"Recently the Reserve Bank of India gave its approval for granting two new banking licences. This has come after a decade of waiting for new banking licences and though there were many applicants, notably two big industrial houses, the RBI chose to remain cautious and conservative. Many people wondered why the number of new banks was limited to only two-Bandhan and IDFC - when there were 25 applicants. Perhaps this was because of the RBI’s perception that problems in India’s banking sector are huge and what is needed is financial inclusion which means more banking services for all, especially for the rural population. Only 58.7 per cent of households in the country are availing of banking services, according to the 2011 census. Thus 40 per cent of India’s 1.2 billion population is financially excluded.
The Central government’s attempt at greater financial inclusion started since Independence. There have been many initiatives like priority sector lending in which all scheduled commercial banks are mandated to lend to the agricultural and small-scale sectors. In addition, it has promoted the growth of cooperative and regional rural banks. There has also been the formation of self-help groups for providing credit to vulnerable groups. A recent RBI committee on financial inclusion headed by Nachiket Mor suggested that priority sector lending should be increased to 50 per cent of bank lending from its current 40 per cent.
Though the credit share of rural areas in terms of number of branches accounts for 30 per cent of the total branches of scheduled commercial banks, the share of actual rural credit accounts for less than 10 per cent of the total credit. Public sector banks have 33.1 per cent branches in rural areas where as the private sector bank branches amounted to just 13.3 per cent of their total branches (March 2013). Banks have been asked to prepare self-set targets for opening rural ’brick and mortar’ banks and hiring business correspondents, and offering financial products like basic savings bank deposit accounts (BSBD), kisan credit cards and general credit cards since January 2010. The banks’ plans for financial inclusion are closely monitored by a regulator on a monthly basis. As a result, there has been progress. But small-scale enterprises haven’t been well served.
In my research interviews with owners of small enterprises like making dairy products in Punjab villages and handlooms/handicrafts in rural West Bengal, I invariably found that lack of credit availability was one of the major constraints towards business expansion. Around 90 per cent of small businesses have been found to have no links with formal financial institutions. The 2011 Census revealed that only 5.18 per cent of the units (both registered and unregistered) of MSMEs availed of finance through institutional sources. The majority of units i.e. 92.7 per cent had no finance from banks and depended on self-finance.
Needless to say that small-scale sector needs a leg up and financial assistance because it employs a large number of people (59.7 million) and are spread over 26.1 million enterprises. They contribute to around 45 per cent of the manufacturing output and around 40 per cent of the exports. If financial inclusion had been there, this sector would have experienced higher productivity through the use of technology and innovations which they could have accessed through bank finance.
Also banking services are concentrated in big cities and India’s six largest cities have 10 per cent of India’s bank branches, the bottom 50 districts have barely 2 per cent of the bank branches. In cities, migrants are not adequately covered and face difficulties in opening bank accounts. In agriculture, credit to farmers with above 5 acre land holdings accounts for the largest share (44 per cent) of the total credit. For meaningful financial inclusion, banks should give priority to small farmers.
Financial inclusion will promote higher savings and will encourage people to start small and micro enterprises, especially women who can then get a regular flow of income and this can help reduce poverty in a sustainable manner. One reason for the persistence of poverty is high interest rates charged by money-lenders, whose presence in the countryside has not been greatly reduced. They are important in financing the purchase of raw materials and even the sale of products and offer personal loans/advances for consumption purposes (weddings, funerals, health costs) to workers in villages.
Unfortunately, banking services available in villages have not shown rapid pace of inclusiveness. This is because technology plays a key role in expanding the reach of formal banking services. Banks are increasingly using alternate channels of delivery like ATMs, net banking and phone banking and depending on information and communication technologies to expand their reach. For financial inclusion through digital means, much more needs to be done and adequate infrastructure such as digital and physical connectivity, uninterrupted power supply are pre-requisites for having a proper banking system. In a total of 6 lakh villages, 80,000 villages have no electricity and this works against the proper functioning of banks. Banking services should be in vernacular languages rather than in English because the rural population may suffer from English phobia, making them reluctant to approach a bank.
Self-help groups (SHGs) with linkages with banks have been active in many rural areas but have not spread evenly throughout India. The spread is poor, especially in the central and north-eastern regions. Also, certain difficulties have been experienced by SHGs in obtaining bank credit.
Recently the retiring Deputy Governor of the RBI, Mr. K.C. Chakrabarty, stated that ’a lot remains to be done on financial inclusion’. Banking to be inclusive would require greater financial literacy and gender equality. All banks rather than ’women-only banks’ should include women, especially poorer ones, in their financial services. Perhaps later on, more banking licences would be granted, perhaps even to big industrial groups. Globally it is quite common to permit industrial houses in the banking business and only 12 per cent countries restrict the mixing of banking and commerce. But the independence of banks has to be guarded and assured.
(The writer is a Senior Fellow at Observer Research Foundation, Delhi)
Courtesy: The Tribune, May 5, 2014
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