New account-

holders should be enabled to have access to an array of banking products, so that there is also financial deepening.

C. J. Punnathara

There are happy tidings for the country’s financial inclusion policy. In a recent speech in London, Ms Usha Thorat, Deputy Governor, Reserve Bank of India, revealed that between March 2006 and 2007 as many as 60 lakh no-frills bank accounts were opened.

While this is, no doubt, a creditable achievement for the banks, it is still too early to call for celebrations. There still remains a vast and untapped rural heartland, waiting for financial inclusion.

While the no-frills account was perceived as the springboard for financial inclusion, such inclusiveness is but the stepping-stone to another broader goal — that of financial deepening. For this, the newly empowered bank customers should be enabled to extend their finance activity into an array of products, leading to all-round economic development.

The endeavour of governments and banks should be to ensure that no-frill accounts are not left idle, but are kept active. Once such customers graduate from a savings bank account to loan products and, later, perhaps to a bouquet of financial products, the country can claim financial deepening.

Thus, it is not just the numbers that count, but also the quality of the new no-frills accounts opened. According to disaggregated data, 59 per cent of the country’s adult population have bank accounts. But there is a flaw.

The percentage is arrived by dividing the total number of bank accounts by the number of adult population and does not take into account the possibility of one person having more than one bank account.

No ‘deepening’

So, the number is likely an inflated one. But it indicates that two in every three adults have a bank account. However, in rural India, the percentage of those without a bank account is 61.

An important question is: Are the newly opened no-frills accounts actively operated? Indications are that just a few are active. And even among these, most are proving to be a repository of savings, rather than creating demand for new loans and other products.

This is evidenced by the fact that only 14 per cent of the account-holders also have a loan account, while 59 per cent have only savings bank accounts. The picture is bleaker in rural India, where only 9.5 per cent have a loan account.

Though tremendous progress has been achieved, the plight of rural India continues to be alarming as far as financial inclusion and financial deepening are concerned.

Of the 203 million households in the country, over 72 per cent — numbering 147 million — are in rural India; 89 million are farm households. As many as 73 per cent of these farm households have no access to formal credit. And 51 per cent have no access to any form of credit.

Changing pattern

According to the All-India Debt and Investment Survey carried out by the National Sample Survey Organisation, there has been a sea change in credit disbursement since Independence.

In 1951, non-institutional credit accounted for 92.7 per cent of the total debt. Of this, as much as 69.7 per cent came from money-lenders. By 2002, the share of non-institutional credit fell to 38.9 per cent, with 26.8 per cent still coming from moneylenders.

In 1951, institutional credit comprised a paltry 7.3 per cent, of which 3.3 per cent came from cooperative banks and 0.9 per cent from commercial banks.

By 2002, however, institutional credit grew to 61 per cent, of which 30 per cent was from cooperative banks and 26 per cent from commercial banks. Going by these numbers, the country seems to have made marked progress towards financial inclusion. But while the figures might look impressive, the actual number of people who receive credit is still paltry — just 9.5 per cent of the rural population, or 14 per cent of the total population.

Surprisingly, between 1991 and 2002, the extension of institutional credit suffered a setback, falling from 66 per cent to 61 per cent. In its place, non-institutional credit grew from 30 per cent (1991) to 39 per cent (2002). And, more significantly, moneylenders seem to have made a comeback, their share growing from 17 per cent to 26 per cent.

No doubt, these data are a bit dated. What we need to know is, are non-institutional creditors and moneylenders ‘re-tightening’ their grip on the economy? Preliminary indications are that this may not be so.

The growth of 60 lakh no-frills accounts last year is one indicator. Also, evidence comes from the resurgent growth in agricultural credit, by 90 per cent — from Rs 90,541 crore to Rs 1,72,292 crore between 2004 and 2006.

It is still too early for the financial sector to rest on its laurels. For nurturing greater equity and accelerating economic development, the early gains in inclusion should be transformed into financial deepening as well.

(This article was published in the Business Line print edition dated July 5, 2007)
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