Financial inclusion: Reaching the un-reached

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: The Rangarajan Committee has been interacting with stakeholders, financial institutions and academia to frame guidelines for financial inclusion. Financial inclusion became necessary in the context of the financial exclusion that the banks indulged in overly in the aftermath of liberalization and re-regulation of the financial sector.

Financial inclusion simply means that banks will offer a basic bank account to any one who wants to have one. The term was coined in the British lexicon as they found that nearly 7.5 million persons did not have a bank account. The objective of nationalization of banks -- ‘reaching the unreached’ -- took a backseat in the post-1991 economic reform period, when banks opted for the preferred customer route in their pursuit of profit. It is this context that made me look into the past to draw a lesson or two for this reincarnation of social banking in the sophisticated version of financial inclusion. The top 100 centres share 23.3% of the bank branches, 64% of bank deposits and 75.1% of credit in the country. Eighty percent of agricultural credit accounts are in twelve States; over 70% of SSI accounts are again in 11 states; most public sector banks derive 60-70% of their profits from no more than 25-28% of bank branches. The gaps in banking are staring at us. It is an acknowledged fact that banks are most unlikely to provide mainstream finance to large numbers in interior rural and tribal areas in small amounts.

The intermediation is taking roots in microfinance institutions and self-help groups. Equally true is the fact that government, with a myriad of schemes floated out of either political necessity or bureaucratic enthusiasm, can only facilitate those institutions that have a desire and mechanism to reach the poor/vulnerable/underprivileged groups. But all these groups are in need of not just money. They need advice on how to use banking and credit productively. Here, it is good to recall what happened to the differential rate of interest (DRI) scheme in the 1970s and 80s. The scheme envisaged collateral-free credit dispensation to the poorest of the poor up to a ceiling of Rs 6,000 repayable in easy installments. Adverse selection (politicians’, bureaucrats’, academicians’ and bankers’ relatives sneaked into the eligible groups) and poor monitoring apart from lack of interest in the poor led to abandonment of the scheme.