Financial inclusion has been a much debated subject for several years now and, over the last few years, it has gained a lot of momentum. While the issue has been a subject of discussion and development of various financial services industries banking, capital markets, mutual funds and insurance, pension funds, etc the last two weeks witnessed at least two reports on financial inclusion.
Rating agency Crisil came up with its Inclusix index for the financial year ended March 2012 that covered the extent and growth of financial inclusion across 638 districts. Last week, the Reserve Bank of India (RBI) committee on Comprehensive Financial Services for Small Businesses and Low-Income Households chaired by Nachiket Mor submitted its report. While the Inclusix showed the extent of bank account and credit penetration across states and their divergence across them, the RBI committee submitted various recommendations for the banking system along with its vision to provide, by January 1, 2016, an electronic bank account to every Indian adult who has an Aadhaar card.
The committee has also presented its vision to provide low-income households and small businesses with access to formally regulated lenders by January 1, 2016. If the plan goes through, it will not only provide everyone with a bank account and thereby a formal system for monetary transaction, it will also be beneficial to the economy as it will help channelise domestic savings which otherwise goes to the informal system gold, unregulated collective investment schemes where investors end up losing lots of money.
The current situation
Crisils Inclusix index that rates districts on the basis of the number of bank branches, deposits made and credit provided has given a score of 42.8 to the country on a scale of 100 and that reflects under-penetration of formal banking in the country. The report also said that only one out of two Indians has a bank savings account and only one in seven have access to bank credit.
The RBI report states that close to 90 per cent of small businesses have no links to the formal financial institutions, and as high as 60 per cent of the rural and urban populations does not have a functional bank account.
This has left a large part of the economy dependent on the informal sector for meeting its credit needs, said the RBI report.
Even on the savings front, the report noted that savings as a proportion to GDP has fallen from 36.8 per cent in 2007-08 to 30.8 per cent in 2011-12 and the household financial savings have declined from 11.6 per cent of GDP to 8 per cent during the same period.
The challenge is clearly the ability of the formal financial system to mount a strong supply response, which needs to be strengthened considerably, said the report as it recommended in its report to reach out to low-income households and small businesses in a bid to bring them within the formal banking system.
What has been done
The Reserve Bank of India has, over the years, taken several steps such as no-frills bank account, reaching out through banking correspondents to provide formal banking to all villages with a population of over 2,000. While it achieved much of that target, RBI has now set a target for banks to cover all villages with population of less than 2,000 through its financial inclusion plan 2013-16.
The Securities and Exchange Board of India has also taken steps to push for mutual fund penetration beyond the top 15 cities.
In 2012, Sebi proposed new remuneration rules for mutual fund distribution under which funds houses were allowed to deduct a higher expense ratio of 30 basis points if 30 per cent of their sales come from cities beyond the top 15 cities. The incentive was aimed at pushing the industry to boost their efforts to sell products in smaller towns.
What needs to be done
While providing bank accounts to all adult individuals in the country is a dire need, various sectors in the financial services space have seen varied initiatives. While financial sector regulators RBI and Sebi have been running programmes on financial education and inclusion, the RBI panel chaired by Mor has set a target to provide every adult Indian with a bank account in the next three years. It even proposed the creation of 10 special category banks, including payments bank that would cater to small businesses and low-income households with a relaxed entry level capital requirement of Rs 50 crore. It has also proposed the formation of wholesale banks which can be permitted to accept deposits of over Rs 5 crore.
But not everyone seems impressed with the idea.
RBI panel members Shikha Sharma, MD of Axis Bank, and SS Mundra, CMD of Bank of Baroda, expressed skepticism about the proposal. It is evident that while creation of such banks is a step forward from pre-paid instrument providers (PPIs) and shall improve accessibility to the low-income households, it may however not help in achieving the desired level of financial inclusion, they said in a separate note in the report.
They further added that the overall objective of financial inclusion is to provide access to a complete bouquet of financial services including credit, insurance and risk management products, which may be difficult to achieve through the payment bank framework, vis--vis, a BC/branch model, which stands greater chances of achieving the vision.
However, there is unanimity on the fact that financial inclusion is the need of the hour and RBI will have to be quick to take a decision on the manner it wants to push financial inclusion.
The need for financial inclusion
Financial inclusion and higher penetration of the formal banking system into the unbanked regions in the country will not only help channelise the savings into formal system but will also help in preventing investors from being lured by illegitimate collective investment schemes or Ponzi schemes that have collected more than Rs 10,000 crore from investors across the country. In the absence of the formal system, investors often fall for such products that collect money from them and thereby risk their lifes savings.
Figure it out
* 183 million: Loan accounts, which is a fourth of the total savings accounts
* 5.6%: Growth in bank branches
in 2012, which is the least in the last three years
* 7.9: Bank branches per lakh of population. The bottom 50 districts have just 3.5 in comparison
* 66.1: Inclusix score for the southern region while it is 30.9 for the north-eastern region
* 30.8%: Savings as a proportion of GDP in March 2012 down from 36.8 in March 2008
* 8%: Household savings as a per cent of GDP in March 2012 down from 11.6 per cent in March 2008.
(Source: RBI & Crisil)
RBI panels 2016 vision
* Every adult Indian to have a universal electronic bank account
* Every resident would have access to an electronic payment service within fifteen minutes of walking distance and it would allow resident to deposit and withdraw cash
* Each household would have access to formally regulated lenders
* Everyone would have access to suitable investment and deposit product providers at reasonable charges
* Each household and business will have access to insurance and risk management product
* Each low-income household and business would have a legally protected right to be offered only suitable financial services