With concerns about the recovery of the Indian economy waning gradually, the focus of policymakers is returning to some enduring issues such as inclusive growth and poverty alleviation. It is important to undertake integrated efforts to tackle these issues and one of them is further enhancement of financial inclusion, which the Rangarajan committee defines 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”. The financial services range from simple savings and loan services provided by banks to insurance, pension and investment services.
Extent of financial exclusion
RBI and the government have taken several initiatives in past few years to enhance financial inclusion across the country. RBI took various measures such as no-frill saving accounts (a saving account that requires no or negligible balance and is without any additional facilities), simple KYC (Know-Your-Customer) norms, easier credit facilities through general purpose credit card (GCC), electronic benefit transfer (EBT) through banks, usage of business correspondent model for remote areas, liberalisation of bank branch and ATM expansion, expansion of banks in north-east states, effective use of information technology, use of regional languages and financial education.
While these initiatives have paid off to an extent in terms of increased network of bank branches in rural area and priority-sector lending, a sizeable portion of the rural and economically vulnerable population remains excluded from basic banking services. Around 40% of the population has bank accounts, just 10% has any kind of life insurance cover and 0.6% have non-life insurance. Further, only 13% of population has debit cards and only 2% has credit cards. This points to the low level of financial inclusion in the country.
The extent of financial exclusion is a concern given that 81% of Indian households save a portion of their income. In this backdrop, the question that now arises is: despite many initiatives taken at various levels and strong saving habits of households, why does a large portion of the population remain excluded from any kind of financial services?
Issues
In addition to lack of financial awareness and language barriers, various demand- or supply-specific factors act as key barriers to financial inclusion. The key barrier from the supply side is transaction costs. Given the low volumes, banks find many difficulties in extending financial services to rural un-banked area. Besides, banks are often seen to be wary of providing credit to relatively high-risk segments, given the uncertainty associated with payback. In order to tackle this issue, banks, in recent years, have partnered with microfinance institutions that provide small loans to low-income segments. However, recently it has been seen that interest rates charged by MFIs are exorbitant and lack transparency in some cases, in turn leading to high cost of credit.
On the demand side, there are various factors that result in low financial inclusion. Currently, the policies are aimed only at helping people to open more bank accounts and extending credit. However, in addition to these basic banking services, poor people also require financial products in which they can invest their small savings and get higher returns.
On the other hand, the inability of poor households to spare money even to complete the initial information for getting bank loans such as a photograph, or income certificate; or to sacrifice a day’s wage for completing the loan formalities becomes a major hurdle in getting credit from bank. For them, the moneylender is more approachable and unlike banks, provides a loan despite a small amount outstanding on a previously taken loan. Further, it has been seen that there are four main types of loans that rural households often require: these are survival loans to meet the hardships particularly during drought, loans urgently required due to socio-cultural commitments such as marriages and festivals, loans for agriculture or business purposes and small loans to meet recurrent operating needs. There is often a mismatch between the credit requirements of rural borrowers and the portfolio of purposes for which banks give credit.
In this regard, efforts taken by a public sector bank in terms of agricultural credit are notable. The public sector bank has extended revolving cash credit to farmers under Kisan Credit Card (KCC) Scheme. The KCC scheme provides farm loans taking into consideration the credit requirements of the farmer for entire year along with his consumption needs. The development of a saving linked financing model not only ensured repayment of loans by farmers but also channelised their savings to bank accounts.
The way ahead
The changing demographic profile of India that will lead to increase in labour force does provide a significant opportunity to banks and financial institutions going forward. The remittances of a large pool of labour force are expected to result in growing source of deposits for banks. Moreover, development of saving products that meet the specific requirements of the poor households and distribution of micro-insurance by banks might help in accomplishing the goal of financial inclusion. Apart from this, supply side issues can be addressed by using the vast postal network, or set up of satellite branches that open on weekly market days at various locations.
The author is Sr Economist, Dun & Bradstreet India
