Government of India is emphasizing on inclusive growth and the Approach Paper to the 11th five-year plan says that, “Plan provides an opportunity to restructure policies to achieve a new vision based on faster, broader based and inclusive growth. It is designed to reduce poverty and focus on bridging the various divides that continue to fragment our society” (Planning Commission, 2006). In order to achieve inclusive growth, many argue for people centric and pro-poor macro policies. Achieving inclusive growth is far more challenging than raising economic growth rate. Public Policy should give priority to ‘inclusive’ sectors to avoid lop-sided growth benefitting only a few sections of the society. Financial inclusion is also an effective step towards inclusive growth. It is known that finance plays a catalytical role in the development process. There have been numerous researches analyzing how financial systems help in developing economies. The research has not just looked at how finance helps economic activity but also social aspects like poverty, hunger etc. Like any research on a particular topic, the findings have been diverse and the consensus is that finance helps but the magnitude of impact differs.
Today throughout the world, interests shown by authorities in different countries in financial inclusion clearly show that there are concerns that large segments of the world’s population are excluded from formal payments system and financial markets while financial markets are developing and globalising rapidly. There is an obvious market failure and thus governments and financial sector regulators are seeking to create enabling conditions such that markets become more open, more competitive, affordable and inclusive. The banking industry has shown tremendous growth in volume and complexity during the last few decades. Despite making significant improvements in all the areas relating to financial viability, profitability and competitiveness, there are concerns that banks have not been able to include vast segment of the population, especially the underprivileged sections of the society, into the fold of basic banking services. The reasons may vary from country to country and hence the strategy could also vary but all out efforts are being made as financial inclusion can truly lift the financial condition and standards of life of the poor and the disadvantaged.
What is Financial Inclusion? :”Financial inclusion may be defined 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.” (Rangarajan’s committee on financial inclusion)
Thus, financial inclusion is delivery of banking services at an affordable cost to the vast sections of disadvantaged and low-income groups. 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 good, 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 scope of financial inclusion: The scope of financial inclusion can be looked into: a) through state-driven intervention by way of statutory enactments (for instance the US example, the Community Reinvestment Act and making it a statutory right to have bank account in France). b) through voluntary effort by the banking community for evolving various strategies to bring within the ambit of the banking sector the large sections of society. When bankers do not give the desired attention to certain areas, the regulators have to step in to remedy the situation. This is the reason why the Reserve Bank of India is placing a lot of emphasis on financial inclusion. In India the focus of the financial inclusion at present is confined to ensuring a bare minimum access to a savings bank account without frills, to all. Internationally, the financial exclusion has been viewed in a much wider perspective. Having a current account / savings account on its own, is not regarded as an accurate indicator of financial inclusion. There can be multiple levels of financial inclusion and exclusion. At one extreme, are the ‘super-included’, i.e., those customers who are actively and persistently courted by the financial services industry, and who have at their disposal a wide range of financial services and products. At the other extreme, are the financially excluded, who are denied access to even the most basic of financial products. In between are those, who use the banking services only for deposits and withdrawals of money. But these persons may have only restricted access to the financial system, and may not enjoy the flexibility of access offered to more affluent customers.
International Experience for financial inclusion: An interesting feature which emerges from the international practice is that the more developed the society is, the greater the thrust on empowerment of the common person and low-income groups. It may be worthwhile to have a look at the international experience in tackling the problem of financial exclusion which may be a worthwhile exercise.
The Financial Inclusion Task Force in UK has identified three priority areas for the purpose of financial inclusion, viz., access to banking, access to affordable credit and access to free face-to- face money advice. UK has established a Financial Inclusion Fund to promote financial inclusion and assigned responsibility to banks and credit unions in removing financial exclusion. Basic bank no frills accounts have also been introduced. An enhanced legislative environment for credit unions has been established, accompanied by tighter regulations to ensure greater protection for investors.
A Post Office Card Account (POCA) has been created for those who are unable or unwilling to access a basic bank account. The concept of a Savings Gateway has been piloted. This offers those, on low-income employment, £1 from the state for every £1 they invest, up to a maximum of £25 per month. In addition, the Community Finance Learning Initiatives (CFLI s) were also introduced with a view to promoting basic financial literacy among housing association tenants.
A civil rights law, namely Community Reinvestment Act (CRA) in the United States prohibits discrimination by banks against low- and moderate-income neighborhoods.
The CRA imposes an affirmative and continuing obligation on banks to serve the needs for credit and banking services of all the communities in which they are chartered. In fact, numerous studies conducted by Federal Reserve and Harvard University demonstrated that CRA lending is a win-win proposition and profitable to banks. In this context, it is also interesting to know the other initiative taken by a state in the United States. Apart from the CRA experiment, armed with the sanction of Banking Law, the State of New York Banking Department, with the objective of making available the low-cost banking services to consumers, made mandatory that each banking institution shall offer basic banking account and in case of credit unions the basic share draft account, which is in the nature of low-cost account with minimum facilities. An interesting feature of basic banking account scheme is the element of transparency i.e. the banking institution should, prior to opening the account, furnish a written disclosure to the account holder describing the main features of the scheme i.e. the initial deposit amount required to open the account, minimum balance to be maintained, charge per periodic cycle for use of such account, maximum number of withdrawal transactions without any additional charge and other charges imposed on transactions for availing electronic facility not operated by the account holder’s banking institution, etc.
India Vs North Eastern Region: Bank nationalization in India marked a paradigm shift in the focus of banking. Nationalization of commercial banks in 1969 and 1981 was intended to shift the focus from class banking to mass banking, thereby reaching out the unbanked areas through branch expansion.
The rationale for creating Regional Rural Banks was also to take the banking services to poor people especially in rural areas. The branches of commercial banks and the RRBs have increased from 8321 in the year 1969 to 86960 branches as at the end of March 2010. It further increased to 162894 as on March 2023. However, 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. The new policy also places a lot of emphasis on the efforts made by the Bank to achieve, inter alia, financial inclusion and other policy objectives. Still in March 2023, only about 3 percent banks are in NE Region, out of which about 63 percent of the banks are in Assam, 8 percent in Meghalaya and 4 percent in Nagaland. Within the country, there is a wide variation across states. All the states of North Eastern Region are below all India average No. of accounts per 100 of population as well as No. of accounts per 100 of adult population.
Besides if we look into regional spread of scheduled commercial banks, region wise credit-deposit ratios, penetration of SHG-Bank linkage and variations within the region, it depicts the picture of low financial inclusion of the north eastern region. Today we have index of financial inclusion which also depicts the poor state of affairs in terms of financial inclusion especially if we talk about this region, where all the states of the region are below 20 ranks.
(To be continued…)
ICFAI University, Nagaland
Measures by RBI and GOI towards Financial Inclusion: Historically, the Reserve Bank of India (RBI) and the Government of India (GOI) have been making efforts to increase banking penetration in the country. Some of these measures include the creation of State Bank of India in 1955; nationalisation of commercial banks in 1969 and 1980; initiating the Lead Bank Scheme in 1970; establishing Regional Rural Banks (RRBs) in 1975; introducing a Self -Help Group (SHG)-Bank Linkage Programme in 1992 and formulating the Kisan Credit Card scheme in 2001. In November 2005, banks were advised to make available a basic banking ‘no-frills’ account with low or nil minimum stipulated balances as well as charges to expand the outreach of such accounts to vast sections of the population.
In order to ensure that persons belonging to low-income group, both in urban and rural areas do not encounter difficulties in opening bank accounts owing to procedural hassles, the know your customer (KYC) procedures for opening accounts has been simplified. The Reserve Bank has directed banks to make available all printed material used by retail customers in English, Hindi and the concerned regional language. In January 2006, banks were permitted to utilize the services of non-governmental organizations (NGOs/SHGs), micro-finance institutions and other civil society organizations as intermediaries in providing financial and banking services through the use of business facilitator and business correspondent models. To extend hassle-free credit to bank customers in rural areas, the guidelines on General Credit Card (GCC) schemes were simplified to enable customers’ access credit on simplified terms and conditions, without insistence on security, purpose or end-use of credit. With a view of providing hassle free credit to customers, banks were allowed to issue general credit cards akin to Kisan Credit Cards (KCC).
Consequences of Financial Exclusion: Financial exclusion is a serious concern among low-income households as well as small businesses, mainly located in semi-urban and rural areas. Consequences of financial exclusion will vary depending on the nature and extent of services denied. Financial exclusion complicates day-to- day cash flow management – being financially excluded the low-income households as well as the micro and small enterprises deal entirely in cash and are susceptible to irregular cash flows. Low-income households, the absence of access to bank accounts and other saving opportunities result in lack of savings ; low investments ; lack of financial planning and security for old age ; difficulties in gaining access to credit or getting credit from informal sources at exorbitant rates ; increased unemployment due to lack of self –employment opportunities ; higher incidence of crime etc. Thus, financial exclusion not only widens the ‘Rich-Poor divide’, it also leads to ‘Social Exclusion’.
The Challenged ahead: The banking industry in India has undergone certain fundamental changes over the last two decades. Reforms since the early nineties in the banking sector have facilitated increasing competition, the development of new generation private sector banks as well as technological breakthrough in diverse financial products, services and delivery channels. With the recent developments in technology, both delivery channels and access to financial services have transformed banking from the traditional brick-and-mortar infrastructure like staffed branches to a system supplemented by other channels like automated teller machines (ATM), credit / debit cards, internet banking, online money transfer, etc. But access to such technology is restricted only to certain segments of the society. There is a growing divide, with an increased range of personal finance options for a segment of high and upper middle-income population and a significantly large section of the population who lack access to even the most basic banking services.
Experience has shown that in the initial phase of real and financial sector reforms, there is a need to build in adequate provisions ensuring that the economically weak segment of population have increased participation in the process of economic growth and social development. Reforms in financial systems, therefore, need to be complemented by measures that encourage the institutions, instruments, relationships and financing arrangements to be properly geared for providing sound, responsive financial services to the majority of the people who do not have such access. The essence of financial inclusion is in trying to ensure that a range of appropriate financial services is available to every individual and enabling them to understand and access those services.
For promoting financial inclusion, we have to address the issue of exclusion – of people who desire the use of financial services, but are denied access to the same. Financial exclusion has a geographic dimension as well. Inaccessibility, distances and lack of proper infrastructure hinder financial inclusion. Vast majorities of population living in rural areas of the country have serious issues in accessing formal financial services. And that is the challenge before the banking industry today in India. Therefore, financial institutions have to ponder on the following areas so as to reach out vulnerable sections of the society and include them in the financial network. These are, Appropriate Technology; Appropriate and Efficient Delivery model; Mainstream banks’ determination and involvement; Strong Collaboration among Banks, Technical Service Provider, BC Services; Involvement of all -Especially the state administration at grass-root level; Liberalisation of BC model; Financial education/literacy.
Conclusion: Access to finance, especially by the poor and vulnerable groups is a prerequisite for employment, economic growth, poverty reduction and social cohesion. Further, access to finance will empower the vulnerable groups by giving them an opportunity to have a bank account, to save and invest, to insure their homes or to partake of credit, thereby facilitating them to break the chain of poverty. Thus, “Financial inclusion has become an issue of worldwide concern, relevant equally in economies of the under- developed, developing and developed nations. Building an inclusive financial sector has gained growing global recognition bringing to the fore the need for development strategies that touch all lives, instead of a select few.”
Professor (Dr.) Saundarjya Borbora
ICFAI University, Nagaland