The Hindu Business Line : Inclusion is more than an account

One small but significant measure of the changes happening in the financial system is the decline in small savings among households. The latest data show gross small savings collections declining, for the first time in ten years, by over 10 per cent during April and August this year. In absolute terms this means a fall of nearly Rs 10,000 crore. Part of the decline has been explained by a shift in household preferences to bank deposits, especially long-term deposits with tax exemptions attached; conversely, the threat of rising inflation is goading some others to spend now rather than watch the value of their savings erode in low-return savings schemes. The fear of rising inflation also explains the preference for the equity market as a hedge against the decline in the value of savings.

While such explanations may help explain the shift to other, safer or more attractive instruments, the data on hand, indirectly but more pertinently, cast light on a broader aspect of the financial system that has been unaddressed for long. This is the fact that large sections of people, especially those at the lower levels of the income stream and in the rural areas, remain outside the banking system. It is only of late that financial inclusion has become something of a policy imperative. Part of the reason for this policy concern lies within the banking system itself. In recent years, the credit-deposit ratio has been steadily climbing; last year the incremental non-food credit-deposit ratio rose from 90 per cent in the first half of the year to 133 per cent in the second. While increases in deposit rates may help banks garner more funds, the need for an expanding network into unbanked or under-banked areas of the economy is urgent, as even the Reserve Bank of India has admitted.

After nationalisation in 1969, the branch network of public sector banks increased from 8,321 to 68,382 in 2005. But the number of deposit accounts, both current and savings, as a ratio of the adult population has varied widely from 89 per cent in Kerala to 33 per cent in Bihar, the national average being around 60 per cent. More than a third of the population is, therefore, unbanked and it is imperative that the banking industry extends its sphere of influence and mobilises the savings at the margin. The central bank's proposal to allow foreign banks a greater number of branches in the unbanked areas is indeed welcome. Even as it is important to enable branch expansion, financial education can help households in the rural areas manage their finances more prudently with a view to maximising returns. Financial inclusion must mean more than holding an account or increasing the savings rate at an aggregate level.

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