Financial inclusion is a process of ensuring the availability of financial services to all sections of society, at an affordable cost. A key objective of financial inclusion is to help the unbanked population with institutional finance, to enable them to become self-employed and ensure a stable income.
The government has made a concerted effort to extend financial inclusion by nationalising banks and establishing a network of rural cooperatives and regional rural banks. The RBI too has initiatives like priority sector lending since the early 1970s, opening of no-frills accounts, establishing business correspondents (BCs) and easing of know-your-customer (KYC) norms. Its latest efforts include the preparation of guidelines for licensing payments of banks and small banks. The National Bank for Agriculture and Rural Development (Nabard) has also supported the cause, adopting measures for cooperative banks and regional rural banks, enabling kisan credit cards and spreading financial literacy. In addition, a number of private sector institutions have also been operating in the area. Despite all this, nearly half the population/ households do not even have a bank account.
It is in this context that Finance Minister Arun Jaitley, in his maiden budget speech, mentioned the Financial Inclusion Mission (FIM) to provide banking services to all households in India. The FIM, focused on empowering the weaker sections of society, is likely to be launched on August 15, with two bank accounts eligible for credit per family. The scheme reportedly conceives six pillars to achieve comprehensive or sampoorn financial inclusion. These are — universal access to banking facilities, financial literacy, basic bank accounts and availability of micro credit, micro insuranc, and pension scheme. The vision is to have a banking account for each family and beneficiary by March 2016. To encourage people to start using banking facilities, the government is considering providing an overdraft of Rs 5,000 through a debit card to every basic banking account holder. The strategy is to strengthen the existing business correspondent model (BCM) to make it operationally flexible and viable with the expansion of banking services.
There are numerous challenges to successfully implementing the above proposals. In the absence of Aadhaar, the implementation of some components of the FIM would have to be phased over a few years, requiring sustained monitoring and supervision by the finance ministry.
There is also the need for a bottom-up approach for the FIM to be successful. This implies the active participation of state governments as well as local governments and panchayati raj institutions (PRI). The panchayats could provide office space on their premises or at common service centres, as well as play an important role in resolving the issue of KYC norms. The retention of staff by BCs is another challenge, as the attrition rate is high because of low remuneration to the agent. Stationary BCs at gram panchayats are a viable option, provided they are also integrated with the common service centre and all payments of government schemes — both state and Central — to rural people are routed through bank accounts and a reasonable commission is fixed for their services.
The role of financial literacy, of both potential customers as well as financial service providers, also needs to be emphasised. This implies distribution of literature in the local and simple language, designing flexibility in instruments and offering tenors that are attractive to the local population and training banking officials to be consumer-friendly. In the field survey undertaken by us in Gubbi, Tumkur, it emerged that financial literacy also needs to be imparted to bank officials. The financial requirements of farmers are different from those of artisans in the same rural area. In general, unbanked people prefer ease in banking transactions, the opportunity to make tiny deposits regularly, small loans and an assured channel for remittances. Other findings from the survey revealed that difficult documentation, high transaction costs and time taken to grant loans were the major reasons for the reluctance to borrow from institutional sources and for preferring, instead, informal sources.
The most important factor for success would be changing the mindset of financial institutions. The need is to convince such institutions, especially commercial banks, that financial inclusion is a viable business proposal. To illustrate, the number of postal accounts (savings, recurring and time), at more than 21 crore, amounts to an outstanding balance of Rs 1,20,000 crore. Similarly, the number of bank accounts at non-metropolitan branches, at 70 crore, records an outstanding deposit of Rs 26,88,322 crore.
These are the figures when only half the population has any type of bank account. Another indicator of untapped resources is the large amount committed to numerous chit funds operating in India and the potential business in remittances from cities to rural areas. According to the latest economic census, of the 58.5 million establishments in 2014, 59.9 per cent were in rural areas. Thus, there is scope for substantial business opportunities in tapping and providing appropriate instruments to unbanked households, especially in rural areas. This would make efforts by commercial banks profitable and commercially viable.
The writers are professors of economics and social sciences, IIM, Bangalore