FACILITATING FINANCIAL INCLUSION

Source: YOJANA – January 2018

Authors: Charan Singh and Shivakumara Reddy K

Financial inclusion is a process of ensuring access to appropriate financial products and services needed by all sections of the society in general and vulnerable groups in particular, at an affordable cost, in a fair and transparent manner, by regulated mainstream institutional players. The objectives of financial inclusion include providing the financially vulnerable with access to banking finance and ensuring stable income.

Financial inclusion is not a new concept in India. The Cooperatives Societies Act, 1904 led to the creation of co-operative banks to ensure easy and affordable credit services.

 Financial inclusion, by means of nationalization of banks started in India in 1955 and over the period, more banks were nationalized, keeping priority sector lending in consideration and to extend banking in rural areas and for vulnerable sections of the society.

Apart from the efforts of Reserve Bank of India (RBI) and National Bank for Agriculture and Rural Development (NABARD), following steps were taken to provide banking services across the country:

1. Establishing Regional Rural Banks – 1975
2. Adopting service area approach – 1989
3. Self-help Group-Bank linkage programme – 1989/90

More recently, in November 2005, RBI simplified ‘Know-Your-Customer’ (KYC) requirements and introduced ‘no-frills’ accounts. Technology led innovations were encourage like the use of hand-held devices in remote areas.

Limited Reach of Banking

Despite several initiatives, poverty, low-income levels and distance from bank branches restricted vulnerable groups from getting access to formal banking system. As per Census 2011, only 58.7 percent of total households in India had access to formal banking services.

Expansion of Banking and Role of Money Lender

Because of less bank branches and distance from bank-branches, money lenders do substantial business. The share of professional moneylenders in rural credit has been increasing since 1991.

Government Initiatives

1. Pradhan Mantri Jan Dhan Yojana – Envisages universal access to banking facilities with at least one basic banking account for every household. As of December 2017, total of 30.7 crore accounts have been opened under the scheme.
2. Rapidly increasing size of branch networks in rural areas.
3. Facilitating the penetration of private banks in rural areas.

Innovation in Extending Credit

Alternatives to brick and mortar branch like mobile vans, banking kiosks and Banking Correspondents (BCs) are being introduced. These alternatives offer convenience of banking, saving of transportation cost and saving of time/wages lost to visit a branch located at a distance. Commercial banks have been successful in extending banking services of nearly 6 lakh villages mainly through BCs. There has been a substantial increase in banking outlets, business transactions, number of bank accounts opened and amounts deposited.

Select Issues and Suggestions

1. Extend financial inclusion to the disabled, elderly and hearing and vision impaired persons. (By making banks and ATMs disabled-friendly).
2. Tackling technological issues like machine breakdowns or lack of connectivity. Multi-lingual devices could be used to inspire confidence in the rural population.
3. Flexible financial schemes designed for different segments of unbanked population. (Eg. On basis of agricultural cycle)
4. Assigning responsibility to monitor to a dedicated financial institution.
5. Enhancing financial literacy.