The Hindu Business Line : Stock-taking on financial inclusion

The majority of India's population in the urban, semi-urban and rural areas is still under-served by the banking industry. Bold initiatives are needed to bring these areas into the financial mainstream.

The following views were voiced recently on financial inclusion and credit penetration in the banking industry.

There are 93 million mobile users today. The number of mobile phones currently is more than the number of borrowers from the banking system. There is a clear need to increase the outreach and scale up operations at existing outlets

— Ms Usha Thorat, Deputy Governor, RBI at BANKCON.

The ratio between banks deposits/accounts operated and total adult population still remained low, even compared to other developing economies. The Indian national average is just 59 per cent compared to 92 per cent in UK. The mere opening of a bank account is not enough. Banks should offer all financial services to those who open accounts. This would wean Rural India away from unorganised sector that charges high rates of interest.

— Mr V. Leeladhar, Deputy Governor, RBI, at a meeting on May 21

The overall percentage of deposit account penetration of 45 per cent for India is misleading as break-up of figures showed that Urban India has a penetration of 114 per cent while the figure stood at dismal 19 per cent for Rural India. Interestingly, for 2006, 93 per cent of the borrowers in India borrowed less than Rs 2 lakh and their share in terms of total outstanding credit was just 18 per cent.

— Mr Bhaskar Ghose, MD, IndusInd Bank, at an IBA seminar.

India is practically the only country in Asia with a virtual vacuum in the financial system after the large commercial banks.

— Mr Sanjay Sinha, MD, MCRIL, an MFI rating agency, in an article on RRBs.

The above viewpoints certainly spell out the need for a far deeper perspective on the current status of credit penetration and financial inclusion.

An effort is being made to provide that perspective on the basis of banking figures as on December 31, 2006 and from the growth trends in the years between December 31, 2001 and December 31, 2006 from the data provided by the RBI by various geographical and population segments (see Table).

The Perspective

The banking industry's size more than doubled, from Rs 1,605,278 crore to Rs 4,147,176 crore during last five years with the number of branches growing by 3,757, from 66,261 to 70,018. At the economy growth rate of 9 per cent-plus, the banking industry will double every four years. The share of the top six metros (Mumbai, New Delhi, Chennai, Kolkata, Bangalore and Hyderabad), in total deposits is 45 per cent and in credit 56 per cent.

This segment, with a population of 60 million (2001 Census), represents half the banking industry's size, at Rs 2,082,121 crore, with 94 per cent CDR. The share of the metro segment, which includes 35 centres with a population of over 1 million, is 55 per cent of deposits and 66 per cent of credit. As many as 2,811 branches were opened in this segment in the five years. The concentration of banking is more pronounced in this segment (Rs 2,489,767 crore or 60 per cent) with an approximate population of 100 million (2001 Census). Excluding the six metros, the remaining 29 metro centres contribute an additional 10 per cent share in deposits and 7 per cent in credit, indicating a lower penetration in these centres, with an approximate population of 40 million.

Other Urban Centres

As for the top 100 urban centres (inclusive of metros), their share is 68.2 per cent of deposits and 77.1 per cent of credit.

The remaining 94 centres, with an approximate population of 90 million (excluding the six metros) contribute an additional 12.9 per cent share to deposits, and 10.7 per cent to credit.

Assuming urban population of 280 million, as per Census 2001, the branches with a 34 per cent share in this segment contribute a high percentage of deposits and credit.

The urban centres (excluding metros) representing a population of around 180 million contribute an additional share of 20 per cent in deposits and 18 per cent in credit.

The share of Semi-Urban Centres has decreased from 19.6 per cent to 14 per cent in deposits and from 11 per cent to 10 per cent in credit, with branch strength remaining at 22 per cent over the five years. The market size in the segment increased from Rs 268,253 crore to Rs 504,526 crore.

The share of Rural Centres, over the five years, fell from 14.6 per cent to 10.5 per cent in deposits, and from 10.4 per cent to 8.3 per cent in credit.

The branch strength declined by 1,910 whereas market size increased from Rs 210,661 crore to Rs 390,536 crore.

The Semi-Urban and Rural Centres, covering a population of 780 million, contribute 26.03 per cent of deposits and get 17.83 per cent of credit, with a combined CDR of 55 per cent vis-à-vis the national CDR of 75 per cent, Metro CDR of 89 per cent and Urban CDR of 81 per cent.

The findings

The majority of India's population in the urban, semi-urban and rural areas thus appears to be still under-served by the banking industry, leading to financial exclusion. There are uneven levels of penetration in each population segment, more so at semi-urban and rural segments.

The Bottom of Pyramid (BOP) Financial System is also undergoing tremendous transformation. RRBs are being amalgamated, with consequent organisational, technological and managerial complexities.

The State cooperative banks are being restructured as suggested by the Vaidyanathan Committee recommendations. Urban cooperative banks in the hinterland are on a weak wicket, following the level playing field regulatory norms. Commercial banks are finding it difficult to staff the vacant positions in the rural branches with personnel who have local and rural sensitivities. The BOP of the financial system is not structurally enabled to contribute to the macro objectives of financial inclusion and credit penetration. The situation certainly calls for some bold out-of-box initiatives.

(The author is Managing Director, Coastal Local Area Bank Ltd, Vijayawada. The views are personal. Feedback can be sent to vjmohan@hotmail.com)