Financial Inclusion in India

Ever since former Reserve Bank of India Governor, Dr. YV Reddy mentioned the words “financial inclusion” in his 2005 speech, the words became common parlance in the government and at the RBI. The 11th Five Year Plan (2007-12) documented that significant segments of the Indian population had been excluded from the growth over the previous decade and called financial inclusion a top priority.

The extent of financial exclusion remains staggering. Out of 600,000 villages in the country, only about 30,000 have a commercial bank branch. Till recently, more than 50% of India’s population did not have any bank account and more than half of the total farmer households did not seek credit from either institutional or non-institutional sources of any kind.

In 1934, government policymakers made the RBI statutorily responsible for the development of the agriculture sector, to ensure adequate credit was available in an organised manner. The first major initiative was taken in 1955 when the Imperial Bank of India was nationalised to what became the State Bank of India. This was followed by the nationalisation of 14 major commercial banks in 1969.

Several measures were taken in subsequent years, such as mandating banks to lend to small-scale industries, agriculture sector and to small borrowers; opening of bank branches in rural areas; introduction of Lead Bank Scheme; the 20- Point Economic Programme and the Integrated Rural Development Programme.

None of the above measures, however, have had much impact. As per the findings of RBI’s 2009 High Level Committee, the Lead Bank Scheme has been a failure since a large section of the rural population and the urban poor do not have access to banking facilities.

Public sector banks routinely fail to achieve their targets of loans to the agriculture sector. In the name of reforms, banks have been allowed to close rural branches. The latest Jan Dhan Yojana scheme by public sector banks has recently been touted for its success. But of the new 17 crore Jan Dhan accounts, almost 50% are non-operational. How can this be considered success?

The RBI recognises this failure and has set up another committee to determine ways to expedite financial inclusion. The committee must consider reviving the core mission of public sector banks — to serve rural, unbanked areas, lend to the poor at affordable interest rates and disband agents who charge usurious rates.

The committee must assign this mission to the public sector, because private sector goals are fundamentally focused on profits rather than serving the poor.

Financial Inclusion

Financial inclusion is a critical objective for us, the RBI says. Indeed, it should be when Census 2011 says that 50% of Indian households do not have any banking services at all. That is nearly 50 years after the great nationalisation of 1969 and its avowed objective of taking banking to the common man.

Given the level of financial exclusion in India, therefore, we want to encourage non-bank financial intermediaries to play their due, critical role in bridging the vast gaps, the RBI says.

And, it also goes without saying that given the size and diversity of the country, we cannot have just a few non-bank financial intermediaries operating in some exclusive, select places. What we need are thousands of small financial intermediaries operating throughout the country.

But what does the RBI actually do?

It has fashioned a regulatory regime in the past couple of decades which has effectively shut out small level non-bank financial intermediation — in the organised, registered or formal sector.

In 10 years time, we do not have any deposit-taking non-banking financial company with asset size up to Rs. 25 lakh. To be sure, the disappearance of finance companies up to Rs. 25 lakh would also have to do with the fact that the purchasing power of money has declined at an annual rate of more than 10% in the past decade.

The erosion in the value of money increases the value of the assets held. (This is the convergence referred to earlier). Still, we can see that there has been a fall in the number of companies across all asset size ranges up to Rs. 500 crore.

Even 10% or more annual inflation cannot wipe out the millions of small borrowers who could constitute the customer base of small finance companies up to Rs. 500 crore asset size. What is happening to them?

They continue to exist. But, given the RBI’s heavy-handed approach to curtailing the activities of NBFCs, they are left high and dry by the “organised” financial system, as the banks anyway do not deal much with them.


India Post Payments Bank

The government plans to set up 650 India Post Payments Banks and is gearing up fast to provide financial services through all the 1.55 lakh post offices to fulfil the Modi’s vision of financial inclusion. This new service has many special features like affordable price, track & trace, volume discounts, pick up facility, compensation for loss or damage and, therefore, high value for money. With the launch of this service, the Department of Posts is set to start a new chapter of close collaboration between the post office and the businesses in India that want to reach their customers abroad.

The Minister also launched e-IPO (Indian Postal Order) in the denominations of Rs 10, Rs 20, Rs 50 & Rs 100, as a pilot project in Bihar, Delhi and Karnataka, and said that in the next two months, the service will cover the entire country. e-IPO will be used for all purposes like fee payment for RTI/ educational institutions/ Court/ online registration for cable operators etc. Customers can purchase e-IPO online from one’s home or workplace, as per one’s convenience. This launch is a part of Digital India Initiative as the payment will be made through Debit Card/ Credit Card / Net Banking.

At the all-India level, it is estimated that the recurring credit requirements of such small/micro businesses and households aggregate as much as Rs. 20,00,000 crore — 80% of which is met from the non-formal sector.

But what does the RBI have in mind? Its Governor has recently been quoted: “NBFCs should continue to be regulated by RBI as credit creation by non-banks should also be regulated by the central bank for “effective monetary policy.”

One wonders what is there left to regulate deposit-taking NBFCs. What else is one to conclude when the RBI puts up a Rs. 25,000 crore liquidity window to support (arguably undeserving) corporate/HNI investors of debt mutual funds post July 15, 2013; but drives the small non-bank finance company out of business; and, denies an essential service to the small borrower.

From a larger perspective, these are the wages of the central bank not having a single-point economic objective; and, therefore, taking recourse to omnibus bans such as those on NBFCs; and arbitrary moves such as liquidity support to mutual funds.


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