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Inclusive Growth & Governance
Samruddha Paradkar, Associate Economist, CARE Ratings    5/30/2011 2:42:05 AM

In the past, theories of development focused on level of domestic production in the economy, the trade balance of the country, or its current account deficit and such other macro economic factors. We hardly find any mention of finance as an important growth factor. Slowly and gradually financial inclusion is finding its way through into main stream economics. Government is directing its policies not only towards achieving economic development but also focuses on micro level, social upliftment in order to bring about holistic growth.

Financial Inclusion
Public goods and services are non-rival and non-excludable in nature. In other words, these are goods and services which cannot be withheld from any individual and must be supplied communally. Banking services are in the nature of public good therefore, it is important that these services should be made easily available to every citizen of the country at affordable costs.
In India, financial inclusion is confined to ensuring the bare minimal access to a savings bank account without frills, to all. However, internationally financial inclusion is viewed in a much wider perspective. Recognizing this, the Central government has relooked at the definition of financial inclusion as not just opening of bank accounts, but also provision of banking services such as credit, remittances, and overdraft facilities and so on.
The Committee on Financial Inclusion, set up under the guidance of Dr. C. Rangarajan defines Financial Inclusion as follows:
“The process of ensuring access to financial services and timely and adequate credit where needed by vulnerable groups such as weaker sections and low income groups at an affordable cost.”

Financial Exclusion — A Reality
Last five decades have seen the banking industry grow tremendously in volume and technology, with introduction of automated teller machines (ATMs), debit/credit cards, internet banking to online money transfers and soon. However, the unresolved point is that the access of these services is constrained to only a few segments of the society. This is evident from the fact that there are 60,000 ATMs in India, of which only 20,000 are in the rural and semi urban regions. With various services like privileged banking or priority banking, focus is mainly on the high and upper middle class income populace. However, there is a considerably large segment of the population which is unaddressed. People with low income do not have access to even the basic banking services. Banks in order to satisfy their profit appetites have ignored this low income segment of the society. This financial exclusion is one obvious truth that is staring us in the face.

Exhibit 1 illustrates the widespread income disparities among the rural and urban population in the country. States like Haryana and Delhi show stark discrepancies in the income distribution among the rural and urban populace, followed by MP, Gujarat and Maharashtra. On the other hand, Kerala, Chandigarh and the north Eastern states reveal lower levels of discrepancy in the income distribution among its rural and urban population. States of Punjab and Chandigarh illustrate that the income distribution among the rural population is greater at around Rs. 2,00,000 and that among the urban population is at around Rs. 1,85,000. However, there is little need to be ecstatic about the discovery as this is mainly on account of wheat producing farmers in these regions being wealthy.

According to the Invest India Incomes and Savings Survey of 2007, 24% of the total paid workforce was in the low-income category, implying that nearly 80 million earners are in the low-income group. This survey further reveals that the average annual income of low-income earners was Rs. 21,000 with rural earners getting only Rs. 18,000.

Further, the Human Development Index 2010 published by the UNDP states that India has performed poorly on almost all indicators like life expectancy, education, per capita income, infrastructure and so on and hence have ranked India at 119th position among 169 countries.

Steps Taken by RBI in order to Attain Financial Inclusion
RBI has made several contributions in order to achieve financial inclusion. Some of them are stated below:

  • Creation of ‘no frill accounts’
  • Liberalized branch expansion
  • Overdraft facility in Savings bank account
  • Undertook financial literacy programmes
  • Introduced technology products and services and so on

The Finance Minister, Pranab Mukherjee, announced that an additional number of 73,000 unbanked villages, with a population of at least 2,000 would be brought under the purview of the banking industry by the end of the current fiscal, out of these 23,000 to avail banking services by the end of April.
Further, the Government has also under taken certain banking facilities like ‘Swabhimaan’ and ‘Swavalamban’ in order to target the unorganized sector.

Despite these numerous efforts, the ‘bottom of the pyramid’ population has not availed of the required banking facilities on account of several reasons. The most prominent problems are stated below:

Awareness Barriers
It is distressing to note the indifference among the masses about the formal banking system. Even people who qualify as ‘banked’ population also have very limited understanding of the use the various banking services in order to enhance their financial security. There is wide spread lack of knowledge that banking products can be used to build up wealth and ensure a comfortable life post retirement. There are numerous services provided by banks that help individuals keep away from frauds and losses from unscrupulous activities.

There is grave lack of awareness among the rural population in India about the banking services primarily on account of lack of access to facilities. There is a need to address these bottlenecks and create awareness among the masses about the benefits of banking services.                         

Regional Barriers
It has been found that there is demand for financial services however it is not being met in the rural regions and also in the interiors, where it is difficult to reach. Therefore, this unaddressed population has to rely on informal sources of finance namely money lenders. Since, these funds are availed at exorbitant rates these poor people are trapped in a vicious circle.

Documentation Barriers
A few banks have penetrated into the rural areas however, using these facilities requires providing various documents regarding a person’s identity, income, etc. It becomes difficult to attain these numerous documents from these poor people. This in turn de-motivates the poor population from availing financial services.

Language Barriers
Problem also arises from language barriers, where people are unable to comprehend the intricate offer documents and hence don’t come forward to subscribe to these facilities.                                   

Profit Barriers
The cost of maintaining bank branches is quite high coupled with low volume of transactions in the rural areas makes branch based banking in such areas unviable. It cannot be denied that private and foreign banks focus on making their order books look more attractive. Hence, the high opportunity and operational costs act as de-motivating catalysts for these banks to reach out to the rural regions of the country.

It is important to note that for a speedy and sustainable development of India, the expansion of the rural population is crucial. It is vital to understand that only ensuring the well being of those in the urban/ metropolitan will not bring about the required long term growth. A holistic approach is required where even the rural population reaps the benefits of advancement of technology.

It is critical to understand that although India’s growth story appears to be rosy and impressive, sustainable growth is not possible without financial inclusion. Therefore, financial inclusion for the bottom of the pyramid population is necessary to alleviate the discrepancies that exist between the rural and the urban population in the country. So far RBI’s objective has been that each individual in the country should have access to the basic financial products, with a short term objective of reaching out to every village with a population exceeding 2,000 being covered by a bank branch by 2012. However, there is a need for policy makers to look beyond the ‘no frill account’ approach to attain financial inclusion.

Some Grave Statistics
Table 1 illustrates that the share of deposits has been declining in the rural, semi urban as well as urban areas from 11.7%, 16.5% and 21.3% as on September 2005 to 9.4%, 13.7% and 21.1% as on September 2010. In contrast, the share of deposits in the metropolitan areas has been increasing gradually from 50.5% as on September 2005 to 55.8% for the same period in 2010. The same peaked to 56.8% during September 2007. The share of credit is lower than that of Deposits in the rural, semi urban and urban areas, however the share of credit in metropolitan areas is greater implying that the resources get intermediated in the metropolitan areas. This indicates that banks earn greater margins and profits through investments in high potential areas as compared to focusing on priority sector lending to underdeveloped regions. The cost of operating a bank account and the cost of transaction for banking services, which includes deposits, withdrawals, credit and other banking products, is not only high for the consumers but also for the banks. This leads to little penetration and reduced delivery of services in order to bring the large number of potential unbanked/under banked population under the mainstream banking system.

Table 2 illustrates the distribution of SCB branches in India. Regional Rural Banks (RRBs), which are partly owned by the Central government (50%) and the State government (15%) along with a sponsor bank (355), has grown to 15,127 branches from a mere 12 branches in 1975. Giving loans to farmers, artisans, etc was the main aim of RRBs. However, RRBs have not been able to achieve the desired results and need to enhance their penetration. It can be observed from the following table that as on March 2009, the Regional Rural Banks (RRBs) have 76.9% branches in the rural areas followed by the SBI comprising 34.6% of its total branches in the rural areas; Nationalized banks together have 34% of its total branches in the rural areas, whereas foreign banks concentrate in the metropolitan region with 79.5% of its total branches set up in the Metropolitan areas and about 1.4% in the rural areas. This brings out clearly the need of foreign banks as well as private players to reach out to the underdeveloped regions.

The Government of India constituted a ‘Committee on Financial Inclusion’ under the leadership of Dr. C Rangarajan in order to address the problem of financial exclusion. The Rangarajan committee considered that steps must be undertaken as a mission to expedite the process of financial inclusion. Noting that the seasonal nature of the occupation in rural parts of the country the committee recommended a savings product suited to the seasonal income pattern of rural households, money transfer arrangements, small credit facilities, life and non-life insurance cover and other financial products and services as necessary for comprehensive financial inclusion. The committee has also suggested a National Rural Financial Inclusion Plan, an elaborate structure to operationalize this plan district level upwards and a National Mission on Financial Inclusion. The Committee stresses on the role of RRBs to extend their services to unbanked areas and increase their credit to deposit ratio.                                   

The focus of the Government should be at gradually removing the supply side constraints arising because private sector banks are less forthcoming in the areas which have low scope of profit making. At the same time there is a need to create awareness amongst the rural population and address the demand side issues. It is seen that even today one third of the rural population depends on loans from traditional and usurious money lenders. Three fourth of the total farmer households do not use the institutional sources of raising credit. Hence, even after four decades of establishing the Regional Rural Banks and National Banks for Agriculture and Rural Development and various steps incentives announced by policy makers in the Government budgets, financial exclusion continues to be a blatant reality.

The scope of financial inclusion cannot be restricted to simple ‘no frill accounts’, it has a wider and a pivotal role to play in achieving a growth process that yields broad based benefits and ensures equal opportunities to all. Financial inclusion is ensuring every individual understands the use and the importance of a wide range of financial services made available to them. 

(Miss Samruddha Paradkar is a University Merit Holder in Economics. She completed her graduation in Economics from St. Xavier’s College and majored in Economics from Mumbai University. She is also a Visharad in Bharat Natyam. She has backed various prizes and scholarships for her excellence in academics and extracurricular activities. Currently she is working with CARE Ratings as an Associate Economist.

The views expressed in the article are personal and do not reflect the official policy or position of the organisation.)


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