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There has been a marked economic growth of the Indian economy over the years. The fruit of this growth though has not been equitably distributed all over the spectrum of the country. This is very obvious in the rural and agricultural sector. Even in the cities this phenomenon is experienced with the sprawling of slums. An essential element of democracy is inclusive growth. Economic growth of a democracy can be sustainable only if it is inclusive. The inclusive growth is necessary for expansion of market which will sustain the momentum of the economic growth.
An integral part of this economic growth is financial inclusion. Though access to finance is taken for as granted in most developed countries but access and use of formal financial services has its own barriers. Hence financial inclusion is important. Financial Inclusion is defined as the process of ensuring access to financial services and timely and adequate credit where needed by vulnerable groups such as the weaker sections and low income groups at an affordable cost (Rangarajan 2008). To understand the scope of financial inclusion it is important to understand the nature of financial exclusion. Financial exclusion signifies the lack of access by certain segments of the society to appropriate, low-cost, fair and safe financial products and services from mainstream providers (Mohan 2006). The definitions indicated that the need for financial inclusion is for the people who operate at the margin of the society as they are the people who are financially excluded.
ECONOMIC GROWTH AND FINANCIAL INCLUSION
It has to be seen how the financial institutions how they use the mechanism of financial growth and contribute in the process of economic growth. It may seem that low level of financial inclusion is the result of income inequity and decline in equality is likely to have high level of financial inclusion (Kempson et al., 2004). But even the developed economies do not have the inclusive economic growth.
The Reserve Bank of India (RBI) along with other financial institutions, the banking sector has been promoting financial inclusion. This process can broadly be divided into three phases. In the first phase (1960-1990), which was prior to the liberalization, privatization and globalization era emphasis was laid on the financially backward areas of the economy and focus was on directing/diverging the credit flow into that area. In the second phase (1990-2005) emphasis was on strengthening the financial institutions and promoting the help groups self. The third phase started in 2005 when RBI explicitly recognized the issue of financial inclusion in its annual policy statement of April 2005. RBI initiated several measures to achieve financial inclusion, notably facilitating 'no-frills' accounts and "General Credit Cards" for low deposit and credit. Other steps were introduction of pilot projects of 100% Financial Inclusion in the Union Territory of Pondicherry and one district each in all the States and Union Territories and constitution of a separate committee for the north-east region headed by the Deputy Governor of RBI.
Even the Planning Commission has recognized the importance and one of the important recommendations in the 11th Five Year Plan (2007-2012) was for the promotion of financial inclusion. It emphasized that it was imperative that domestic savings from the households should be directed towards productive sectors. It is here that the financial institutions, banking sector have a major role to play in the process of financial inclusion as they are the prime intermediary for the mobilization of savings and subsequent investment fueling the economic growth. Financial inclusion is only a mechanism in achieving and sustaining this economic growth. Hence it is very important that the financial institutions, banking sector to deliver their services at an affordable cost to the vast sections of disadvantaged and low income groups. These institutions need to exterminate the problem of financial exclusion.
JUSTIFICATION FOR FINANCIAL INCLUSION
The major justification about financial inclusion is that it is necessary for economic growth and even poverty alleviation (Beck, Demirguc-Kunt and Levine 2004) and major reason for the financial exclusion is market imperfection. The people who are financially excluded on the ground of informational asymmetries, transactions costs and contract enforcement costs as they lack collateral, credit histories, and connections fail to finance high return investment projects in absence of access to credit. This impedes the rate of economic growth and hinders the process of poverty alleviation. They work as poverty traps and increase income equality (Galor and Zeira, 1993). New development programmes through new investment will spur the economic growth and the impact will be even more when it comes from the financially excluded class. Empirical evidences have been put forward to establish the link between role of financial inclusion and economic growth (Klapper, Laeven and Rajan, 2006). Access to finance is also considered important for democracy and a market economy as it develops the opportunities to everyone (Rajan and Zingales, 2003). This access to finance is often equated with access to basic needs such as safe water, health services, and education (Peachey and Roe, 2004).
EXAMINING FINACIAL INCLUSION
It is argued that financial inclusion is not access to financial services rather use of those services. Distinction has been made between access and use of financial services and their actual use (Beck and de la Torre (2005).
There are various other measures which the financial institutions can take to promote financial inclusion.
Encouraging grass-root level organizations like farmers club as is the case with National Bank for Agriculture and Rural Development (NABARD) and other Non Governmental Organizations who would ensure local participation. Another important aspect is lack of financial education. One of the major reasons for financial exclusion is insufficient network of the banks in the rural areas. This directly impedes the access to institutional credit. The reason given by commercial banks is that high transaction cost acts as a major deterrent for rural expansion. This aspect can be negated by appointment of business facilitators and business correspondent wherein Self Help Groups, Micro Finance Institutions could act as intermediaries. For remote areas and which are otherwise isolated mobile banking can be the solution.
Technology could be the answer to financial exclusion.
Technology: As elaborated earlier, technology is the key to providing
low cost financial services in rural areas. It can reduce transaction
costs sharply and time taken by banks in processing applications,
maintaining accounts and disbursing loans. It has the potential to
address the issues of outreach and credit delivery in rural areas, in
a cost effective manner. However, from the standpoint of 'inclusive
banking', it needs to be realized that technology per se is not an end
in itself. For it to be effective, it has to aid the reform process, which
intends to strengthen the co-operative banks, revitalizing the
omnipresent primary co-operative credit society, addressing the
problems of RRBs, etc. The point is that technology should not be
seen as a panacea for all ailments affecting the banking sector
BC/BF Model: Banks are showing keen interest in pursuing the BC
/ BF model for attracting new customers. Banks should ensure that
the banking awareness created and potential identified by BFs get
translated into business propositions by providing suitable banking
services in the area. One way of doing this is to provide mobile outlets,
which could visit the various locations, as per a schedule programme,
so as to purvey banking services to the excluded.
Micro Finance Institutions
The rural Micro Finance Institutions (MFIs), which have emerged as
a powerful tool for fighting poverty, may be made a part of the financial
system for effective delivery of rural financial services. The banks need
to gear up their rural branches for facilitating bank linkages of SHGs
and JLGs where the programmes have not shown satisfactory
progress. The Business Correspondence models (MFIs, NGOs, etc.),
as recommended by the Internal Group on Micro Finance (Khan
Committee), may also be put in place, which will increase banking
Monitoring Financial Inclusion: For effectively monitoring the
progress in achieving financial inclusion an index on the lines
suggested in this paper may be constructed and progress monitored.
This is essential to enable policy makers to keep a pulse on the
situation with respect to financial inclusion.
Despite the laudable achievements in the field of rural banking, issues
such as slow progress in increasing the share of institutional credit,
high dependence of small and marginal farmers on non-institutional
sources, skewed nature of access to credit between developed regions
and less developed regions loom larger than ever before. Therefore,
the key issue now is to ensure that rural credit from institutional
sources achieves wider coverage and expands financial inclusion. For
achieving the current policy stance of "inclusive growth" the focus on
financial inclusion is not only essential but a pre-requisite. And for
achieving comprehensive financial inclusion, the first step is to achieve
credit inclusion for the disadvantaged and vulnerable sections of our
The state has to play an important role in financial markets. The role
itself is necessitated due to pervasive market failures which in the
current globalised scenario is not a rare occurrence. In developing
countries both market and government as institutions have their
limitations, but it is necessary to design government policies that are
attentive to those limitations. Financial Inclusion is one such
intervention that seeks to overcome the frictions that hinder the
functioning of the market mechanism to operate in favour of the poor
ROLE OF TECHNOLOGY IN FINANCIAL INCLUSION
It would be a great injustice to the organizers of this conference, IDRBT, if I do not share my thoughts on technology related issues in promoting inclusive banking. Financial Inclusion, as envisaged above, will bring in enormous business volumes, large number of additional customers as also manifold increase in banking transactions. This would require application of cutting edge technology to deliver such services efficiently while simultaneously complementing human efforts.
Technology would also be required in terms of providing banking access and other relevant information to customers. Technology is also required to enhance the product range as also their usefulness, as in the case of Kisan Cards. However, while developing and applying such technology, it is imperative that the technology used is user-friendly and tuned to customer needs, keeping in mind that many of such customers might not be familiar with modern technology such as Smart Cards, Biometrics, Touch Screens etc. I am sure that IDBRT would devote adequate resources towards development of such banking technology, which could be useful even for customers who do not have the benefits of formal education.
In terms of quantitative indicators such as bank branches/ATMs per sq. km. of area or bank branches/ATMs per 1000 population, it can be seen that developed countries mostly have higher level of financial inclusion. Similar patterns are also observed in terms of loan/deposit accounts per capita, household share of bank accounts etc. These data reinforce the earlier observation that Financial Inclusion is a prerequisite of economic development.
The international experiences also indicate that what is required is a flexible approach suited to the needs of potential customers and continuous innovation and experimentation so that different banks use different methods and models to reach these customers and attune their strategies.
The Road Ahead
Move towards inclusive financing is a big challenge for the financial system. Besides banking, insurance companies too would be required to target BoP customers. Through specially designed products, if insurance companies can provide risk mitigation and sharing mechanism for the target customers, it would complement funding efforts of the banks.
In our country, efforts have been made in the past and institutions have been created to address the issues relating to financial inclusion. Large number of branches of nationalized banks in rural areas and the network of Regional Rural Banks has taken banking to rural populace. There are good number of Microfinance Institutions and Self-Help Groups catering to the needs of the BoP customers. But Micro finance still plays only a modest role in India.
At the all India level, less than 5% of poor rural households have access to microfinance as compared to 60% in Bangladesh. The southern states account for almost 75% of funds flowing under microfinance programmes. By far the most successful model of microfinance in India in terms of outreach is SHG Bank Linkage. The number of SHG linked to banks increased from 500 in the early 1990s to over 800000 by 2004; however expanding the outreach remains a challenge. SHG Bank linkage reaches out to just 3-6 million women through loans and about 16 million women through providing deposit accounts in a country where there are 400 million people living on less than a $/day.
In March 2004 the Indian MFIs sector as a whole had loans outstanding of about Rs.5 billion reaching less than 2 million people, a tiny fraction of the poor people in India. In contrast larger MFIs in Bangladesh such as Grameen Bank reach well over a Million clients. However, a lot needs to be done to achieve the benchmark levels in terms of Banks' outreach and deposit ratios.
In recent times, as per RBI directives, banks have started the process of greater Financial Inclusion through the No Frills Accounts which should prove to be a gateway for provision of and access to a range of banking products and services.
Banks would need to adopt an innovative, customer-friendly approach to increase their effective reach so that share of organized finance increases. Product, technology and distribution are the important platforms banks can operate on to render their products useful for target customers, without of course compromising on risk management. Even new ways of managing and sharing of risks would be required. For example, banks could acquire skills to operate in commodities markets, which would facilitate new instruments for risk reduction sharing, say by small farmers. Also, flexibility would be needed in terms of deployment of human resources by bringing persons with local knowledge so that bank products can be distributed at attractive costs.
To conclude, banks have large number of outlets in the rural area and it may be further increased. With enabling technology support, the delivery channel could be widened with reduced transaction cost. Further, with the introduction of core banking solution, in most of the banks, there is huge surplus of manpower.
This, surplus manpower, needs to be reoriented to take up the challenge of advising the rural masses and bring them into the fold of banking & credit. The banks need to assess their capacities and local knowledge to promote Financial Inclusion, which would be bank-specific.
Banks could begin with reaching BoP customers in select areas or clusters in certain select activities to begin with. This would facilitate right scaling of skills. Over the period, wider areas and activities could be covered.
However, I am sure with the collective effort from Banks, regulators, the Government, SHGs & corporate sector, more and more rural poor are brought within the ambit of financial inclusion. Banks have an important role and stake in inclusive banking, as it would be a necessary intermediate step towards inclusive growth.