Financial inclusion report suggests good time for small players

The success of Jan Dhan Yojana in opening a number of bank accounts gave the impression that financial inclusion programme has taken off. But a panel set up to look at a five-year financial strategy for measurable plan for financial inclusion headed by RBI executive director Deepak Mohanty has pointed out that not only are we a long way off from achieving the desired goal but also in many cases we are moving in the wrong direction.

Interestingly, some of the data that have been disclosed and the route that the panel has suggested for financial inclusion highlight opportunities ahead for players in the business.

Before looking into the opportunities first let’s look at the findings of the panel.

The panel was mandated to review the existing policy of financial inclusion including supportive payment system and customer protection study and articulate the underlying policy and institutional framework and suggest a monitorable medium-term action plan for financial inclusion.

In its current form, the panel has found out that there are significant gaps in terms of usage, inadequate ‘last mile’ service delivery, and exclusion of women as well as small and marginal farmers and very low formal link for micro and small enterprises. There were also systemic issues of stability of the credit system, over-indebtedness and agrarian distress.

The committee thus changed its scope of work and set a much wider vision of financial inclusion with a focus on access to a basket of basic formal financial products and services that should include savings, remittance, credit, government-supported insurance and pension products to small and marginal farmers and low-income households at reasonable cost. The panel suggested increasing the access of small and marginal enterprises to formal finance such that by 2021, over 90% of the hitherto underserved sections of society become active stakeholders in economic progress empowered by formal finance.

Further, the committee was of the view that a meaningful financial inclusion is not feasible without government-to-person (G2P) cash transfer.

The poorest of farmers is still dependent on the money lender to meet his financial need. Around 63.7% of farmers with land ownership of less than 1 hectare borrow from moneylenders. Share of banks is less than 13%. As land ownership increases share of borrowing from established channels increases. In case of land holding of over 10 hectares borrowing from moneylenders drops to 16 per cent.

The panel has pointed out that the interest subvention scheme of the government, which provides a two per cent subsidy for short term crop loans to farmers should be done away with and should be replaced with a universal crop insurance scheme for small and marginal farmers. The proposal makes a lot of sense, since anyway the marginal farmer is not benefiting from the scheme as banks are reluctant to lend them money. Financial stress for farmers increases if their crops fail. Insuring against such failures will be of more use to them then a two per cent interest subvention.

For providing credit the panel has suggested a scheme of ‘Gold KCC’ (kisan credit card) with higher flexibility for borrowers with prompt repayment records, which could be dovetailed with a government-sponsored personal insurance, and digitisation of KCC to track expenditure pattern.

Looking at the composition of the Jan Dhan accounts the panel has suggested banks to make special efforts to step up account opening for females and asked the Government may consider a deposit scheme for the girl child – Sukanya Shiksha - as a welfare measure.

The panel has asked to increase the use of Aadhaar which should be linked to each individual credit account and the information shared with credit information companies to enhance the stability of the credit system and improve access. The panel has suggested increased use of technology, including digitalisation of land records to achieve the financial inclusion target.

The panel's recommendation opens up opportunity for banks, especially payment banks in the rural space. Payment banks, because of the low cost structure and mobility are best suited to capitalise on the opportunity.

Software companies stand to gain as increased use of technology, both for fast roll out and prevention of leakages will be more in use. The feet-on-the-ground or the Business Correspondents, as the panel calls them, will have a key role to play in rolling out the various schemes.

But the data which says that nearly two-third of marginal farmer still goes to the local moneylender ensures steady growth for microfinance companies to increase their footprint before the banks catch up with them.

In short, the panel report points out that there is enough room for growth for the financial sector at the bottom of the pyramid.