There is unanimity in thinking among the intelligentsia that if India is to become an economic power,growth has to be inclusive and touch the lives of millions of people living in rural India. It is heartening to note that the Government is conscious of the fact and has taken unique steps to which will go a long way in alleviating the sufferings of poor people. The pattern of growth in the financial sector which is gradually being opened up for private participation also follows the model of inclusive growth. However,the policy guidelines differ from one constituent to the other in the financial service sector which is rather inexplicable. It is the informal financial sector which added to the plight of rural poor by not only by not providing financial help at the time of need but also exploiting them to their personal advantage. It was rightly expected that the financial sector in its new avatar would provide succour to the rural poor. While efforts have been made in this direction an overall policy is sadly out of place.
In case of banks,Reserve bank has adopted a two pronged strategy to ensure banks participate in the economic revival of all sections of society by controlling distribution and by making lending to priority sectors mandatory. Distribution is managed by granting license for opening new branches with a stipulation that for every three branches opened in rural and semi urban areas one new branch is allowed to be opened in city area which are more profitable. This ensures that more branches are opened in non urban centres. As per RBI data as of March 31,2008,48,633 commercial bank branches were operating in the rural/semi urban areas as against 29,140 in urban areas. On the lending side 40% of advances have to be made in the priority sector of which 18% are earmarked for agricultural lending and balance 22% for others including housing,education SME etc. In the agricultural sector 25% of total loans have to be for direct lending for agriculture. These mandated provisions have certainly been responsible for flow of credit to rural poor and other less financially affluent sections of society. Banks have done a commendable job in this direction.
In case of Insurance,the regulator IRDA has set equally challenging targets for the industry. They have not mandated opening of offices in rural/semi urban areas like Banks. But companies are required to do minimum amount of rural business and cover certain minimum number of lives from the social sector comprising of unorganized sector and groups from socially weak and vulnerable sections. In case of life insurance it starts from first year of operations and from 6th year onwards companies have to compulsorily sell at least 18% of policies in the rural sector and cover at least 25000 lives annually(as on 31st day of March) from social sector. Most companies have complied with these requirements. Number of life policies sold in the last two years in rural areas were 1.26 crore in 2007-08 and 1.56 crore in 2008-09.Similarly 25000 lives from social sector have been covered. To achieve this life insurance companies had to open more than two-thirds of 11700 branches in rural and semi-urban areas without any statutory intervention
In case of general insurance companies 5 per cent policies are required to be underwritten in rural areas. Compliance is strictly monitored by IRDA and in case of noncompliance companies have been fined.
Sebi has not prescribed any minimum stipulation for mutual funds to distribute products in rural areas or cover people in the social sector. There is also no stipulation like in case of banks that certain minimum branches will be opened in non city and non metro areas. This has lead to concentration of mutual fund branches in urban areas with 75 % of the turnover arising from 16 major towns. One can only guess the reasons for this. One argument can be that equity investments are speculative in nature and it will not be desirable to expose investors in non metro centres to these risks. But if one looks at the responses to some of the large IPOs and the data about number of sub brokers being added in the stock exchanges and the number of demat accounts being opened in non-metro areas,the argument for not making mutual fund industry participate in inclusive growth can hardly be convincing. Notwithstanding the above the bulk of funds with the industry are debt funds. Certainly people in rural and semi urban areas need to be encouraged to save under these secure schemes rather than allow them fall to the temptation of entrusting their savings to informal sector and lose their hard earned money. This business may not be as profitable as in the major cities but is in tandem with the road map for growth envisaged by our Government. The regulatory indulgence is quite surprising.
The new NPS is of recent origin. It is too early for any mandated rural foray. But it will be advisable to lay a long term inclusive growth pattern and to make it mandatory at some future point of time. Merely hoping that various POPs in the rural or semi urban areas will get some business may lead the beneficiaries under the scheme to be confined to cities and urban areas as in case of mutual funds.
While some major initiatives have been taken in ensuring that financial sector touches all sections in the country there is inconsistency in approach. It is high time that a composite policy is put in place to ensure that all participants in the financial sector contribute to the inclusive growth of the economy.