The Hindu Business Line : Financial inclusion

It is the context rather than the content that makes today’s official exhortation to banks to follow inclusive practices particularly relevant. Although not called as such, inclusive banking in the sense of extending banking products and services to un-banked areas as well as to the relatively less affluent sections is hardly new in India. In fact, for a little over two decades following bank nationalisation, in 1969, public sector banks went on a branch expansion sp ree that has few parallels anywhere in the world. Concepts such as social and innovative banking entered the financial lexicon for the first time. It was during that period that lending to small-scale industrial units and agriculture became institutionalised. A few public sector banks, led by the State Bank of India, can claim credit to be the true pioneers. Perhaps the most visible symbol of inclusive banking practised in the 1970s was the Rs 5 savings bank account, which meant anyone could aspire to banking facilities.

If despite all those impressive achievements, banks are once again exhorted to adopt inclusive practices the reasons are not far to seek. One, the commencement of the financial sector reform process in the early 1990s meant that banks had to pay heed to profitability considerations rather than just expand their balance-sheets. While inclusive practices were never given up, the bank managements reoriented their priorities to achieve profit targets and retain market shares. Two, by many yardsticks the Indian financial sector has to cover considerably more ground. Only 59 per cent of the adult population has bank accounts. The number of people not having access to basic banking facilities is more in the rural areas than in the urban areas. Just 39 out of 100 of the rural population have a bank account. The extent of financial exclusion is much more in the credit side: The number of loan accounts is just 14 per cent of the adult population. Once again the rural sector suffers a greater degree of discrimination.

A number of causes have contributed to financial exclusion on such a large scale. Today, the problem is viewed as a socio-economic constraint whose redress is absolutely necessary for equitable growth. Limited or no access to basic financial services, it is proved, has stifled growth impulses. Access to affordable credit and insurance can improve livelihood opportunities. Such an empowerment of the weaker sections is vital for social and political stability. Besides, it confers formal identity. If the interpretation of financial inclusion is in a much wider context today, so also the means to pursue it are multi-pronged. Of special significance is the adaptation of technology for reducing the transaction cost and extending the reach of the financial system. The development of alternative, cost-efficient, delivery channels for both deposits and loans is the biggest challenge before the financial sector.