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Submitted by Nachiket Mor on
This is an excellent post by Kendall and Mass of BMGF. I want to add to this debate by sharing a few more perspectives on this issue: 1. Very strictly speaking, if we carry currency notes, we are all financial included because the currency notes we carry are actually cheques issued by the Central Bank of our country on deposits placed with it. These deposits are unique in that they do not carry any interest (though it is indeed the case that during the Civil War the Southern Confederates did issue interest bearing currency notes: but in return are fully negotiable ("holder in due course" / “bearer” has good title). While I am not an expert on this issue, my understanding is that the principal reason why Central Banks do not offer to pay a premium upon redemption of a currency note is that that they implicitly assume full financial inclusion -- i.e., access to higher interest rate deposits. This is the same logic that the India Central Bank (the Reserve Bank of India) offers for imposing an implicit "tax" on individuals and companies that keep money in savings accounts and current accounts by repressing those interest rates. 2. If we accept the (above) position that as individuals who carry currency notes we do actually have the ultimate "no frills" bank / savings account (UNFSA), the relevant questions then shift from access to any kind of savings account to the features that are offered and how they compare to the UNFSA that we already have. 3. There is a concern that the full negotiability and liquidity of the UNFSA may itself be a problem on one very important count -- since it is fully negotiable it can be converted into a non-financial asset by giving into short-temptation (cup of tea) and not allow the holder to accumulate enough to build a house which arguably could be more "necessary" for her happiness. If indeed this is a valid concern then traditional savings and checking accounts may not be very useful because of the “easy debit” feature that they may offer. Professors Abhijit Banerjee and Sendhil Mullainathan presented a theoretical paper on this at IFMR ( a little while ago on this issue and the empirical work done at the Centre for Microfinance at IFMR by Professors Abhijit Banerjee and Esher Duflo both suggest that this indeed could be a problem and that traditional microloans could actually be a savings device with the saver purchasing a “commitment service” by paying the interest rate to the lender. To many of us that have borrowed money to purchase a home so that we are “forced” to save this will be a familiar problem. Viewed from this perspective the hard line that is often drawn from savings and loans may be actually be a real one and they may actually be substitutes for each other with loans having features that make them a form of savings superior to UNFSA and ordinary savings accounts. One more feature of the loan is that since the final result of the “saving” is already with the client (the repaired or the new home or the study table) and all that she has to do is ensure that she now “saves” regularly by paying her instalments, if the local lender goes belly-up for any reason, her “savings” are still safe with her. 4. In countries like India where the only accounts on offer from banks are low-interest rate savings accounts it is possible that when one subtracts the transactions costs associated with even local level banking the nominal rate of return obtainable on UNFSAs is higher than from traditional savings accounts offered by local financial institutions. There is the added fear that if the local financial institution (or Self-Help Group or a Village Level Savings and Loans Association) is less secure than the Government of India perhaps a relatively high risk premium needs to be subtracted from that savings account as well making the UNFSA a superior alternative. It is not surprising to me therefore that attempts by the Indian banks to offer regular bank accounts have not met with much success in terms of savings account balances in them. For all these reasons I would argue that promoting access to minimalist savings accounts with regular banks without any other services or promoting Village Level Savings Associations (VLSA) or Self-Help Groups that take in savings or cooperative credit institutions that offer savings and loans may not necessarily offer a superior alternative to regular microloans. IFMR Trust ( has experimented with offering, in remote rural locations, Money Market Mutual Funds that invest in short-dated government securities with great success – the transactions costs are near zero, minimum investment amount is 2.5 cents, interest rates are several percentage points higher and since the money is transferred intra-day to the Mutual Fund and away from the Local Financial Institution there is no risk that the insolvency of the local financial institution will “eat into” the savings of the low-income household. For longer-term savings they have just launched the National Pension Scheme and are already signing up more than 100 clients a day with absolutely no marketing and for the rural middle class will soon launch an index based mutual fund. In my view these may be more interesting directions to explore further if one is looking for a product superior to the UNFSA.