Friday, March 13, 2009

Financial Inclusion-A Basic Approach

Financial inclusion is an institutional move to cover those unbanked masses who so far have been denied access to formal banking/financial services. So, it has motive to ensure these services to all people in a fair, transparent and equitable manner at an affordable cost.Lack of credit for working capital is often cited as a major reason for the sickness in the agrarian finances/small scale industries,the core aim of this drive is to assist the aspiring peoples with hassle free finance at rational rate of interest besides putting them into overall banking culture.
About 75% of the bottom half of Indian households still rely on informal sources of finance like Moneylenders, and less than 15%have access to bank credits.

So, socio-economically weaker section of country still remains largely untouched from institutional credit despite impressive growth of banking system over the decades. Nearly three quarters of farm households in the country still have no access to any formal source of credit.
According to the Invest India Incomes and Saving Survey Of 2007 by research firm IIMS Data works, just 44.9 percent of Indian earners had bank accounts, though coverage rates varying widely in individual states. Just as 38% of paid workers in villages had accounts compared to 62% of their counterparts in urban areas. These divides creates major loopholes in the development path of financial inclusion plan.

Financial inclusion is a key priority of India not only for sustaining its growth rate but also for poverty eradication at a much faster pace and for bridging the growing rural-urban divide. In crux, financial inclusion needs inclusive developments. The ultimate aim of development in this context is to improve the welfare of common peoples. Size of Indian economy immensely matters during the plan execution; especially with infrastructure development. Its assist a lot in expanding domestic demands which will enhance overall efficiency in the rural sector and boost a large growth of purchasing power.
The declining contribution from the primary sector to GDP reduces the per capita income of the rural population which creating the ground for uneven income distribution.

The overall traditional composition is distorting, average size of farming is declining by effect as proportion of the small and marginal farmer and landless agricultural laborers is rising. In the urban centers proportion of unorganized sectors are increasing besides with the marginalization of laborers.
The committee has also recommended that the government should constitute a national mission on financial inclusion (NAMFI) comprising representative of all stakeholders to suggest the overall policy changes required and supporting stakeholders in the domain of public /private sector and NGOs in undertaking promotional initiatives.
The major recommendation relating to commercial banks included target for providing accounts credit to at least 250 excluded rural households per anum in each rural/semi urban branches; targeted to expansion of commercial savings, credit and insurance products, incentives to human resources for providing inclusive financial services and simplification of procedures for agricultural credits.

The major recommendation relating to RRBs are to extending their services to unbanked areas and increasing their credit-deposit ratios, no further merger of RRBs ; Widening of network and expanding coverage in a time bound manner, separate credit plans for excluded regions to drawn up by RRBs and strengthening of their boards.
In case of co-operative banks the major recommendation were early implementation of Vaidyanathan Committee Revival Packages, use of Primary Agricultural Committees (PACs), and other primary co-operatives society to adopt group approach for financing excluded groups.
Other important recommendation of the committee and encouraging SHG in excluded regions; legal status for SHG, measure for urban micro-finance and separate category of Micro Financial Institutions (MFI).

For focused backing the Lead Banking Scheme (LBS) was introduced in 1969, based on the recommendations of Gadgil Study Group. The bankers committee headed by F.S Nariman; concluded that districts would be the units for area approaches. LBS has some of very vital provisions like, Priority Sector Lending, Different Rate Of Interest Rates(DRI).Potential Linked Plan of NABARD ,Effective channelisation of SHG,SME financing etc.
No doubt, massive investments such of such provisions assist a lot to weaker section upliftment but scale of such benefits are comparatively very low to expectations. Keeping the views of shortcomings in mind Government Of India (GOI) constituted a high power committee headed by Mrs Usha Thorat, Deputy Governor of RBI, to suggest reforms in LBS.

India has been ranked poorly in the first-ever index of financial inclusion (IFI). The index prepared by the Indian Council For Research On International Economic Relations (ICRIER) to find out the reach of banking services in 100 countries world wide ranks India at 50th position this placed below even to countries like Kenya and Morocco. The study underlines the need for expansion of banking services to ensure that they reach the weaker sections. So, banking services have to move from class to mass scale.
The committee on financial inclusion was constituted by the Government Of India under the chairmanship of Dr C Rangarajan on June 26th 2006 to prepare a strategy on financial inclusion. The committee submitted its final report on January 4,2008.

The report viewed financial inclusion as a comprehensive and holistic process of ensuring access to financial services with timely and adequate credit, particularly to vulnerable groups such as weaker sections who falls in low income group at an affordable cost. Financial inclusion, therefore ,should access to mainstream financial products. Such as bank accounts credit remittances and payment services, financial services and Insurance facilities.
The report observed that in India 51.4 percent of farmer households are financially excluded from both formal/informal sources and 73% of farmer households do not access to formal sources of credit. Exclusion is most acute in Central, Eastern and North Eastern region with 64%of all financially excluded farmers households. The overall strategy for building an inclusive financial sector should be based on: -

1. 1.Effective improvements with existing formal credit delivery mechanism

2. 2.Suggesting measures for improving credit absorption capacity especially amongst marginal and sub-marginal farmers and poor non-cultivators

3. 3.Evolving new models for effective reach

4. 4 Leveraging on technology based solutions

Keeping in view the enormity of the task involved, the committee recommended the setting up of a National Rural Financial Inclusion Plan (NRFIP) with a target of providing access to comprehensive financial services to at least 50%(55.77 million) of excluded rural households by 2012 and the remaining by 2015.This would require semi-urban and rural branches of commercial banks and RRBs to cover a minimum of 250 cultivator and non-cultivator households per branch per annum.
From35,000 in early 1990s to as low as 30,572 by March 2006 through mergers and swapping of rural branches –share of 16,000 people per branches is not satisfactory; Any how to see it on all India basis, still only 30% of the rural people have bank account the. The rural people get only 9.2% of the total credit lent out by scheduled commercial banks.

According to NSS data (Indebtedness of farmers households-2003) 46% of the outstanding debts of farmers is sourced from the unorganized financial system. In such despairing scenario, some moves like priority sector lending have come up with extraordinary results; Under this plan ,scheduled commercial banks including RRBs are mandated to lend at least 40% of their net bank credits at concessional rates to the priority sectors comprising agriculturist(18%),SSI(10%) and other small credit seekers from different sectors. By this move, the credit to priority sector increased from 14% in 1969 to 37.7% in 1991 of net bank credit.
RRBs are allowed to fix interest rates and to more relaxation to usher its branches in semi-urban areas.

Now some new priority sectors included new borrowers such as professionals, SMEs , Leasing& hire purchasing companies etc. Priority sector lending are a major stimulus towards the mission of financial inclusion in India which also holds very positive underlying to rural economy.In current global economic crisis it becomes imperative to reshape some regulatory as well as operational practices of financial institution to cater the needs of mass peoples and sustain Indian growth story with more inclusive developments of its people.
Let we hope that financial inclusion’s plan may reestablish more focus on rural development and infuse happiness& esteem in the life and profession of our food earners.

Atul Kumar Thakur
New Delhi

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