Yawning gaps in access to financial resources

What comes to mind when you hear the term ‘financial access'?

To some, it could simply mean the availability of banking facilities. To those who think a little deeper, it could imply access to funding that businesses have.

T.A Bhavani and N.R Bhanumurthy, Professors of Economics, in their book Financial Access in Post-Reform India , use the term in the context of the latter. And they talk specifically about access to funding from the formal financial system. What is the gap between the actual requirement and the funding received by different segments? This is the prime question that the book seeks to answer.

Financial sector reforms

Viewing this issue through the prism of liberalisation since 1991, the book attempts to find out if financial sector reforms have actually helped improve access or, in other words, reduce this gap (They term it ‘financial resources gap' or FRG) over the years.

That said, the first four chapters of the book seem too long an introduction to the authors' mission. The initial chapters look at ‘financial development' from dimensions such as structure, size, reach, efficiency and soundness.

They suggest that the reform measures have helped the financial sector develop in India after 1991. The premise is that if reforms have led to the development of the sector, then this development must have led to improved financial access. Establishing this connection does not require four chapters. But the approach is probably derived from the fact that these are research papers re-published as a book.

The meat is hence in chapters five and six that discuss the extent of financial access at the household and sectoral (agriculture, services and industry) levels and find out if financial development has indeed improved access. This throws up interesting findings. The authors use data from the All India Debt and Investment Surveys (AIDIS) conducted by the National Sample Survey Organisation for 1992 and 2002 to state that the FRG for households was still at a large 74 per cent in 2002, although down from 90 per cent in 1992.

This means only about 26 per cent of the funding requirements came from formal sources, such as banks and financial institutions. While this wide gap surprises, a good ten years after reforms, the fact that only about one-third of Indian households had a bank account till 2001, puts things in perspective. The FRG of urban households was found to be higher than rural households.

This trend is repeated in the survey of services sector (data from NSS – 2002) where the FRG for urban service sector enterprises (unorganised) was found to be higher than rural ones (75 per cent versus 73 per cent). While the agriculture sector showed no clear trend, with the FRG ranging from 40-70 per cent from 1992 to 2005, the manufacturing sector's FRG (unorganised) remained as high as 70 per cent in 2005-06 (78 per cent in 1994-95).

One look at these numbers tells the reader that the gaps are indeed huge. But let's go to that in a bit. Meanwhile, the varying time periods for which gaps have been calculated for each of the segments need attention. While the authors may not be at fault for non-availability of data for a uniform time period across the board, it makes comparison difficult.

10-year-old data

The data for households and services sector, for example, is 10 years old. Recent numbers may tell a different story.

Besides, for the services sector resource gaps, data for only one-time frame (2002) is available. Hence, this does not facilitate comparison.

The authors, though, have tried to make up for the varying time frames toward the end by arriving at a combined FRG for agriculture, industry and services for 2004-05 using estimates.

Similarly, in the chapter on ‘Private participation in the banking sector', data from the ‘Trends and Progress of Banking in India 2008-09' have been used. This could have been updated with the two reports (2009-10 and 2010-11) published by the Reserve Bank of India.

This apart, the authors have succeeded in quantifying the gaps in financing that they set out to find.

Not only that, from various sub-components of their research, it is also obvious that more needs to be done to improve access to formal institutions, specifically the unorganised sector. But only about half a page at the fag end of the book is dedicated to what can be done to better the situation.

The authors could also scale up the business correspondent model of the RBI, self-help groups and micro-finance institutions. While associated problems with these institutions are hot topics of discussion at present, one feels the authors could have drawn suggestions from international experience.

Overall, it is a book for hard-core economists, bankers and researchers. The others would need to do plenty of skimming to keep going till the end.

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