India crossed the 1 billion mark way back in 2001 and at present we are a nation of 102 billion people with approximately 250 Million Poor. 72% of Indian population lives in villages and any policy or action that aims at changing way of life in India and improving standard of living has to have a rural dimension to it. Financial inclusion is one such dream that is a much talked about topic now a days. As per the 2001 census the ratio of quantum of deposit account to adult population (a benchmark used to measure the extent of financial inclusion) was 59% for India with high variations across the states. This ratio is as high as 94% in developed countries like UK. Keeping in mind the role financial inclusion can play in bringing about socio-economic revolution government of India now appears determined to promote it.
What Financial Inclusion is all about?
The question that strikes mind at once is that what financial inclusion is. It’s better to define financial exclusion first and then talk of financial inclusion. Financial exclusion means isolation of a section of people from banking and other financial services like disbursement of loan, life insurance etc. In case of India this exclusion is quite high. Financial inclusion aims at including all the left out people into the banking net. Unfortunately in India the financial service most talked of in terms of financial inclusion is credit extension. However, improvement in savings behavior and channelization of scattered savings is also an aspect of financial inclusion.
Financial inclusion is very necessary as it will make disbursement of benefits of government’s social welfare schemes much simpler and extensive. It will also help in reducing corruption rampant in these schemes. Monitoring of such schemes will become easier and implementation less costly and less cumbersome. Apart from this it also aims at saving poor and down trodden from the clutches of money lenders and giving them enough credit exposure to promote entrepreneurial ability in them. While the haves are able to get loans at a 12-14% interest rates the have-nots of society are forced to get it at rates as high as 40-50% due to financial exclusion.
Hurdles in the way
The hurdles in way of financial inclusion in India are two fold. First, 72% of India’s population resides in villages and compared to this only 42% of public sector banks’ branches are in rural areas. Private Banks on the other hand are completely urban centric. Thus, inadequacy of banking exposure is one reason. Secondly, RBI as made it mandatory for the banks to know their customers well i.e. to open bank accounts only after having proper identity proof. Now, poor and rural people most of the times don’t have proper identity proofs. This stops those having exposure to the banking services enter into the banking net. It is quite contradictory that bank passbooks which serve as identity proof require an identity proof t be possessed. So where does a poor begin in getting an identity proof. Is financial exclusion a by product of identity crisis in India. To an extent the answer is yes although, other factors are also at work. Unique Identification Development Authority’s ADHAAR project with be a revolution for financial inclusion in India and this will make matters much easier for govt. However, we may require waiting long for this revolution and till then the show must go on.
Steps towards Financial Inclusion
Nationalization of Indian banks in 1969 was the first step in this direction. It transitioned India from an era of class banking to mass banking. Banks were made responsible to take care of needs of all. Qualitative credit control and priority sector lending were some tools enforced for the purpose. However extent of availability of banking services couldn’t be much revolutionalized due to existence of bottlenecks and it is only now that the government appears determined to achieve a minimum level of financial inclusion i.e. at least one bank account per family. For this RBI has directed banks to popularize no frill accounts i.e. account with no or very low minimum deposit requirement. Apart from this RBI has also loosened the knot of Know Your Customer procedures for customers with total balance in all their accounts not exceeding Rs.50, 000 and total credit in all accounts in a year not exceeding Rs.1, 00, 000.
Apart from this Micro Finance Institutions are being promoted in the country and these institutions have been included in the priority sector lending by banks. However the extent of effectiveness of MFIs in fostering financial inclusion remains a debatable topic with their high rates of interest, extortionary ways of retrieving money, their presence centering in mainly in states with high financial inclusion and recent rows on the loopholes in their functioning. Anyways the not for profit MFIs i.e. the Self Help Groups are a real revolution as far as financial inclusion is concerned. They have empowered people financially, taught them financial decision making and helped in bringing millions in the net of financial security.
However, the simplest path towards financial inclusion is via extended penetration of public sector banks. It is often thought that rural branches are unprofitable but banks should think from the perspective of interest they can earn on loan disbursed against the deposits collected from these areas. This is the strategy of ‘low margin on high volume’ which can turn financial inclusion into a commercially successful proposition. All banks need to do is to redesign their strategy to add more people from bottom of pyramid. As far as giving new banking licenses is concerned government should ensure that a mechanism is in place to ensure that the newly established banks don’t crowd the already crowded urban banking space.
If taken seriously by the government financial inclusion in India will not be a distant dream with the growing realization among the private sector of the importance of masses in Indian economy.
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