The Hindu Business Line : From ‘class banking’ to ‘mass banking’

Financial inclusion needs an aggressive push, by taking banking to underserved areas, greater use of technology to keep transaction costs down, and a bigger role for rural banks.

— M. Govarthan

Taking banking services to rural areas.

S. D. Naik

That India has been ranked poorly in the first-ever Index of Financial Inclusion (IFI) prepared by a New Delhi-based think-tank need not come as a surprise to the observers of the country’s banking and financial scenario. Even so, the extent of financial exclusion is depressing for a trillion dollar economy that boasts of the highest number of billionaires in Asia.

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 worldwide, ranks India at 50th position below countries such as Kenya and Morocco. The study underlines the need for expansion of banking services to ensure that they reach the weaker sections.

EXTENT OF EXCLUSION

According to the Invest India Incomes and Savings Survey of 2007 by research firm IIMS Dataworks, just 44.9 per cent of Indian earners had bank accounts, with coverage rates varying widely in individual States. Just 38 per cent of paid workers in villages had accounts compared to 62 per cent of their counterparts in urban areas.

As for the disbursal of institutional credit, the situation is quite grim. About 75 per cent of the bottom half of Indian households still depend on informal sources, such as moneylenders, and less than 15 per cent have access to bank credit. The so-called bottom of the pyramid still remains largely deprived of institutional credit despite the growth of a fairly robust banking system over the decades.

Nearly three-quarters of farm households in the country have no access to formal sources of credit. Apart from declining public investment, the denial of timely and adequate institutional credit to farmers is one of the important reasons for the poor performance of agriculture in the post-reform period.

Over the years, there has been a steady decline in the performance of co-operative banks, credit co-operatives, and the regional rural banks (RRBs) which have been assigned the role of providing timely and adequate credit to farmers. Even public sector banks, with their vast rural branch network, have failed to meet their farm lending targets, year after year.

Tap technology

Financial inclusion is a key priority for India not only for sustaining the country’s high growth trajectory but also for poverty alleviation at a much faster pace and for bridging the growing rural-urban divide. This cannot happen unless special efforts are made for deepening the market penetration of banking services to move from ‘class banking’ towards ‘mass banking’.

Efforts are also needed to lower the cost of credit for millions engaged in the farm sector, small-scale and rural enterprises, non-farm labourers and workers employed in the unorganised sector. Looking at this in another way, it needs to be emphasised that the growth of banking in hitherto unbanked areas holds the key to larger resources mobilisation.

The spread of bank branches in rural areas is quite inadequate. In fact, the number of such branches has declined in the post-liberalisation era. The number of rural bank branches in the country has come down from 35,000 in early 1990s to as low as 30,572 by March 2006 through mergers and swapping of rural branches. At one time, rural India accounted for 57 per cent of total bank branches in the country. This share has now come down to 47 per cent. What is more disappointing, they generate only 14 per cent of deposits and 12 per cent of advances.

The big challenge in promoting rural banking is to keep the costs low in view of the fact that while the number of transactions in such areas may be high, they are mostly small-value transactions. However, technology can play an important role in keeping the costs of such transactions low. Unfortunately, public sector banks (PSBs), which account for 70 per cent of assets, have been slow in making use of modern technology to bring down transaction costs.

A ROLE FOR SMALLER BANKS

While the emphasis in recent years is on mergers and consolidation of banks to make them globally competitive, one need not overlook the fact that locally focused smaller banks also have a special role in providing the much-needed banking services in smaller towns and rural areas.

This has been elaborated by Mr P.N. Joshi, a renowned banker with a career spanning more than four decades. In his memoirs, Glimpses of Changing Banking Scenario (Mehta Publishing House, 2008), Mr Joshi shows how small private sector banks design their credit schemes to suit the local requirements of production, distribution and growth. They have devised innovative schemes to assist new entrepreneurs, small-scale industries, agriculture, professionals, retail trade and small businessmen. Local knowledge and ‘informality’ is the keynote of their services.

Mr Joshi feels that even in the globalisation era, small banks can play a crucial role, particularly in rural India. He wants the Indian Banks’ Association to work out a detailed plan for efficient functioning of small banks.

He also makes a case for an intimate tie-up between the smaller banks, basically rural-based and closer to the common man, and the new large private banks with international exposure. Such a tie-up will help evolve a market for rural products not only into the metro cities but even for exports to foreign countries.

OTHER MEASURES

The Committee on Financial Inclusion headed by Dr C. Rangarajan has recommended a number of measures including a larger role for rural banks. It has suggested that commercial and regional rural banks should open 250 new accounts per branch every year with a focus on financing marginal farmers and poor non-cultivator households.

Also, the experience so far has shown that the microfinance movement in the country holds out a great promise of reaching out to the poor. It is seen that self-help groups (SHGs) are a good institutional structure in Indian conditions. Currently, 10 million SHGs are working across the country with a credit base of Rs 1,00,000 crore.

Even so, SHGs and microfinance institutions (MFIs) have a long way to go. Out of some 400 million poor workers in the country, less than 20 per cent have been linked with financial services provided by MFIs.

Efforts are needed to make MFIs an integral part of mainstream banking and to bring down the rates of interest on micro credit to ensure that the microfinance movement gathers further momentum.

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