The concept of financial inclusion as a programme was first introduced in India in 2005 by the RBI. The objectives of financial inclusion are to provide a basic no-frills banking account for making and receiving payments, and other financial products like credit, remittance, insurance and pension, especially for the poor. But the emphasis has largely been on banking accounts.
The first approach of the RBI in financial inclusion was to provide banking outlets closer to the people and encourage them to open bank accounts. But after 2014, the government’s emphasis shifted to everyone having a bank account through Pradhan Mantri Jan Dhan Yojana (PMJDY). The programme became a huge hit and within eight years nearly 48 crore new bank accounts were opened, with a balance of ₹1.77-lakh crore.
The government also came up with insurance and pension schemes like Pradhan Mantri Suraksha Bima Yojana, Pradhan Mantri Jeevan Jyoti Bima Yojana and Atal Pension Scheme. Although these have not got the same traction as PMJDY, they are still successful initiatives towards financial inclusion. However, from the All India Debt and Investments Survey, 77th round of NSSO, it can be gleaned that nearly three-quarters of rural and four-fifths of urban India are still outside the formal financial system. The poor still face scarcity of credit and bridging the credit gap has been a major challenge for policymakers.
As part of extending credit, microfinance institutions (MFIs) were among the several initiatives launched in the country. Today, there are more than 250 MFIs catering to nearly seven crore poor households. In addition, the self-help group (SHG) bank linkage programme has brought about 14.5 crore poor households in the fold of the banking system. There would be some overlaps, but it can be safely assumed that about half the population is covered by the microfinance initiatives and both streams together provide more than ₹4.5-lakh crore, which is equivalent to about 10 per cent of the priority sector credit in the country.
Microfinance, through MFIs, has reached far-flung areas, and at the doorsteps of the poor. The ease of transacting with MFIs has made microfinance a popular product, even though the credit comes at a higher cost; but definitely not usurious as local moneylenders. It also helps in building a credit history for the people, especially those in the informal sector.
When the government started the Pradhan Mantri Mudra Yojana to support micro-enterprises in 2015, MFIs were taken as major partners. About 60 per cent of the credit extended under Shishu category of Mudra loans were contributed by MFIs. Of the balance, a significant number of accounts is financed by banks through banking correspondents and co-lending mode, which are mainly through the microfinance platform.
The government can further the microfinance movement in three ways. One, create a conducive environment for the functioning of MFIs; there were several instances where the micro-lending environment was vitiated by vested elements. Two, an incentive programme like tax concessions and subsidised funding or even credit guarantee will encourage MFIs to move into less-penetrated areas.
And, three, a programme can be initiated to transform existing development institutions to a viable financial intermediary, purveying micro-credit in its area of operation.
The writer is ED and CEO, Sa-Dhan. Views are personal