The Indian growth story has been chartering exponential graphs since quite some time and there is little doubt that the potential for further growth is only getting bigger with each passing day. The demographic dividend is a significant factor behind the optimism prevailing in the economy as policy makers realize the significant competitive advantage on account of the same. Channelizing this demographic dividend might well be the biggest challenge confronting our ambitious plans to take on the world and make our mark on the global economy.
Financial Inclusion therefore, assumes paramount importance in the light of the aforementioned vision. With the majority of the masses still outside the purview of the financial system, it remains to be seen how soon can the Indian economy bring these neglected few into the folds of the ‘burgeoning’ economy and utilise their services in generating significant and lasting momentum in our growth plans. It is therefore no surprise when one observes the prevailing belief in the current global economic scenario – the more developed the society is, the greater the thrust on empowerment of the common person and low income groups.
In simple terms, financial inclusion is delivery of banking services at an affordable cost to the vast sections of disadvantaged and low income groups. It is an integral policy feature for not just the governments of the developing world but also the developed ones. Unrestrained access to public goods and services is the sine qua non of an open and efficient society. As banking services are in the nature of public goods, it is essential that availability of banking and payment services to the entire population without discrimination is the prime objective of the public policy.
The costs of financial exclusion are varied and consist of increased travel requirements, higher incidence of crime, and general decline in investment, difficulties in gaining access to credit or getting credit from informal sources at exorbitant rates, increased unemployment, etc. It therefore seems plausible to state that financial exclusion is the stepping stone to social exclusion.
The dismal record of the Indian economy in attracting the ‘neglected few’ to the banking folds can be attributed to the following reasons: remote, hilly and sparsely populated areas with poor infrastructure, lack of awareness, low incomes/assets, social exclusion, illiteracy, distance from branch, branch timings, cumbersome documentation and procedures, unsuitable products, language, staff attitudes etc. These factors are instrumental in the high transaction costs and the accompanying procedural hassles. The sorry situation is worsened further by the easy access to ‘informal’ sources of credit – say, the moneylenders who lend at exorbitant rates.
Bank nationalization in India marked a paradigm shift in the focus of banking as it was intended to shift the focus from class banking to mass banking. The rationale for creating Regional Rural Banks was also to take the banking services to poor people. There are certain under-banked states such as Bihar, Orissa, Rajasthan, Uttar Pradesh, Chattisgarh, Jharkhand, West Bengal and a large number of North-Eastern states, where the average population per branch office continues to be quite high compared to the national average. The new branch authorization policy of Reserve Bank encourages banks to open branches in these under banked states and the under banked areas in other states.
Thankfully, for our economy, the policy makers are slowly but surely stepping up the efforts for a major push towards financial inclusion. The RBI has been at the forefront of this landmark movement with a slew of welcome measures. In November 2005, banks were advised to make available a basic banking “no-frills” account with low or nil minimum balances to expand the outreach of such accounts to vast sections of the population. Also, in order to ensure that persons belonging to low income groups, both in urban and rural areas do not encounter difficulties in opening bank accounts, the know your customer (KYC) procedures for opening accounts has been simplified for those persons with balances not exceeding Rs 5000 and credits in the accounts not exceeding Rs.100000 in a year.
In January 2006, banks were permitted to utilise the services of non-governmental organisations (NGOs/SHGs), micro-finance institutions and other civil society organisations as intermediaries in providing financial and banking services through the use of business facilitator and business correspondent (BC) models. The BC model allows banks to do “cash in – cash out” transactions at the location of the BC and allows branchless banking.
In view of their vast branch network (45000 rural and semi urban branches) public sector banks and the regional rural banks have been able to scale up their efforts by merely leveraging on the existing capacity. Financial Inclusion is now being viewed by these banks as a huge business opportunity in an overall environment that facilitates enterprise and growth. It provides them a competitive advantage and defines a clear niche for their growth.
The National Bank for Agriculture and Rural Development (NABARD) has been an active player in India’s quest towards 100% financial inclusion. NABARD has an able partner in the Indian Institute of Banking & Finance (IIBF), Mumbai; together the two aim to equip the business correspondents and business facilitators . It has introduced a scheme to support the capacity building needs of business correspondents and business facilitators of banks in association, under which it will reimburse the course fee of to those who successfully complete the certificate course offered by IIBF. The course will be conducted by IIBF at the state or district level through local accredited institutions.
One of the ways in which access to formal banking services has been provided very successfully since the early 90s is through the linkage of Self Help Groups (SHGs) with banks. SHGs are groups of usually women who get together and pool their savings and give loans to members. NABARD has been the driving force behind these SHGs along with some NGOs; both these entities have been integral in promoting and nurturing such groups and in the process, contributing immensely to the drive towards financial inclusion.
The IT services are now globally recognized as India’s ticket to the exclusive ‘economic superpower’ club. This obvious source of competitive advantage in the global context can reap significant benefits in the domestic context too. Financial Inclusion is one such ‘domestic goal’ that can receive a major fillip with the aid of the aforementioned IT services. Pilot projects have been initiated using smart cards for opening bank accounts with bio metric identification. Link to mobile or hand held connectivity devices ensure that the transactions are recorded in the bank’s books on real time basis. Some State Governments are routing social security payments as also payments under the National Rural Employment Guarantee Scheme through such smart cards. The same delivery channel can be used to provide other financial services like low cost remittances and insurance. The use of IT also enables banks to handle the enormous increase in the volume of transactions for millions of households for processing, credit scoring, credit record and follow up.
Mobile Banking is yet another field where there is a lot of untapped potential when it comes to financial inclusion. It can radically reduce transaction costs even in remote locations. The International Telecommunication Union (ITU) estimates that over half the people of Low Income Countries (LICs) are within reach of wireless service and aims to connect the world by 2015. Basic banking services are made available remotely through low cost wireless phones.
It is important for the public and the private enterprises to realize the significant economic opportunities lying in this seemingly ‘bottom of the pyramid’ scenario. The trick may well be in harnessing the ‘first mover advantage’ as the earlier the enterprises capture the minds (and then the pockets) of the ‘un-banked’ masses, the sooner they might book the seemingly vast and untapped reserves of profits. From a societal point of view too, financial inclusion is a key determinant to the well being of the masses as it has a multiplier impact on the lives of people drawn into the formal financial system and is a direct route to social inclusion.
To conclude, financial inclusion is the key to a holistic and sustainable growth for India in the years to come. High GDP growth in India, triggered by an open economy has created job opportunities in urban and semi-urban India and it will go further into rural India, increasing the potential for growth to vast sections of disadvantaged and low income groups. Financial Inclusion would help in bringing much needed access to the unbanked masses, which are the future growth engine of the economy. While government in India has already set up various initiatives to support Financial Inclusion, they also need to be backed by progressive policies. These can be effectively implemented only through private-public partnerships powered by ubiquitous technologies.