This being a political initiative, announced during the PM’s high-profile independence day speech, questions were immediately raised about who ultimately pays for defaults on the overdrafts. Another sticking point was the record of previous Indian outreach programs to the unbanked, many of whose accounts went dormant shortly after they were opened, imposing additional costs on banks and fellow depositors.
Whatever the flaws in the execution of India’s program, very few people disagree with the idea that people need bank accounts. They are instrumental in establishing a credit history and access to loans, which steers people away from more predatory forms of lending. Many effective poverty-reduction tools like microcredit and conditional cash transfers work best with bank accounts.
Because private-sector banks deem the poor to be less-desirable customers, governments often need to intervene, offering bank accounts through government agencies with a presence in most communities, like post offices. In India’s case the process involves compensating middlemen in remote towns who form the last link between the bank and many account-holders. The private sector, for its part, has experimented with mobile banking to remove the need to travel to a bricks-and-mortar bank branch.
According to World Bank data, the unbanked are more likely to be women living in rural areas, where the barriers to banking are greatest because of the costs of visiting town centers where banks are likely to be located. Some 59% of adults in the developing world are estimated not to have an account at a formal financial institution, and 55% or borrowers in these countries use only informal sources of credit.
As the Philippines dabbles with microcredit schemes and CCT, it’s a good time to take stock of where the country stands in providing the banking infrastructure that makes such programs possible.
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