Stressing that "financial inclusion is no longer an option, but a compulsion", Prime Minister's Economic Advisory Council Chairman C Rangarajan today said growth of the bank-SHG (self-help group) linkage programme would give a boost to the micro-finance sector.
Delivering the key note address at a seminar here on microfinance and financial inclusion, Rangarajan said that expansion of the business correspondents programme would also contribute to growth of the sector.
"Bank-SHG linkage programme and expansion of business correspondents model will constitute the main pillars of the future development of bank-related micro finance, even as other forms of micro-finance institution will continue to grow," Rangarajan said.
"The bank-SHG linkage scheme has proved to be an effective way of providing credit to very small borrowers and this needs to be further strengthened. This has worked well and has contributed significantly to financial inclusion, as the financial inclusion attained through SHGs is sustainable and scalable on account of its various positive features," he said.
"One of the distinctive features of the programme has been the high recovery rate. However, the spread of SHGs is very uneven and is more concentrated in southern states. This regional imbalance needs to be corrected," the former RBI Governor said.
He said that in order to increase the outreach of the banking sector, the Reserve Bank has permitted banks to use the service of specified institutions as intermediaries for providing banking services.
However, Rangarajan said it is regrettable that the scheme has not taken off in a big way.
"The business facilitator and correspondent model needs to be effectively implemented, as the model has high potential. Banks must take the initiative to remove the obstacles that come in the way of an extended use of facilitators and correspondents," Rangarajan said.
"The recent announcement of the RBI to allow the corporates with a wide network of retail outlets to become business correspondents is a welcome step," he said.
"However, one critical issue in the effective use of this model revolves around as to who should bear the additional transaction costs resulting from the employment of facilitators and correspondents. This, of course, depends upon the level of use.
"When large transactions, such as those involved in MGNREGA, are entrusted to the banks with compensation, the scheme can take off," he said.
He also suggested ways to strengthening the banking sector in rural areas.
Rangarajan said that rural branches must go beyond merely providing credit and suggested that in districts where the population per branch is much higher that the national average, commercial banks should be encouraged to open branches.
He said that a simplified document for the grant of small loans must also be evolved.
He also focused on issues related to the average size of loans, low cost institutions having a rural bias, local feel and pro-poor focus and the role of technology.
"In the task of making service available to everyone, technology has an important role to play. The required outreach into interiors with low operational cost is only possible with the use of appropriate technology," he said.
"Technology has to be leveraged to create channels beyond branch networks to reach the unbanked and to extend to them banking services similar to those dispensed from branches," he said.