India has had a long history of initiatives to bring about financial inclusion since 1947. The Reserve Bank of India (RBI) and the ministry of finance have been striving to achieve financial inclusion through a series of programmes starting with nationalisation of the Imperial Bank to State Bank of India in 1955, introduction of cooperative banks, State takeover of major banks in the 1960s, opening of regional rural banks, priority sector lending programme, banking correspondent model, the no-frills account etc. However, all these initiatives have met with limited success.
As the Raghuram Rajan Committee on financial sector reform had pointed out in 2008, it is not possible to achieve financial inclusion of 600 million through regulatory or administrative fiats alone, but by making the financial inclusion programmes viable for all parties involved.
The big question is: will we achieve financial inclusion for the excluded 4 billion in the world by 2020? India accounts for a large portion of this 4 billion. First we need to understand what we mean by financial inclusion. Is it merely statistics? Or does it have a real positive impact on people’s lives? It is not about the 70 million no-frills bank accounts opened that are not actively used. It’s not about one small loan given to 30 million micro-finance customers. We checked the impact on customers after one or two loan cycles. The customers told us that their lives were somewhat better and, most importantly, they were no longer dependent on money lenders; but they were certainly not out of poverty.
Till 1985, the middle class could only open a savings account or at best fixed deposits. They were virtually excluded from all other credit options. But in a span of 10 years, the middle class has got access to the entire gamut of financial services. This opened up the purchasing power of the 200 million, which turned India’s growth rate from the Hindu Rate of 2% to 8-9% . This is the impact of financial inclusion.
Can we provide the full gamut of financial services to the 600 million excluded: credit, savings, remittance, insurance and pension by 2020? It is possible with some pro-active action. The biggest challenge today in India is providing the poor an effective savings product.
There are silver linings and the base has been created to make this goal achievable. On Tuesday, finance minister Pranab Mukherjee tabled the Microfinance Bill in Parliament. The Bill requires that all micro-finance institutions (MFIs) with minimum net worth over R5 lakh have to be registered with the RBI. The sector is currently regulated by the respective states. The Bill also proposes to set up a council to ensure development of the sector. The Universal Identification (Aadhaar) is in full swing along with opening of a no-frills account for the financially excluded. Over 30 million micro-finance customers’ credit records have been uploaded with credit bureaus. The mobile banking platform and regulatory framework is also in place for funds transfer through the Interbank Mobile Payment Services. In India, we have more than 930 million mobile subscribers, of whom 313 million are in rural areas.
As recommended by the Rajan Committee, we need to do a couple of things: allow the Non Banking Financial Company (NBFC)-MFIs to be banking correspondents for savings and tie this up with mobile banking; and second, issue licences for ‘small’ or ‘limited service’ banking, specifically for financial inclusion.
If we are able to do this, I am hopeful that we will be able to achieve full financial inclusion by 2020. We have created the platform; we only need to take the leap.
(Samit Ghosh is founder, Ujjivan Financial Services, a microfinance institution)
The views expressed by the author are personal