Sunil Jain: Exclusive banking

PERSPECTIVES

The Raghuram Rajan report on financial sector reforms has pointed to the rich-poor divide in banking. So, for instance, under 18 per cent of those in the lowest income quartile have bank accounts as compared to 86 per cent in the top-most quartile; only a tenth of loans in the lowest quartile were from banks as compared to around half in the top-most quartile (there is a great correlation between professions and bank accounts, with wage labourers hardly having bank accounts and most businessmen having them). Not surprising then, that the poorest, who tend to borrow from informal sources, pay the highest interest rates "" around half the loans by the lowest quartile households are at more than 36 per cent interest rates while over 40 per cent of loans in the top-most quartile are at below 12 per cent and another fourth at between 12 and 24 per cent. While that calls for more inclusive banking, a point worth keeping in mind is that even those with bank accounts take significant loans from moneylenders and relatives/friends, where interest rates are very high. Nearly 15 per cent of those in the top-most quartile have taken loans from moneylenders in the last two years and another 32 per cent from relatives/friends (a fourth of those in the top-most quartile pay interest rates of over 36 per cent!). That is, while more bank branches is an obvious solution, it is not the only one. 
 

Sources of loan by income group
Loan sources	% of persons in income quartile who have taken loan from sources in last 2 years
	Lowest income quartile	Second income quartile	Third income quartile	Highest income quartile
Relatives/Friends	39.2	34.4	33.2	32.0
Moneylenders	39.8	33.2	25.8	14.8
Banks	9.6	20.7	33.3	45.8
Self-help groups	9.7	8.4	3.3	3.4
Co-operative societies	5.4	4.9	6.5	7.4
Chit funds/ NBFCs	1.6	1.9	1.5	1.2
Microfinance institutions	1.1	1.4	1.2	0.9
Others	1.0	0.9	0.8	1.4
Sources: Invest India Foundation, IISS, 2007