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Financial inclusion calls for new initiatives

The poor need not only capital but also real services for their economic activities

PHOTO: MOHAMMED YOUSUF

SOUND ECONOMICS: Andhra Pradesh Chief Minister, Y. S. Rajasekhara Reddy (centre), launching the State Credit Plan 2006-07, at the State-level Bankers Committee meeting on priority sector lending held in Hyderabad recently. K. Ramakrishnan (left), Chairman and Managing Director of Andhra Bank, and State Finance Minister, K. Rosaiah, also participated in the function.

THE TERM `financial inclusion' is popular in Indian financial circles especially after the Reserve Bank of India announced a series of measures in its credit policy for 2006-07 to include many of the hitherto excluded groups in the banking net. The policy advocated an active role for the convener banks of the State Level Bankers' Committees, (SLBCs) in all States, and these were given the responsibility of reaching 100 per cent financial inclusion in at least one district in their area of operation.

Extending the reach of formal financial institutions among the poorest of the poor should mean taking them out of the clutches of money lenders.

The reforms in the financial sector anywhere are meant to meet two major objectives — profitability of the financial institutions as business entities; and serving the needs of the real economy — with due consideration for the principles of equity. But there are obvious contradictions.

In the race for profitability, there is an obvious need to reduce operational costs. In the process, there is a natural exclusion of several sections of the society from the financial net. Reducing the adverse consequences of such exclusion, and bringing the maximum number of people under the financial system is the key concern of financial institutions throughout the world.

U.K. model

In the U.K., the government established a framework for ensuring enhanced financial inclusion, by setting up a Financial Inclusion Fund of 120 million pound sterling over three years and a Financial Inclusion Task Force to oversee its progress. A platform for collaboration between local governments and the financial institutions also has been set up in order to ensure that everyone has access to financial services and that such inclusion corresponds with the needs of local economic development.

In India, the RBI has issued guidelines by which banks are encouraged to enhance the level of financial inclusion in their areas of operation in a time-bound manner.

Financial inclusion is not an end in itself. Having a bank account, or an insurance coverage, ipso facto, does not mean an enhancement in the economic position or well being of a person. But it acts as a facilitator.

Poverty is a well-known problem in most developing countries. But what is needed is to develop mechanisms that ensure that poverty is not exacerbated by lack of access to financial services. People need information and advice when they get into debt. Such information and guidance can best be delivered by appropriate mechanisms. If such effective mechanisms are put in place, they in turn reinforce the demand for credit.

While attempting to reach the hitherto excluded sections through a campaign mode is a laudable initiative, the reality of Indian banking still remains. On one hand, there is a high skewness in financial assets in favour of urban households. The latest RBI figures also indicate that the 85 commercial banks, concentrated in urban centres, account for 78 per cent of India's financial assets while cooperative banks and regional rural banks account for only nine per cent and three per cent, respectively.

This explains, to some extent, the rural retrogression, which has its social reflections in phenomena such as farmers' suicides.

Large institutional intervention, such as in the form of micro finance, has had more of a bandwagon effect than contributing to the dynamics of the economy. Large employment oriented rural programmes still suffer largely from inadequacy of backward and forward linkages. The conventional "credit-technology-market" approach should undergo a major change in favour of innovative organisational initiatives. It is in this context that the relevance of meaningful business development services arises.

The RBI's initiatives also are likely to yield much less of their expected benefits unless the programme is properly restructured to make ripples in the micro-meso layers of the productive system.

On a campaign mode, public sector banks are competing with each other to achieve high targets. In the process, even the bare minimum that is available with the poorer sections of the society will be siphoned off as savings (an indirect effect). But what is added to the local economy?

Some of the banks have come forward with general purpose credit cards and artisan credit cards which offer collateral free small loans. But does it actually help the interests of the poor people, especially when globalisation tends to exclude local economies.

For the poor man, finance is everything as it saves him from day-to-day hardships. But for the planner, providing enough finance does not always mean good economics. Good economics demands that he becomes capable of articulating his financial needs. Financial needs arise out of economic activities that are sustainable. For this, the poor need not only capital but also real services. It is this logic that underlies the setting up of the financial inclusion fund, as also linking up such a fund with initiatives for local economic development.

Public sector banks would rather think on these lines and support professional institutions and organisations that can deliver real services as also conceive and implement capacity building initiatives. Financial inclusion centres may be set up in such professional institutions. The objectives of financial inclusion can better be achieved through such initiatives.

P. M. Mathew

(Director of Institute of Small Enterprises and Development, Cochin. He can be contacted at: director@isedonline.org or ised@md2.vsnl.net.in)

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