7 PM | Financial Inclusion Challenges | 24 January, 2019 |ForumIAS

Interview Guidance Program (IGP) for UPSC CSE 2024, Registrations Open Click Here to know more and registration

Read In-depth analysis of all the Editorials here

Context:

The recent Report on Trend and Progress of Banking in India 2017-18 points out slowdown in financial inclusion (FI) efforts.

The concept of financial inclusion:
There are several definitions to measure financial inclusion according to different committees and institution such as:
• C. Rangarajan Committee: Financial inclusion defined as the process of ensuring access to financial services and timely and adequate credit where needed by weaker sections and low-income groups at an affordable cost.
• RBI’s definition: It is the process of ensuring access to appropriate financial products and services needed by all sections of the society in general and vulnerable groups such as weaker sections and low-income groups in particular at an affordable cost.
• Raghuram Rajan Committee: Broadly refers to universal access to a wide range of financial services at a reasonable cost. These include not only banking products but also other financial services such as insurance and equity products.
• G20: It refers to a state in which all working age adults have effective access to credit, savings, payment, and insurance from formal service providers. “Effective access” involves convenient and responsible service delivery, at a cost affordable to the customer and sustainable for the provider.

Financial Penetration statistics in India:

Currently, 80 per cent of Indian adults have a bank account 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.
According to IMF 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.
Digital channels are able to provide most of the banking services; they are unable to popularize loan products through digital platform due to lack of digital literacy.
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 centers.
Due to merger of State Bank Associates with SBI and Vijay Bank and Dena Bank amalgamating with Bank of Baroda, number of ATMS and bank branches will further see downfall.

Initiatives to overcome barriers to financial inclusion

Government Initiatives:
- Pradhan Mantri Jan Dhan Yojana -Launched in August 2014, designed to ensure accelerated access to various financial services like basic savings bank accounts, affordable, need-based credit etc.
- Aadhaar – Unique identification authority of India (UIDAI): Was established to issueunique Aadhaar numbers to every Indian citizen in 2009. This reduces the number of people who have not opened bank accounts due to lack of legal documents.
- Direct Benefit Transfer: The government of India has introduced Direct Benefit Transfer for preventing financial leakages in the form of intermediaries and delayed payment.
Programmes introduced by the RBI
- Financial Literacy Programmes: The Reserve Bank of India has identified the following five target groups such as Farmers, small Entrepreneurs, Self Help Groups (SHGs), school students, and senior citizens to provide financial literacy programmes through Financial Literacy Centers (FLCs).
- Business correspondent model: In the year 2006, RBI has permitted intermediaries such as Business Facilitators (BFs) and Business Correspondents (BCs) for providing financial services to the places where banks are not able to provide services directly.
- Simplified KYC norms: The RBI also asked banks to have simple Know Your Client (KYC) regulations for the less fortunate people of the society.
Initiatives taken by Banks:
- Self Help Group – Bank Led Initiative (SLBP): In this model, the banks involve themselves with a group of local people with the idea of enabling them to pool up their savings. The same is deposited with the bank against which the bank also provides a certain amount of credit facility
- The Rural Self Employment Training Institutes (RSETIs) have been set up by various banks all over the country at the district level. The key objective of RSETI is “Short term training and long term hand holding with assistance to credit linkage for trainees”
- The opening of bank branches: During the second phase of financial inclusion programme, unbanked villages with population less than 2000 have identified and allotted to public sector banks, private sector banks, and regional rural banks.
- General Credit Card (GCC)/Kisan Credit Card (KCC) – With a view to helping the poor and the disadvantaged with access to easy credit, banks have introduced the general-purpose credit card facility in their rural and semi-urban branches.
- No-frills account/Basic Savings Bank Deposit Account (BSBDA) – Based on the report on financial inclusion, 2017, there were 73 million BSBDA accounts in India in the year 2010. As a result, in the year 2017, BSBDA accounts increased to 533 million a huge rise of 500 %.
Financial Inclusion with the Help of Private Companies
- Some of these programmes include HaryaliKisan Bazaar by DCM, EChoupal or E- Sagar by ITC, Project Shakti by Hindustan Unilever, and many more.

Challenges to Financial Inclusion

Demand Side issues:

Remoteness from the financial institutions: Usually, banks are locating its branches in the high densely populated areas for covering its cost of operations and people in rural area are scattered and their density are very low.
Financial Illiteracy: Due to lack of financial literacy the rural population relies mostly on informal sector for availing finance at exorbitant rates. They get caught up in the vicious circle of poverty, debt and debt repayment and hence fail to access any formal financial services.
Low and Irregular income:Income level is one of the prominent factors that hinder the underprivileged from availing services from banks. Majority of the people’s income level in the rural area is low and irregular too. A major portion of people is in seasonal employment. Hence, income level decides the people’s saving and investment avenues.
Financial Exclusion: High loan default rates during the past add to the severity of financial exclusion.

Supply Side challenges:

Inappropriate products: Generally, banks are targeting educated and a high-income group of people. They develop financial products based on these target groups’ requirements. The needs of low income and weaker section of people are quite different.
High Cost: Nowadays banks are operating for profit under the competitive environment. They levy charges for different transactions like minimum balance requirement, charges for usage of ATM services, processing fee etc.
The attitude of employees: Employees of the formal financial institutions give differential treatments to dissimilar target groups. The high income group receives overwhelming response whereas low income and rural people suffer from bitter experiences.
Lack of proper Documents: Majority of the poor people like migrants, tribes etc. cannot access the formal financial services due to lack of having any legal documents.
SHG-Bank linkage model: It was observed that the SHGs were unable to procure loans from banks even after a year of formation and group activities

Suggestions for enhancing the Financial Inclusion:

Enhanced Budgetary Allocation: Towards encouraging financial literacy and education should be enhanced as per the requirement.
Investment in financial literacy: RBI and banks should coordinate with educational institutions such as CBSE, UGC and AICTE, to include FI as a mandatory subject at different educational.
Infrastructure: Investments in social and physical infrastructure as well as in financial literacy, need-based products, are essential to enable the economy in achieving inclusive growth.
Encouraging NGOs and MFIs to participate in this process will help identify default risk as they work closely with the target population
Post offices could play a proactive role in inclusive growth in areas where there are no banks and other formal financial institutions.