FINANCIAL INCLUSION: Banking & Finance

Transcription

1 By: Dr C. Gounasegaran Francis Kuriakose Deepa Kylasam Iyer FINANCIAL INCLUSION: Progress so far As India grows in stature on the world stage, there is a danger that it will leave half its population behind, mired in poverty. Financial inclusion is the only way the country can ensure all its citizens benefit from its comparatively healthy GDP growth rates. form. Exclusion could arise due to problems related to access, local conditions, the cost of finance, marketing or self-exclusion in response to negative experiences or perceptions. Financial access provides an environment where people can avail various financial products such as deposits, credit, micro-insurance, pensions, financial counselling and safe fund transfers at affordable prices. Thus financial inclusion is the process of facilitating access to those sections of the population who are denied such facilities, enabling them to become a part of the formal financial system, either as individuals or as groups. Financial inclusion by itself is one of the top policy priorities of the government. It is also an essential part of a larger social inclusion agenda. There is a compelling moral case for equity; but it is also necessary if there is to be sustained growth. A country s most important resource is its people. Joseph E. Stiglitz, Nobel laureate in Economics, 2001 India is a nation of 1.2 billion people, spread across 28 states and seven union territories. There are around 600,000 vil- lages and 640 districts in our country. Forty per cent of the households in India have bank accounts, but only 38 per cent of the 87,051 branches of scheduled commercial banks are in rural areas. A vast majority of our population, especially in rural areas, is excluded from the safety net of easy access to finance. Financial exclusion means the inability to access the necessary financial services in an appropriate Definition and scope of financial inclusion The Rangarajan Committee on Financial Inclusion in India (2008) defines financial inclusion as, The process of ensuring access to financial services and timely and adequate credit, where needed, to vulnerable groups such as weaker sections and low-income groups, at an affordable cost. The United Nations (2006) September 2013 FACTS FOR YOU 25

2 elaborates on the scope of financial inclusion as follows: A financial sector that provides access to credit for all bankable people and firms, to insurance for all insurable people and firms and, to savings and payment services for everyone. Inclusive finance does not require that everyone who is eligible should use each of the services, but they should be able to choose to use them if (they) desired. Thus the scope was widened not only to cover the access to services but also to the wider choice offered to people. The World Bank (2008) further clarifies the scope of access as follows: Broad access to financial services implies an absence of price and non-price barriers in the use of financial services. In sum, the broad area of financial inclusion not only provides an enabling environment to use financial services but also removes both external and internal constraints that stand in the way of people becoming a part of the formal financial system. History of financial inclusion Efforts have been made to provide financial services, especially credit facilities, to the rural population since the 18th century. Taccavi loans were provided to the poor farmers in order to buy seeds and agricultural implements. The institutionalisation of systems for financial inclusion in India began with the establishment of credit cooperatives following the enactment of the Cooperative Credit Societies Act in After Independence, these efforts were intensified, following the recommendations of the All India Rural Credit Survey Committee of The expansion of the traditional commercial banks to rural areas commenced with the nationalisation of the Imperial Bank of India and its History of Financial Inclusion in India Year Particulars 1793 Formal distribution of Taccavi loans 1883 Land Improvement Loans Act to finance agricultural loans to farmers to improve production 1904 Cooperative Credit Societies Act 1928 Subsequent to the Royal Commission on Agriculture in India, Land Mortgage Banks were created 1935 The Reserve Bank of India (RBI) set up its Agriculture Credit Department 1949 The RBI was nationalised 1955 The Imperial Bank was nationalised and renamed the State Bank of India 1963 The Agriculture Refinance Development Corporation was set up 1969 Nationalisation of 14 Scheduled Commercial Banks 1970 Lead Bank Committee (F.K.F. Nariman) was formed Setting up of the Rural Electrification Corporation (REC), Small Farmer Development Agency (SFDA) and Regional Rural Banks (RRBs) 1981 Nationalisation of 6 Scheduled Commercial Banks 1982 Creation of National Bank for Agriculture and Rural Development (NABARD) 1989 Service Area Approach (SAA) was initiated 1992 NABARD s Self Help Group (SHG)-Bank Linkage Policy 1996 Local Area Banks were set up 1997 Targeted Public Distribution System (TPDS) introduced 2005 Task Force on the Revival of Short Term Cooperative Credit Structure (STCCS) 2006 Policy initiative for Business Correspondents (BCs)/Business Facilitators (BFs) 2007 Committee on Financial Inclusion (C Rangarajan) 2008 Agriculture Debt Waiver and Debt Relief Scheme 2009 The Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) came into existence (NREGA since 2005) 2009 Formalisation of the Unique Identification Number Aadhaar 2013 Direct Benefit Transfer Scheme (DBT) Source: Karmakar, K.G. et. al (2011). Towards Financial Inclusion in India, Sage Publications, New Delhi conversion to the State Bank of India in The nationalisation of 14 major commercial banks in 1969 and another six commercial banks in 1980, along with the introduction of the Lead Bank Scheme in 1970, were steps that facilitated rapid expansion of the banking system into hitherto unbanked areas. Regional rural banks (RRBs) were established under the RRBs Act, 1976, to overcome the difficulties faced by commercial banks, like cultural barriers in dealing with rural people and the high costs involved in the setting up of rural branches. The cooperatives, which had made sufficient inroads into rural India, suffered from inadequate resources and a lack of professional competence in banking. RRBs were envisaged as hybrid banks, incorporating the technical competence and professionalism of the commercial banking system with the local field-level knowledge and low-cost structure of the cooperative banking system. The issues of outreach and credit were fundamental and integral to the concept of RRBs. There are 67 RRBs in India with a total network of 16,000 branches as on January The creation of the National Bank for Agriculture and Rural Development (NABARD) in 1982 was specifically intended to extend credit and financial services to farmers and the rural population. The appointment of the Committee on Banking Sector Reforms (R Nar- 26 FACTS FOR YOU September 2013

3 asimhan) in 1998, the Committee on Financial Inclusion (C. Rangarajan) in 2007, and the agriculture debt waiver and debt relief scheme introduced by the Government of India in 2008 have further pushed the cause of financial The introduction of a universal and targeted public distribution system (PDS), the provision for employment in rural areas through the National Rural Employment Guarantee Scheme (NREGS), the implementation of the project to bring the population under a unique identification number (AADHAR) and the Direct Benefit Transfer (DBT) scheme in 2013 are the most recent measures by the government to realise inclusive growth targets. Major attempts to provide financial access to the population have been summarised in the table. Current scenario The bank nationalisation phase in India marked a paradigm shift in Indian banking, as it was intended to shift the focus from class banking to mass banking. Branches of commercial banks and RRBs have increased from 8321 in 1969 to 100,277 as on December 31, The average population per branch office decreased from 64,000 to 18,000 as on June However, there are certain under-banked states such as Bihar, Orissa, Rajasthan, Uttar Pradesh, Chattisgarh, Jharkhand and West Bengal where the branches are unevenly spread. The extent of financial exclusion is 75 per cent or more in the North Eastern states of Meghalaya, Arunachal Pradesh, Mizoram, Manipur and Assam. There are several benchmarks employed to assess the penetration of financial services in a country. For instance, the quantum of current and savings account (CASA) deposits held as a ratio to the adult population can be used to measure the reach of financial inclusion within a specific country, or to compare it to other countries. According to the 2001 Census, India s CASA ratio to the total adult population was 59. Even within the country there was a huge disparity among states. The ratio for Kerala was 89, while that for Bihar was 33. The northern region (Haryana, Chandigarh and Delhi) had a high coverage ratio of 84, compared to the meagre coverage ratio of 21 for Nagaland and 27 for Manipur. The extent of financial services outreach is very low in India especially when compared with developed countries. For instance, per cent population of the UK either has a current or savings bank account. The Reserve Bank of India (RBI) has actively sought to address this problem with a slew of measures, including a new licensing policy for banks that mandates 25 per cent of their branches must be be opened in rural areas that are largely excluded from the mainstream financial economy. Strategies for financial inclusion The methods that need to be adopted for financial inclusion are as follows: Policy measures. Financial regulators (RBI, SEBI and IRDA) and the Government of India have prescribed certain policies to improve the level of financial A prudent policy must ensure the safety of depositors funds, provide stability to the financial system and achieve universal access to financial services through synchronised efforts of the various stakeholders involved. Performance audit of banks should be conducted to measure the outreach of their target clientele and the financial inclusion targets achieved. Making financial services simple, hassle-free and affordable. Financing groups like selfhelp groups or joint liability groups act as substitutes for collateral requirements, while providing social security and reducing transaction costs. Simplification of the lending procedures and lending at reasonable rates of interest can improve financial access further. The Government of India and the RBI have to ensure that the targets under the Differential Rate of Interest (DRI) scheme, which provides credit at 4 per cent interest to a targeted segment of the population, are achieved by the banks. Adoption of villages by banks and utilising the services of farmers clubs, non-governmental organisations, post offices, business facilitators and business correspondents also help to increase financial Creating a conducive climate for lending. Quality and reliable credit information has to be provided to potential borrowers through the establishment of Rural Credit Information Bureaus. A dedicated legal structure on the lines of the Debt Recovery Tribunal (DRT) should be set up for the recovery of rural loans and for a transparent method to write off the dues of deserving or genuinely distressed borrowers. Risk mitigation measures like the National Agriculture Risk Fund would provide relief to small and marginal farmers in times of calamities. The cooperative credit structure with its grass-root presence and vast outreach should be wedded to the operational structure of commercial banks. Infrastructure projects pertaining to irrigation, connectivity and power should be taken up on a large scale to increase the creditworthiness of individuals. Farmers clubs, training schools, agri-clinics and agri-business centres can effectively impart financial literacy to farmers. Use of innovative products. Innovative products to suit the rural September 2013 FACTS FOR YOU 27

4 Smart card clientele should be widely disseminated. Kisan credit cards, no-frills deposit accounts with nil or minimum balance, and micro-insurance that covers life, health and non-life assets will go a long way in reaching out to farmers and the rural population. Widening the ambit of rural non-farm sectors that generate high employment, like the retail trade in utilities and durables, is desirable. Use of technology. Common service centres and advances in information and communication technology (ICT) have contributed to the lowering of banks transaction costs while providing high-quality services. Provision of e-commerce, e- governance, and timely information on weather, markets and disasters will make the process of financial inclusion more effective. Setting up of a Financial Inclusion Fund and a Financial Inclusion Technology Fund are attempts for up-scaling financial Broad review of development programmes In India, policy initiatives for financial inclusion have been traditionally brought out by three major agencies: The Government of India (GoI), the Reserve Bank of India (RBI) and NABARD (National Bank for Agriculture and Rural Development). This multi-headed economic architectural structure implies simultaneous and synergetic action by the concerned agencies. Due to a strong federal polity in India, the central government is the primary authority invested with the power and responsibility to bring about a qualitative change in the economic lives of Indians. Some of the pathbreaking and important policy measures of the last decade that were set up to ensure financial inclusion are discussed in detail below. Public distribution system (PDS). The PDS is an Indian food security system that provides subsidised food and select non-food items to people through a network of public distribution shops (ration shops) both in rural and urban areas. It has been in place for several decades, and the targeted PDS for the last one-and-a-half decades. Major commodities distributed include staple food grains and cereals like rice and wheat and other items like sugar and kerosene. The PDS system distinguishes between households above and below the poverty line. Under the PDS scheme, each family below the poverty line is eligible for 35 kilograms of rice or wheat per month. As 90 per cent of the income of a belowpoverty-line (BPL) household in India is spent on food, PDS empowers the families to invest their income on other socially beneficial activities like education and health, enhancing income and savings of rural households and strengthening the rural economy. Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA). This flagship programme of the Central government enacted by legislation in 2005 provides a legal guarantee for at least one hundred days of employment in every financial year to adult members of any rural household willing to do public works-related unskilled manual labour at the statutory minimum wages. The MGNREGA has provided livelihood and income security, decreased the incidence of poverty, and positively affected health and nutritional outcomes of the poorest and the most marginalised in India. It has also helped reduce the gender differential in wages and has provided alternative work for bonded labourers. This public works programme has led to the opening of 100 million bank and post office accounts, bringing about improved financial National Unique Identity Project. The Unique Identification Authority of India (UIDAI) was set up by the Central government in February 2009 under the chairpersonship of Nandan Nilekani. This is a highly technology-intensive development project that aims to create a citizen-centric database. The project aims to provide a unique identification number to all Indians, thereby doing away with the necessity for multiple identity proofs. This project is also expected to help Indians in reaping the benefits of various government schemes and entitlements, and make it easier to open bank accounts, avail public subsidies, and 28 FACTS FOR YOU September 2013

5 receive timely delivery of goods and services. The brand name of the unique identification number (UID) is Aadhaar, which is a 12-digit number. Aadhaar provides the identity infrastructure for ensuring financial inclusion across the country. For instance, banks can link this unique number to a bank account for every resident, and use the online identity authentication to allow residents to access their account from anywhere in the country. Direct benefit transfers. As part of the financial inclusion drive, the Government of India plans to roll out the Direct Benefit Transfers (DBT) scheme to reach out to the bottom of the socio-economic pyramid. This programme is expected to plug the leakage of subsidies by exclusively targeting the population below the poverty line and enabling direct cash transfers for old-age pensions, scholarships, widow pensions and maternity entitlements to the individual beneficiary s bank account. The DBT scheme was launched in 43 districts spread across 16 states in January This scheme has also mobilised steps to strengthen the banking infrastructure, including opening new branches, installation of ATMs and facilitation of mobile banking. Among the various schemes initiated by the RBI is the Business Correspondent model. In this case, non-governmental organisations/ micro finance institutions set up under the Societies/Trusts Acts, societies registered under the Mutually Aided Cooperative Societies Acts or the Cooperative Societies Acts of States, Section 25 companies, registered NBFCs not accepting public deposits and post offices may act as business correspondents. The scope of activities to be undertaken by business correspondents will include disbursal of smallvalue credit, recovery of principal, collection of interest, collection of Helping people better understand how to borrow and save wisely, and how to build personal wealth is one of the best things we can do to improve the well being of families and communities. Ben Bernake, Chairman, Federal Reserve, United States of America small-value deposits, sale of micro insurance, mutual fund products, pension products, other third-party products, and the receipt and delivery of small-value remittances and other payment instruments. Under the Business Facilitator model, banks may use intermediaries such as NGOs/farmers clubs, cooperatives, community-based organisations, IT-enabled rural outlets of corporate entities, post offices, insurance agents, well-functioning panchayats, Village Knowledge Centres, agri clinics/agri business centres and Krishi Vigyan Kendras for providing facilitation services. Such services include identification of borrowers, collection and preliminary processing of loan applications, creating awareness about savings and other products, education and advice on managing money, debt counselling, processing and submission of applications to banks, promotion and nurturing of self-help groups/joint liability groups, post-sanction monitoring and followup for recovery. India s formal financial services are yet to meet the growing needs of a large part of the population. Half of Indian households do not have a bank account, though more than 40 per cent of the population lives two kilometres from the nearest bank. Hence the informal economy thrives through chit funds, barter and money lenders, in the absence of convenient, reliable, speedy and regulated financial services. The need for increased access to formal financial services is urgent and important for the growth of the Indian economy. The RBI s schemes are designed to ensure affordability, availability, convenience and quality to the banking experience. NABARD has initiated a number of exclusively targeted development programmes for resource-poor backward regions with local participation. The major programmes are Participatory Watershed Development project, Wadi (fruit orchard) development, wasteland development, development of bamboo farming, cluster development, rural entrepreneurship development programme, strengthening rural haats (village markets), and intensive development of backward blocks. Financial literacy is a prerequisite to financial stability. Financial literacy and education play an important role in enabling financial inclusion and inclusive growth. Financial inclusion provides access, whereas financial literacy provides awareness. The disadvantaged people need both access to and awareness of financial services. Financial inclusion is a necessary condition for sustaining equitable growth. There are few, if any, instances of an economy transiting from an agrarian system to a post-industrial modern society without broad-based financial Dr C. Gounasegaran is associate professor and head, Department of Commerce, Kanchi Mamunivar Centre for Post Graduate Studies (KMCPGS), Pondicherry University. Francis Kuriakose is a research scholar in Finance at KMCPGS. Deepa Kylasam Iyer is a writer and an independent researcher September 2013 FACTS FOR YOU 29