Financial Inclusion & MF

8/3/2019 Financial Inclusion & MF

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Financial Inclusion through Micro-finance:

Dr.B.K.Swain

Since the nationalization of commercial banks the banking industry has shown

tremendous growth in volume and geographical reach. However, despite making

significant improvements in all the areas relating to financial viability, profitability and

competitiveness, there are concerns that banks have not been able to include vast segment

of the population, especially the underprivileged sections of the society into the fold of

basic banking services. Even at the global level efforts are also being made to study the

causes of financial exclusion and strategies are designed to ensure financial inclusion of

the poor and disadvantaged. The reasons may vary from country to country and so also

the strategy could also vary to widespread the efforts of financial inclusion, which can

truly lift the financial condition and standards of life of the poor and the disadvantaged.

1. Defining Financial Inclusion:

Financial inclusion is delivery of banking services at an affordable cost to the vast

sections of disadvantaged and low-income groups. As banking services are in the nature

of public-goods, it is essential that availability of banking and payment services be made

to the entire population without discrimination.

2. The Scope of Financial Inclusion:

The scope of financial inclusion can be expanded in two ways i.e. either through

state-driven intervention by way of statutory enactments or through voluntary effort made

by the banking community itself for evolving various strategies to bring large section of

population with in the ambit of the banking sector. When bankers do not give the desired

attention to certain areas, the regulators have to step into remedy the situation. This is the

reason why the Reserve Bank of India is placing a lot of emphasis on financial inclusion.

The focus of the financial inclusion at present is confined to ensuring a bare

minimum access to a savings bank account without frills, to all . Internationally, thefinancial exclusion has been viewed in a much wider perspective. Just having a current

account or savings account on its own, is not regarded as an accurate indicator of

financial inclusion. There could be multiple levels of financial inclusion and exclusion.

It is the paradox that at one extreme there are customers who are actively and

persistently courted by the financial services industry, and who have at their disposal a

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wide range of financial services and products. At the other extreme, we have the

financially excluded, who are denied access to even the most basic of financial products.

In between are those who use the banking services only for deposits and withdrawals of

money. But these persons also have only restricted access to the financial system, and do

not enjoy the flexibility of access offered to more affluent customers.

3. Consequences of Financial Exclusion:

Consequences of financial exclusion will vary depending on the nature and extent

of services denied. It may lead to increased level of harassment, higher incidence of

crime, general decline in investment, difficulties in gaining access to credit, getting credit

from informal sources at exorbitant rates and increased unemployment, etc. The small

business may suffer due to loss of access to high middle-class and higher-income

consumers, higher cash handling costs and delays in remittances of money etc.

According to some research study, financial exclusion can lead to social exclusion.

5. Steps towards Financial Inclusion:

In the context of initiatives taken for extending banking services to the small

customers, the mode of financial sector development until 1980’s was characterized by

• an expanded bank branch network, cooperative banks and new

organizational forms like Regional Rural Banks (RRBs);

• a greater focus on rural credit rather than other financial services like

savings, insurance etc. though banks & cooperatives;

• lending targets directed at a wide range of ‘priority sectors’ such as

agriculture, small business and weaker sections of the population, etc;

• interest rate ceilings, imposed mostly in case of directed lending;

• significant government subsidies channeled through cooperatives and

banks in connection with related government programmes;

• based on a perspective that credit for rural poor people was a social

obligation and not a potential business opportunity.It is absolutely beyond any doubt that the financial access to masses has

significantly improved in the last three and a half decades. But the basic question still

remains, whether it has been good enough. The quantum of deposit accounts held, as a

ratio to the adult population has not been uniformly encouraging. There is a tremendous

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scope for financial coverage if we have to improve the standards of life of those deprived

people.

As a pro-active measure to enhance the financial inclusion, the Reserve Bank in

its Annual Policy Statements, while recognizing the concerns in regard to the banking

practices that tend to exclude rather than attract vast sections of population, urged banks

to review their existing practices to align them with the objective of financial inclusion.

The Reserve Bank, time and again exhorted the banks to achieve greater financial

inclusion, to make available a basic banking ‘no frills’ account either with nil or very

minimum balances as well as to take minimum charges that would make such accounts

accessible to vast sections of the population. The nature and number of transactions in

such accounts would be restricted and made known to customers in advance in a

transparent manner. All banks are urged to give wide publicity to the facility of such

no frills account so as to ensure greater financial inclusion.Further, in order to ensure that persons belonging to low income group both in

urban and rural areas do not face difficulty in opening the bank accounts due to the

procedural hassles, the Know Your Customer (KYC) procedure for opening accounts has

been simplified for those persons who intend to keep balances not exceeding rupees fifty

thousand in all their accounts taken together and the total credit in all the accounts taken

together is not expected to exceed rupees one lakh in a year.

6. The Way Forward for Expanding Credit:

The banks should come out of inhibited feeling that very aggressive competition

policy and social inclusion are mutually exclusive. As demonstrated elsewhere, the

mass banking with no-frills accounts can become a win-win situation for both.

Basically banking services need to be marketed to connect with large population

segments and these may be justifiable for incurring promotional costs. In this regard,

the opportunities are plenty.

• In the context of India becoming one of the largest micro finance markets

in the world especially in the growth of women’s savings and credit

groups and the sustaining success of such institutions, which has been

demonstrated by the success of Sewa bank in Gujarat. Thus, justifying

low cost banking is not necessarily an unviable proposition.

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• The Indian Banks Association may explore the possibility of a survey

about the coverage in respect of financial inclusion keeping in view the

geographical spread of the banks and extent of financial services

available to the population so as to assess the constraints in extension of

financial services available hitherto unbanked sections and for initiating

appropriate policy measures.

• It may be useful for banks to consider franchising with other segments of

financial sector such as Cooperatives, NBFCs, and RRBs etc. so as to

extend the scope of financial inclusion with minimal intermediation cost.

• Since large sections of low-income groups transactions are related to

deposits and withdrawals, with a view to containing transaction costs,

'simple to use' cash dispensing and collecting machines akin to ATMs,

with operating instructions and commands in vernacular would greatly

facilitate financial inclusion of the semi-urban and rural populace.

• It is becoming increasingly apparent that addressing financial exclusion

will require a holistic approach on the part of the banks in creating

awareness about financial products, education, and advice on money

management, debt counseling, savings and affordable credit. The banks

would have to evolve specific strategies to expand the outreach of

their services in order to promote financial inclusion. One of the ways

in which this can be achieved in a cost-effective manner is through

forging linkages with micro-finance institutions and local communities.

• Banks should give wide publicity to the facility of no frills account.

Technology can be a very valuable tool in providing access to banking

products in remote areas. ATMs cash dispensing machines can be

modified suitably to make them user friendly for people who are

illiterate, less educated or do not know English to carry out the

transactions.

Further, banks need to redesign their business strategies to incorporate specific

plans to promote financial inclusion of low-income group treating it both as a business

opportunity as well as a corporate social responsibility. They have to make use of all

available resources including technology and expertise available with them as well as

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with the Micro-finance Institutions (MFIs) and Non-Governmental Organizations

(NGOs). It may appear in the first instance that taking banking to the sections

constituting “the bottom of the pyramid”, may not be profitable but it should always be

remembered that even the relatively low margins on high volumes can be a very

profitable proposition. Financial inclusion can emerge as commercial profitable

business.

7. Regulatory Approach towards Rural Credit:

The Reserve Bank of India has continued to lay stress on the need for financial

inclusion of the under-privileged sections, which have hitherto remained outside the

periphery of the banking system. Through a series of new measures announced in its

Credit Policy, it has once again shown concern for this segment of population which has

been unable to draw benefits from the banking system despite the extensive network of

the public sector Banks.State Level Bankers’ Committee (SLBC) conveners in all States have been given

the responsibility of reaching 100% financial inclusion in at least one district in their

area. Apart from providing banks an opportunity to widen the customer base, they can

keep operating costs down by building products around technology. The permission to

Banks to use the services of NGOs, SHGs, MFIs and Post Offices as intermediaries for

providing financial and banking services will augment the client base and will help to

move towards 100% financial inclusion. The formation of a working group to formulate

schemes for reasonable bank charges will bring in more number of customers with

affordable operative charges. The initiatives to persuade banks to publish and display

various service charges will improve transparency. Overall, the Annual Policy Statement

prompts banks to view financial inclusion of low-income groups as both a business

opportunity as well as a social responsibility and enables the industry to take one more

step towards bringing banking to the masses.

7. Challenges of Credit Flow through Financial Inclusion:

There is plenty of interest in the subject of financial inclusion, not only in India

but in developed countries too. The terminology may be new and the rationale for its

adoption rooted in today’s socio-economic thinking, but for the Indian financial sector it

is hardly original. Nor has this sector willfully shunned inclusive practices, whether

directed by policy makers or by market forces.

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The financial sector’s relative neglect of the rural sector can be

rationalized though not justified. Mainline bank finance in India is urban centric and

overwhelming majorities of its staff are city bred. Equally important, cost of running a

branch bank has historically been high. Numerous attempts at evolving a low cost

business model for rural banking has not been totally successful. Thus, despite the well

documented achievements of Indian public sector banks in spreading the banking habits

for more than three and half decades since bank nationalization, large sections of people,

who are the vulnerable sections of the society as well as some geographical areas

face financial exclusion to a greater degree than the rest of the country.

A number of non- traditional routes are being explored to increase coverage of the

financial sector. Increased use of technology and licensing low cost entities to undertake

basic banking functions are being thought of. While inclusive practices are not new to

the mainline banks, what has changed is the environment. There is passive thinking thatno-frills accounts that are being popularized may not be different from the five-rupee

savings bank accounts of the seventies in the last century.

However, in the context of much tougher guidelines for opening bank accounts,

especially brought about by know-your-customer rules, there is inherent challenge to

open such accounts as well as to make money and prevent benami accounts.

8. Serving Rural Poor through No-frills Bank Accounts:

The no- frills savings bank account introduced by several commercial banks a few

months ago had all the potential to revolutionize India’s rural agricultural economy as

well as usher in the banking habit amongst a large number of the less privileged

population. However, the product was lost among a myriad of financial offerings and

most banks have shown little interest and vitality in marketing it.

Thus, the trigger for greater financial inclusion is likely to remain the country’s

aspiration at greater social and economic equity, rather than as a sign of things to come.

There seems to be neither an inherent demand among the socially and economically

deprived classes, nor a profit-driving urge amongst banks to market the new product.

Though the Reserve Bank of India promoted the no-frills savings bank accounts

with the express intention of bringing greater financial inclusion among the people,

banking continues to remain an elitist to middle-class pursuit, restricted mainly to urban

India.

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Compounding the problem, several Cooperative and Regional Rural

Banks have been trying to gain a foothold in semi-urban and urban pockets, even as the

commercial banks continue to shy away from rural India. But for the strict guidelines

and vigilant enforcement of the Reserve Bank, rural banking would have remained a

mere tokenism. Despite such pacifism, financial inclusion is an essential pre- condition to

build uniform economic development, both spatially and temporally, and ushering in

greater economic and social equity.

Financial inclusion also means extending the banking habit among the less

privileged in urban and rural India and weaning them away form unorganized

money markets and money lenders. But the path of financial inclusion continues to be

daunting, not just for India, but to the developed world as well and economic

development paradigm has revealed that equity is not axiomatic with economic

development. The experience of several other countries reveals that conventionaldevelopment models sometimes aggravated inequity. However, there are no shortcuts to

financial inclusion.

One advantage that our country enjoys in the endeavour towards greater financial

inclusion and equity is that as a late entrant into the realm of accelerated economic

development and it can learn much from the mistakes of other nations.

Additionally, the Government has no qualms in pursuing accelerate economic

development even while wearing the trademark of greater equity and financial inclusion

on its sleeve. This has not only proved to be good politics, but good economics as well.

There are several government and non-government programmes aimed at reducing

poverty and bringing greater equity in the country. But few have proved to be inherently

productive and sustainable. Financial inclusion can transform some of them into

productive and self-sustainable projects.

The micro-credit programme launched through numerous Non-Government

Organizations has found fancy with the banking industry and can prove to be an excellent

tool to bring in greater equity through financial inclusion. Several of the micro-credit

schemes have been eminently successful and have brought rich rewards to the

beneficiaries. With hardly any NPAs in micro-credit disbursal, banks have begun to

pursue and extend micro-credit aggressively. Some banks have been able to double

micro-credit disbursal while contemplating entering the arena in a big way. Micro-credit

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should not only be used to redress poverty and usher in greater equity, but should prove a

tool bring the rural and urban under-privileged into total financial inclusion as well.

Most of the beneficiaries continue to view NGOs and banks as conduits of credit.

As a large number of the schemes are proving successful recently, it is time that

banks started playing a more pro-active role. No-frills account should be promoted to

plough back the returns from the savings habit and ensuring that banks act as a repository

of savings and sources of credit.

There are several rural and urban development programmes promoted by the

Government to eradicate poverty. If banks are also made an effective intermediary,

greater financial inclusion could be one of the meritorious outcomes. As some of the

projects become successful and self-sustaining, greater financial inclusion would become

possible. But the Government would have to do its homework thoroughly to identify

projects where intermediation by banks is possible. The benefits will percolate not onlyto target population, but to banks as well.

9. Financial Inclusion for Credit Initiatives:

Extending the reach of formal financial institutions among the poorest of the

poor should mean taking them out of the clutches of moneylenders . The reforms in

the financial sector anywhere are meant to meet two major objectives i.e. profitability of

the financial institutions as business entities and serving the needs of the real economy

with due consideration for the principles of equity. But there are obvious contradictions.

In the race for profitability, there is an obvious need to reduce operational costs. In the

process, there is a natural exclusion of several sections of the society from the financial

net. Reducing the adverse consequences of such exclusion and bringing the maximum

number of people under the financial system is the key concern of financial institutions

throughout the world.

Indeed, financial inclusion is not an end in itself. Just having a bank

account, or an insurance coverage, ipso-facto, does not mean an enhancement in the

economic position or well being of a person. But it can act as a facilitator. As poverty is

a well-known problem in most developing countries, what is needed is to develop

mechanisms, which ensure that poverty is not exacerbated by lack of access to financial

services. People need information and advice when they get into debt and such

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information and guidance can best be delivered by appropriate mechanisms. If such

effective mechanisms are put in place, they in turn reinforce the demand fro credit.

While attempting to reach the hitherto excluded sections through a campaign

mode is a laudable initiative, the reality of Indian banking still remains beyond the reach

of many households. The latest Reserve Bank figures indicate that the 85 commercial

banks concentrated in urban centers, account for 78 percent of India’s financial assets

while cooperative banks and regional rural banks accounts for only nine percent and three

percent, respectively. This explains, to some extent, the rural retrogression, which has its

social reflections in phenomena as farmers’ suicides. Large institutional intervention,

such as in the form of micro-finance, has shadow effect than really contributing to the

dynamics of the economy. Large employment oriented rural programmes still suffer

largely from inadequacy of backward and forward linkages. The conventional “credit-

technology-market” approach should undergo a major change in favour of innovativeorganizational initiatives.

10. Concluding Remarks:

The commercial banks as a whole are competing with each other to achieve high

targets. In the process, even the bare minimum that is available with the poorer sections

of the society will be siphoned off as savings. Though some of the banks have come

forward with general-purpose kisan credit cards and artisan credit cards, which offer

collateral free small loans but it does not actually help the interest of the poor people.

For the poor man, finance is everything as it saves him from day-to-day hardships

as well as to link his financial needs arise out of economic activities that are sustainable.

Therefore, the poor not only need capital but also real services. It is this logic that

underlines the setting up of the financial inclusion fund as also linking up such a fund

with initiatives for local economic development.

The public sector banks, which are champion in uplifting the rural poor, would

think of linkages and support professional institutions and organizations that can

deliver real services as also conceive and implement capacity building initiatives.

As a first step, financial inclusion centers may be set up in such professional

institutions. The very objectives of financial inclusion can better be achieved

through such initiatives and sustainable economic proposition for the poor will

become a reality.

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References:

• Arunachalam. Ramesh: Alternative Technologies in the Indian Micro Finance

Industry, Published by Action Aid, New Delhi, 1999;

• Bhatt Nitin, Thorat. Y.S.P: India’ Regional Rural Banks: The Institutional

Dimension of Reforms, Journal of Microfinance, Vol. 3, No.1, 2001;

• Fisher. Thomas, Sriram. M.S: Beyond Micro-credit: Putting Development back

into Micro-finance, Vistaar Publications, 2000;

• Greening. H, Bikki. Randhwa: A Framework for Regulating Microfinance

Institutions, Published by the World bank, 1999;

• Joshi. Deepali Pant: Organization of Microfinance, Economic & Political Weekly,

April, 2004;

• Joshi. V.C, Joshi. V.V: Managing Indian Banks, Published by Response Books,

2002;

• Kurum. F, Narayan. Sadagopan: Microfinance Regulation in India, Sadhan

Publication, 2001;

• Littlefred. E, Martin Hollman: Microfinance overtake their Commercial peers,

The banker, 2005;

•Robinson. Marguerite.S: Microfinance, the paradigm shift from credit delivery to

Financial intermediation, Ashgate publication, 1998;

• Thingalaya. N.K: The other side of Rural Banking, BIRD Publication, Lucknow,

2000.

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Financial Inclusion & MF