documented by banks. They also need to look at strategies for lowering account opening cost by maintaining high willingness. • Our analysis on account opening and maintenance cost should just be viewed as a starting point in reviewing these costs and more intensive studies needs to be done from the bank’s side to look into account opening cost, maintenance cost and break even scenarios. Banks are in best position to do such studies and it could greatly benefit the banks and the common man by making the scheme profitable and financially inclusive. • Currently, there is no incentive for the branch managers to act on such accounts as it is not profitable in the short run. While incentives are purely based on profit one brings to the bank, banks should think of providing incentives to schemes that promote social inclusion.