As a society, we are so obsessed with the utility of giving cheap loans as the primary means by which banks can be of help in economic growth and social transformation. And then we simply fail to see the much lower hanging fruit of enabling safe, convenient, and cost-effective deposit accounts that offer interest rates which are positive in real terms.
An immediate objection to this point of view, raised by well-meaning and learned policy makers (and, of course the enlightened intellectuals), is that since the poor have no income how can they have savings? They fail to see that since the poor have highly erratic and uncertain income flows, it is essential for them to have savings and, over time, they have devised myriad means to have small pockets of savings which enable them to survive from one catastrophe to the next.
The immense utility of safe and convenient deposit services is well brought out by Stuart Rutherford in his book, The Poor and Their Money. He describes the quasi-banking services provided by Jyothi, a middle-aged semi-educated woman in the slums of Vijaywada, who makes her living as a peripatetic deposit collector. Her clients are slum-dwellers, mostly women.
Jyothi has, over the years, built a good reputation as a safe pair of hands which can be trusted to take care of the savings of her clients. The service that Jyothi provided was to enable doorstep deposit collection of amounts as small as Rs5 (and multiples thereof). In this way, she helps her customers save Rs1,100 over a 220 days period, out of which she returns Rs1,000 after keeping her fee of Rs100.
The fact that Jyothi’s business was running well gives us no reason to believe that her customers were dissatisfied by her services or cost. This would seem strange to most of our bankers, policy-makers, economists, and officials from Reserve Bank of India (RBI) and Union government since Jyothi was effectively charging a negative rate of interest of about 30% per annum for her services of enabling financial savings! I am sure all of them would have a fit and curse Jyothi no end for such perfidy.
Actually, the service being provided by Jyothi is neither new nor unique. Way back in 1928, Syndicate Bank introduced a deposit scheme, known as Pygmy Deposits, wherein deposits (as low as 25 paise) were collected periodically from the doorsteps of savers—daily wage-earners, petty shop-keepers, vegetable vendors, hawkers, small traders.
That is, those who could save these small amounts per day or week or month, but did not have the time to go to a bank and deposit this amount regularly.
This scheme proved to be both financially profitable for the bank and, at the same time, attractive to the depositors. It helped the bank develop a large low-cost deposit base in spite of substantially higher transaction costs and with minor changes, it ran well till it was nationalised.
These examples give an indication as to how highly the bottom economic 10% of our population values deposit services – provided it is safe, convenient, without bureaucratic hassles and conducted in the local language.
Saving is the income, which is not consumed, and one of its main purposes is to support consumption at times when there is insufficient income – due to loss of job, illness and old age. In the absence of reliable deposit services, it is difficult to keep savings in financial form. Under such circumstances, savings take the form of building up stores of consumables and durables such as land, extra inventory, food-stuffs, liquid assets such as live-stock (chickens, goats, cows, and pigs), jewellery.
Or by having reserves they can borrow from (friends, relatives, and local grocer), alternatively by not insisting on immediate payment for produce sold or labour charges. Small caches of cash are also kept as savings – but this suffers from the danger of being lost, stolen, borrowed, or spent on impulsive purchases. And even if all this is somehow avoided, idle cash simply loses value over time due to inflation.
Another major drawback of non-financial forms of savings is that it is difficult, if not impossible, to easily transfer it from savers to those who can use it for productive investment. Savers and investors not only differ in temperament, skill and risk-taking ability, but also in having access to profitable investment opportunities. Due to this, very often, savers and investors are different peoples. Or, depending on circumstances, the same person could be a saver at certain times and an investor at other times.
Savings in the form of non-productive assets are less liquid, prone to fluctuations in value, risky to keep, and may not generate value over time. If the same assets are monetised, i.e., exchanged for cash which is kept as deposits with banks and the bank thereafter lends it to investors who are short of funds for making productive investments, society as a whole benefits. Savers benefit by transferring their savings into assets which are more liquid and safer, and gives a positive rate of return.
Investors benefit, by having ready access to funds which augments their savings, on which they can generate a return which is more than the cost of borrowing it. Society benefits by transfer of societal savings to productive investment and by the transformation in maturity of numerous short-term small deposits into larger longer-term investments, both of which are primary drivers of economic growth. Banks benefit by enabling this process and make an earning out of this process.
By offering deposit services, banks enable small bits of savings get transformed into much larger investments without adversely affecting the interests of the savers. Banks do this by offering safety, liquidity, and convenience to depositors and using these funds for making larger, illiquid investments (maturity transformation is one of the prime ways in which financial intermediaries create value).
In fact, there is ample empirical evidence from around the globe that providing safety, liquidity and convenience are more important drivers for attracting bank deposits as compared to the rate of interest offered, especially in underdeveloped economies.
One of the difficulties of handling large number of small value deposit accounts is that it tends to create high transaction costs without commensurate benefits for the banks. Banks, in turn, being urban-oriented institutions never got to thinking of how they could redesign their business processes so as to reduce costs and create value.
Thankfully, today technology is there to help reduce transaction costs to ridiculously low levels, provided a little thought and effort at business process re-engineering is done. The kind of break-through thinking which exploded the market when shampoos started getting sold in Rs5 sachets or when fixed costs of owning a cell phone were slashed, can transform Indian banking and economy if more thought is given to deposit services – banking industry’s step child.
(The author worked with various banks - public, private, and foreign both in India and abroad - for nearly 30 years and is currently on a self-imposed sabbatical to try and understand as to what ails Indian banking and what, if anything, can be done to improve its functioning.)