By Suyash Rai, Advocacy, IFMR Finance Foundation

Markets typically exist within the boundaries set by the state. The financial markets are no exception to this. Mobilization and allocation of capital – the key roles of the financial system – are done within the framework defined by the government. From the nationalisation of banks and significant economic ownership to guiding the allocation of capital to priority sectors and regulating various aspects of the financial sector, the Indian government has played just about every conceivable role in the nature of financial intermediation.


The government has also tried to increase financial access primarily through the Reserve Bank of India and other regulators. The most prominent strategy it has followed is the priority sector lending by banks, which requires banks to extend 40% of their lending to sectors defined as preferred (such as agriculture) by the government. Banks and insurance companies have been given targets to open savings bank accounts and provide micro-insurance policies respectively. The government has also used direct influence over public sector institutions to ensure the extension of services at its discretion.

Government Policies and Financial Inclusion

The Self Help Group-Bank linkage programme (SBLP); Kisan Credit Card (KCC) scheme for farmers; Rashtriya Swashtya Bima Yojana (RSBY); financing and refinancing of various cooperative banks, regional rural banks and public sector commercial banks that extend credit to rural clients, especially farmers; and various state-level programmes for extending credit to rural areas are examples of more direct efforts. Many of these steps have had a significant positive impact on financial access.

For example, by March 2009, there were over 61 lakh savings-linked SHGs and over 42 lakh credit-linked SHGs across the country with cumulative credit of over Rs. 50,000 crores accessed since 1992. KCC has become the main source of short-term credit for farmers. As on March 2010, over 5 crore ‘no-frills accounts’ had been opened. Cooperative banks and regional rural banks have the highest outreach with respect to branch penetration in rural areas.

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