Regime of financial inclusion

For the last few years “Financial Inclusion” is the buzzword in the Indian Economy and banking circles. Not only

India’s policy agenda across the globe, especially, that of the developing Nations talking about this. In simplified terms,

financial inclusion refers to facilitate access to formal financial services like a bank account and instruments of deposits,  third party financial products like Insurance, etc, withdrawal and  remittance. As per the RBI Report of the Committee on Medium-term Path on Financial Inclusion , it is  broadly understood as access to the formal financial sector for the marginalised and formal-finance deprived sections of society.

For India, a country of about 1.23 billion population and 72% of which resides in villages, the concept of financial inclusion holds a very important place. Over the decades there existed a wide gap as far as demand & supply of basic banking service was concerned. This had also resulted in a general mismatch in providing  institutional credit to the population and access to standardised financial products.

The scenario  may be best understood from  a speech delivered in August 2014, by  Prime Minister of India Narendra Modi. He highlighted the fact that even after 68 years of independence, the country has not been able to bring 68% of households under the banking system. 75 million households (60 million in rural areas and 15 million in urban areas) out of a total of 247 million households in the country did not have access to formal financial services.

In fact. if one compares the penetration of banking in India with that in some of the developing nations it is undoubtedly on the lower side .

Since the country has the world’s largest network of Post  Offices (150,000 plus ) and network of about 125,000 bank branches and equally a large number of Cooperative Credit  Societies, hence it is evident that geographical demographics is not the only reason for this divide. Now it has been well  accepted by the Government and the RBI that some structural changes are required and that is possible through policy level changes. In this direction, the Committee on Medium-term Path on Financial Inclusion (CMPFI) was set up to devise a measurable action plan for financial inclusion that covers both households and small businesses. The recommendations pronounced by the 14 member Committee have been the guiding light of the recent policy changes. Overall it has defined and addressed the scope of financial inclusion in the Indian context.

(a) Opening bank account and providing Savings facilities (without stipulation of minimum balance)

(b) Access to various forms of Payment services (including payment cards and mobile banking)

(c) Direct Benefit Transfer and other government Disbursement to be credited to the accounts of beneficiaries

(d) Provision of Overdraft or loan facility from the bank

(e) Access to other financial services like Insurance

(f) Access to financial services viz., banking, insurance, loans etc. to the doorstep of the customer  by promoting agent based upon Business Correspondent assisted model

(g) Promote environment of less cash transaction environment with a view to bringing financial discipline

As mentioned earlier a wide geographical territory presents a considerable challange to bring the banking service to the doorstep of the customer. With policy direction from Reserve Bank, on a minimum of 25% of incremental bank branches to be in unbanked areas, there is still a large gap in opening of service outlets close to every village. Nearly 550,000 out of 638,000 villages are still more than 5 kilometres away from the nearest service outlet. In some difficult terrain in the North East region, the nearest bank branch is as far away as 30 kilometres. Employing Business Correspondents has proved to be a

solution to some extent. Linking Aadhar card to allow easy opening of bank accounts under PMJDY (without the obligation of maintaining a minimum balance) gave a tremendous boost.

Access to instrument of savings and investment is one more beneficial aspect that needs mention. Though the cultural ethos of the Indian population is savings driven, due to paucity of knowledge about financial products and their availability like insurance, Mutual Funds, Bonds etc., a large mass of people fell prey to unscrupulous operators in the garb of unregistered financial companies and chit funds. With financial inclusion, the Institutions / banks as intermediaries may act as a conduit to channelize this huge fund into safe savings and investments.

Direct credit of government disbursements and  benefit transfer also had received a major fillip. Disbursements related Civil Service Pensions, Integrated Child Development Scheme. MNREGA . LPG , Kerosene & Fertiliser subsidies, etc. are also touching a significant level.

Granting of licence by RBI to 11 players to set up payments Bank in 2015 was another progressive decision which is expected to contribute positively to the overall framework of Financial Inclusion. Since the Financial Inclusion programme necessitates building a robust infrastructure for easy withdrawl or remittance of money, hence, these set of banks would complement the existing Business Correspondent network employed by some of the scheduled commercial banks.

In conclusion, it may be said that the need of the hour is  to have a comprehensive financial inclusion. The momentum that has been created over the last few years is expected to bear fruit going ahead with the lower most strata of society receiving a direct benefit. With more geographies and population coming under the banking footprint, society as a whole is expected to receive the big push of growth by 2020.

Saptarshi Roy Bardhan