Financial inclusion is fast losing steam

The recent Report on Trend and Progress of Banking in India 2017-18 points out some early signs of slowdown in financial inclusion (FI) efforts. This could undermine the formidable achievement so far in the journey of taking banking to the masses to ameliorate poverty. Amidst the asset quality mess and its multiplier impact, banks seem to be losing appetite to pursue FI.

It may be recalled that banks began to implement financial inclusion as part of their business policy only after the RBI directed them to adopt a three-year board-approved financial inclusion policy (FIP) that began in 2010. It laid a firm roadmap for opening brick-and-mortar branches and spread of alternative modes of banking.

Financial inclusion got a boost from the Pradhan Mantri Jan Dhan Yojana (PMJDY) that added 336.6 million new basic savings bank deposit (BSBD) accounts, expanding the base of such accounts to 536 million by March 2018.

The banking infrastructure comprising bank branches, ATMs, digital kiosks, customer service points (CSP), business correspondents (BCs), point of sale (PoS) terminals and mobile ATM vans currently cover 5,69,547 villages out of the total of close to 6,60,000. But, of them, 5,15,317 villages (90.47 per cent) are covered by BCs offering limited services.

In view of commendable penetration of banking services and sustained policy of financial inclusion, 80 per cent of Indian adults have a bank account today. Indeed, a great achievement. But the worrying point is, half of them are rarely used. According to the World Bank, 48 per cent of the country’s bank accounts have had no transactions in the last one-year. Globally, the percentage of inoperative accounts stands at 25.

While applauding the outreach and development of banking infrastructure, the IMF bemoans that only 13 per cent of Indian adults borrow through formal channels. Despite priority sector lending norms, hardly 35 per cent of Indian farmers utilise institutional loans. The rest probably relies on alternative sources, including moneylenders/indigenous bankers, paying high interest rates. The agenda of financial inclusion includes development of entrepreneurship that can be nurtured only when bank customers can save, borrow, and remit/receive funds.

Having invested huge resources in augmenting financial inclusion , the gap in its usage needs can be filled with suitable strategies to impart financial counselling and digital literacy. Financial literacy enables bank customers to make informed decisions in using financial services for their entrepreneurial growth and well-being.

The RBI has taken several initiatives that include a recent launch of a pilot project of setting up Centres of Financial Literacy (CFL) based on the hub-and-spoke model. Identified change agents will be trained at CFLs, who in turn would undertake financial education in villages. Looking to the rising customer base of banks and the lack of financial knowledge, the task ahead is daunting.

Financial outreach

According to Standard & Poor’s ‘Global Financial Literacy Survey – 2014’, 33 per cent of adults in the world are financially literate. As a result, 3.5 billion adults across the globe, most of them from developing economies, do not have any understanding of financial products and services. The average financial literacy rate is 28 per cent of adults among BRICS (Brazil, Russia, India, China and South Africa) economies — with India’s being 24 per cent, China 26 per cent, and South Africa 42 per cent.

While the financial inclusion agenda is struggling between the pincers of huge pile of inoperative accounts and financial illiteracy among customers, there is an ostensible disdain among banks towards pursuing it. Due to rising operating costs of branches, banks are increasingly opting to deliver banking through digital mode.

There has been a decline in the number of newly opened bank branches — from 8,749 in FY15 to 3,948 in FY18. But the fall is more perceptible in rural centres with population below 9,999 (Tier-5 and Tier-6). The number of new branches opened in such centres has dropped from 3,274 to 1,067 during the three-year period.

The number of ATMs has also started to drop — from 2,08,354 in March 2017 to 2,07,052 by March 2018. The spread of ATMs is already skewed with 56 per cent of them operating in urban and metro areas.

The number of bank branches and ATMs will witness further drop in the next few years due to merger of State Bank Associates with SBI and Vijaya Bank and Dena Bank amalgamating with Bank of Baroda.

But in order to ensure an even spread of branch network in the hinterland, the branch expansion policy of the RBI stipulated that just 25 per cent of of the newly opened bank branches should be located in centres falling in Tier-5 (population of 5,000-9,999) and Tier-6 (population below 5,000).

Effectively, now 75 per cent of bank branches could be located freely in any centre at the discretion of banks on commercial consideration.

When the banking system is fast moving towards digitisation, the RBI can review its branch expansion policy and de-link opening of branches in Tier 5 and 6 centres to the total number of branches.

Having achieved considerable progress in financial inclusion, the next stage is to harness immense rural potentiality for business growth. Steady and coordinated efforts of all stakeholders are necessary, more at the local level by disseminating financial and digital literacy. Banks may have to innovate strategies to extend credit by setting up credit kiosks on the model of digital kiosks.

While digital channels are able to provide most of the banking services, they are unable to popularise loan products through digital platform due to lack of digital literacy.

If financial inclusion efforts are to be fully harnessed and taken forward, the regulator and banks will have to work in cohesion with local government agencies to educate masses on a large scale, highlighting rights and responsibilities.

Taking a cue from the slackness in financial inclusion experienced in the last three years, it is necessary to reinstate focus with appropriate policy reforms and enhancing rigour in its monitoring compatible to the emerging digital ecosystem.

The writer is Director, National Institute of Banking Studies and Corporate Management. The views are personal.

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