Financial exclusion is bad for banks too

In his Budget speech in February 2006 the then Finance Minister, Mr P. Chidambaram, introduced the idea of financial inclusion.

Referring to the NSS 59th Round (2003) findings that of the total number of cultivator households only 27 per cent received credit from formal sources and 22 per cent from informal sources, Mr Chidambaram drew the attention of the House to the conclusion that the remaining households, mainly small and marginal farmers, had no access to credit.

He, therefore, proposed “to appoint a Committee on Financial Inclusion. The Committee will be asked to identify the reasons for exclusion, and suggest a plan for designing and delivering credit to every household that seeks credit from lending institutions.”

In retrospect, it is ironical that financial inclusion entered the economic lexicon of policymaking in 2006-07, the high noon of economic expansion. That year provided vivid evidence of the success of a decade and half of reforms for which, understandably, the UPA government claimed credit.

That more than half the population of farmer-households had no access to any credit could not blunt the euphoric recognition of successful policymaking and its outcomes for the organised economy but the spate of farmer-suicides seemed to call for some action, at least a perception of action.

So financial inclusion, a glossy new-millennium alias for the earlier politically loaded, ‘Garibi Hatao' or ‘Land to the Tiller' seemed only fitting.

Once the NSS data were publicised by Mr Chidambaram, policymakers and central bankers picked up the baton with considerable alacrity. Since then there have been a lot of seminars, conclaves and bankers' conferences on how to include the excluded into the formal financial grid, from using business correspondents to ATMs and of course the old route of more bank branches.

Financial inclusion is good business for banks especially if farmers use their increasingly sophisticated services and products to transact their farm produce. That is why deputy governors of the RBI have variously announced the importance of FI in the RBI's agenda for banks.

As part of its platinum jubilee celebration two years ago, the Deputy Governor, Mr K.C. Chakrabarty, spoke on various occasions on television, to print media, about the RBI's three-year plan for including the excluded, for bringing banks to every Indian.

Another Deputy Governor, the now retired Ms Usha Thorat, talked of using High Technology for the purpose; financial inclusion became the new currency for banks and New Delhi to trade their policymaking craft in.

But all those bent on standing on the right side of FI missed the irony that more than four decades after bank nationalisation, India's formal banking system excluded far more segments than it included. Banking in India despite the pious political rhetoric was still an exclusive domain for the few.

A case study by the RBI last year of financial inclusion in States with particular reference to West Bengal found FI in West Bengal was rather poor. Just three States: Kerala, Maharashtra and Karnataka had high FI, and 14 States, including Gujarat had low FI indices. This list included all the economically backward BIMARU States

In 2008 Mandira Sarma of ICRIER studied FI in comparative terms to figure out just how poor our poor are on a world scale. If Indian billionaires could be measured against western ones why not the poor be compared against their hapless counterparts elsewhere? Ms Sarma defined financial inclusion not simply as an absolute norm of access to financial resources but by the “ease of access”.

The Index of Financial Inclusion measured access on a scale from 0 to 1. The index was meant to capture information on various aspects of the inclusion process. Cross country comparisons require that kind of computation given the possibility that single indicators of inclusion can often be misleading.

Russia for example topped with bank accounts per 1000 but was the lowest for bank branches per 100,000 adult people. For the purpose of this index, Ms Sharma restricted herself to three indicators, banking penetration availability of services and usage of the banking system.

India stood 50{+t}{+h} in a ranking of 100 countries, below Kenya and Morocco. Just what this means from a policy viewpoint is not clear but we know how far India has to climb up that ladder.

In-built biases

Viewed from another perspective the profile of bank business seems stacked against meaningful inclusion; biases are built into the system. RBI data on the spread of bank offices show that in the 10 years to 2001 the total number of bank offices increased slowly but more were added in the metropolitan and urban areas.

In the period 2004-09, the period of high growth; the number of rural bank offices actually declined. Further data show a large part of the banking business comes from the fewer offices in the metro and urban areas; banks cannot get enough of the metros and urban centres.

This is clearly evident in the data issued by the central bank called, ‘Quarterly Statistics of Deposits and Credit of Scheduled Commercial Banks'. In the latest set for September 2011, the record shows the skewed nature of banking in favour of not just the urban but for the metropolitan areas.

As the study notes the number of “banked” centres of Scheduled Commercial banks was 35,435. Of these centres, 27,913 were single office centres and 68 centres had 100 or more bank offices.

As has been the case, the top 100 centres accounted for the bulk of banking business in terms of deposits and credit: 69.6 per cent of the total deposits and 78.5 per cent of total bank credit.

In September 2010, the corresponding shares of top 100 centres in aggregate deposits and gross bank credit were 68.8 per cent and 78.0 per cent, respectively.

The concentration has trickled down only to the next rung. For instance the top 200 centres in terms of aggregate deposits covered 32.4 per cent of reporting offices and 74.5 per cent of aggregate deposits. The top 200 centres in terms of gross bank credit accounted for 31.8 per cent of reporting offices and 81.9 per cent of gross bank credit.

What is more, business in these centres grew healthily thus beating the general trend of a slowdown and exacerbating the rural-urban divide Aggregate deposits of the top 100 centres increased by 23.5 per cent in September 2011 over September 2010 compared to a growth of 13.7 per cent recorded a year ago.

Gross bank credit of top 100 centres expanded at an annual rate of 24.3 per cent in September 2011 significantly higher than the 19.7 per cent growth recorded in September 2010.

Indifferent growth of banking in the rural areas affects the poor severely; but it also affects banks that are unable to access farm transactions. Financial exclusion at the end of the day is also bad for business.

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