Financial Inclusion in India – Opinion

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The Government of India has mainly two objectives for equitable and sustainable development in rural India.

1. Institutionalization of Rural Credit delivery system.

2. Total  Financial Inclusion

While, the IRCDS refers to the substitution of informal financial channels by timely, adequate and hassle-free institutional credit, the FI refers to the provision of banking services to all at an affordable rate of interest

The rural financial system in India is over a century old and one of the largest in the world. The institutionalization of credit started with the establishment of Cooperatives in 1904. In 1954 it was observed by the RCSC that the share of Institutional credit was very low. The formal rural credit institutions which existed then were COOPERATIVES.

It was said that Coop. Failed but they must succeed

The Green revolution and HYV programme led to intensive agriculture cultivation which required massive credit inputs in 1965.

The AIRCRC 1969 envisaged a larger role in CB’s in mobilizing deposits and retail banking in rural areas.   The NARIMAN Committee on Banks proposed each bank to concentrate on certain districts-LEAD BANK Scheme. The third constituent in the system came in 1975 – the RRBs to cater to the credit requirements of the rural poor and the weaker section of the society thru low-cost establishment.

Certain sectors of the economy –  Agriculture, SSI, small traders among others were accorded PRIORITY sector lending status. The target was initially set to achieve 33% by March 1979 and 40 % by March 1985. The direct finance to agriculture and allied activities was mandated to reach a level of 18% by March 1989.

This led to a massive proliferation in the number of bank branches in the rural and semi-urban areas from 517 in 1969 to 34996 in 1998.The credit flow for Agri and allied activities increased from Rs. 2945 crores in 1987-88 to Rs. 18078 crores in 1998-99. This credit flow which had reached a level of  Rs. 87000 crores in 2003-4  further increased to Rs. 228000 crore in 2006-7 and Rs.366919 crores in the year 2009-10.

Thus the massive amounts of funds have been infused in the rural economy in the country in the past 6-7 years. Even this exponential growth in the flow of agriculture credit has neither had a significant effect on substitution of the flow of credit from informal credit sources to formal Institutional sources nor has it been able to provide for Total Financial Inclusion.

Financial Inclusion in India – Opinion

All-India Debt and Investment Survey (AIDIS), 2002. Revealed that over a period of 40 years, the share of non-institutional sources of credit for cultivator households had declined sharply from about 93 percent in 1951 to about 30 percent in 1991, with the share of money lenders having declined from 69.7 percent to 17.5 percent. The share of money lenders had again increased to 27 percent, while that of non-institutional sources overall rose to 39 percent. In other words, notwithstanding the outreach of banking, the formal credit system had not been able to adequately penetrate the informal financial markets; rather it seems to have shrunk in some respects in recent years.

As per NSSO data 2004, 51.4% of farmer households are financially excluded from both formal/informal sources. Of the total farmer households, only 27% access formal sources of credit, one-third of this group also borrow from non-formal sources. Overall, 73% of farmer households have no access to formal sources of credit.

Overall, the population covered by each branch has come down from 63,000 in 1969 to 16,000 in 2007 and the total number of check-in accounts held at commercial banks, regional rural banks, primary agricultural credit societies, urban cooperative banks and post offices during this period has risen from 454.6 million to 610.3 million. Still, very few people in the low-income bracket have access to formal banking channels. Only 34% of people with annual earnings less than Rs. 50,000 in urban India had a bank account in 2007. The comparative figure in rural India is even lower, 26.8%.

In its landmark research work titled “Building Inclusive Financial Sectors for Development”1 (2006), more popularly known as the Blue Book, the United Nations (UN) had raised  the  basic  question: “why are so many bankable people unbanked?” Financial inclusion, thus, has become an issue of worldwide concern, relevant equally in economies of the under-developed, developing and developed nations.

A developed financial system broadens access to funds; conversely, in an underdeveloped financial system, access to funds is limited and people are constrained by the poor availability of their own funds and have to resort to high-cost informal sources such as money lenders chukars, etc. Lower the availability of funds higher is their cost, fewer would be the economic activities that can be financed and hence lower the resulting economic growth. Building an inclusive financial sector has gained growing global recognition bringing to the fore the need for development strategies that touch all lives, instead of a select few.

Access to finance, especially by the poor and vulnerable groups is a prerequisite for employment, economic growth, poverty reduction and social cohesion. Further, access to finance will empower the vulnerable groups by giving them an opportunity to have a bank account, to save and invest, to ensure their homes, access to credit, etc., thereby facilitating them to break the chain of poverty.

The essence of financial inclusion is in trying to ensure that a range of appropriate financial services is available to every individual and also enabling them to understand and access those services. However, inclusive finance does not require that everyone who is eligible uses each of these services, but they should be able to choose to use them if they so desired. To this end, strategies for building inclusive financial sectors have to be creative, flexible, appropriate to the national situation and if necessary, nationally owned.

In countries with a large rural population like India, financial exclusion has a geographic dimension as well. Inaccessibility, distances and lack of proper infrastructure hinder financial inclusion. Vast majorities of the population living in rural areas of the country have serious issues in accessing formal financial services.

Another facet of exclusion which needs to be addressed is “Social Exclusion”– which is an extreme consequence of what happens when people do not get a fair deal throughout their lives, often because of disadvantages they face at birth, and this can be transmitted from one generation to the next. Social exclusion is about more than income poverty. It is a short-hand term for what can happen when people or areas have a combination of problems such as unemployment, discrimination, poor skills, low incomes and poor housing. These problems are linked and mutual.

A broad working definition of financial inclusion as given by the Committee on Financial Inclusion is as under:

“Financial inclusion may be defined as 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.”

Thus the financial inclusion can further be explained as an endeavor to ensure that a range of appropriate financial services is available to every individual and enabling them to understand and access these services. Apart from the regular form of financial intermediation, it may include a basic no-frills banking account for making and receiving payments, a savings product suited to the pattern of cash flows of a poor household, money transfer facilities, small loans and overdrafts for productive, personal and other purposes, insurance (life and non-life), etc.

The overall strategy for building an inclusive financial sector may be based on :

Effecting improvements within the existing formal credit delivery mechanism;

Suggesting measures for improving credit absorption capacity especially amongst marginal and submarginal farmers and poor non-cultivator households;

Evolving new models for effective outreach, and leveraging on technology-based solutions.

Two funds had been constituted with NABARD –  Financial Inclusion Promotion & Development Fund, for meeting the cost of developmental and promotional interventions and Financial Inclusion Technology Fund to meet the costs of technology adoption.

Each Fund will have an initial corpus of Rs. 500 crore, with a start-up funding of Rs. 250 crore each, to be contributed equally by GoI / RBI / NABARD and annual accretions thereto.

It needs NABARD to take an aggressive, liberal approach and promote the faster introduction of the IT-enabled services like Smart Card, Bio-Metric Card, ATMs, etc. to effectively make use of these funds in furthering the cause of Financial Inclusion.

To extend hassle-free credit to bank customers in rural areas, the general credit card (GCC) schemes were introduced to enable customers’ access credit on simplified terms and conditions. The  IT-enabled services like Smart Card, Bio-Metric Card, ATMs, etc., have generally met the challenges of increasing the scope and coverage of financial inclusion.

Financial Inclusion exercise taken up by Banks needs to be implemented vigorously by innovative measures like:-

KCC for crop loans, GCC for the nonfarm sector,

JLGs for the tenant, oral lessee, sharecroppers, etc.,

SHGs for poorest among the poor and the largely excluded population,

Mobile Vans for unbanked areas,

Farmers Club for small and marginal and other farmers,

Business  Facilitators / Correspondent.

Banks will need to innovate and devise newer methods and techniques of bringing other such customers into their fold.

The operational strategy should attempt at:

A simple procedure for sanction of loans,

The user-Friendly approach in giving credit and related other services,

Financial Literacy and Education,

Clear and simple terms of loan and recovery,

The incentive of larger loans after repayment of the earlier loan,

Regular monitoring and supervision of loan a/cs,

Ensure quality of service, timely and adequacy of credit and the market-related interest rate on loaning.

Lastly, it would be desirable to mention that Rural Financial Institutions (RFIs) have great business prospects in the Rural Clientele which cannot and should not be ignored. India and its States cannot undermine the importance of Sustainable and  INCLUSIVE  RURAL  PROSPERITY.

It would, therefore, be desirable for the RFIs to prepare and equip themselves with appropriate STRATEGIES, RESOURCES and MECHANISMS to fulfill the aspirations of the RURAL MASSES.

Overall an ATTITUDINAL change is required to be developed amongst the Branch staff which at times is found wanting in extending helpful attitude and approach to the poor. A realization of the PREDICAMENT of the rural poor and assessment of their realistic financial requirements can only bring an ERA of Sustainable and Equitable development of the RURAL INDIA our “BHARAT”


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