Financial inclusion is an important policy pillar of Narendra Modi-led government to ensure inclusive development (sab ka saath, sabka vikas). What it means briefly is to mainstream financial services for masses, especially credit at affordable costs from institutional sources.
This is not the first time financial inclusion is being given a policy thrust. In the past, too, various governments tried to bolster it, and that was one of the reasons why bank nationalisation took place. There have been some successes in this during 1951-1991, when the share of outstanding debt of rural households from institutional sources increased from a meagre 7.2% to 64%. But, thereafter, the very period of economic reforms showed a dismal performance, with the share of institutional sources declining from 64% to 56% during 1991-2013. This is one of the biggest lapses of India’s reforms story. If the Narendra Modi-government can correct this flaw, it can be a game-changer by alleviating poverty at a much faster pace than has happened under the reforms undertaken from 1991-2013.
Realising the importance of financial inclusion, the government took a bold step by introducing the Jan Dhan Yojana. The government deserves much appreciation for the speed at which these accounts have been opened—the scheme has already found place in the Guinness Book of World Records. At the moment, around 20 crore bank accounts have been opened, and more than R30,000 crore of deposits have been received under this scheme. However, the real challenge, which also undermined previous efforts at financial inclusion, is to prevent these accounts from remaining dormant.
To ensure that the scheme remains active and relevant in fulfilling its objective, the prime minister had asked RBI to prepare a roadmap for financial inclusion. The report of the RBI committee on the medium-term path on financial inclusion, released December 2015, emphasised the role of a holistic strategy involving players like telecom operators, biomentric verification, payments banks and land registrars for last-mile service delivery. Some of its major recommendations include linking all credit accounts with a biometric ID such as Aadhaar; moving away from short-term interest rate subvention on crop loans and towards a crop insurance scheme; and replacing various inputs and output subsidies with direct benefit transfers (DBT). The report finds that although there has been significant improvement in access to banking services through expansion in number of rural branches, banking correspondents and no-frills banking accounts, a large degree of financial exclusion prevails in East and North East India. High interest rates (above 20%) charged by the informal sector as well as micro-finance institutions continue to be a matter of concern. In this context, let us focus on one of the key recommendations of the RBI committee, the one on phasing out the interest subvention scheme.
The interest subvention scheme was introduced by the government in FY07 with the objective of providing substantial and cheap loans, at 7% interest (with an upper limit of R3 lakh), and if the borrower was regular with repayment, the interest rate was to be lowered to 4% gradually. Some states have gone ahead and extended loans even at 0% to farmers, a large portion of the rural population. This has resulted in a significant increase in the amount of short-term agricultural credit, with actual disbursements consistently surpassing targets. This is hailed as a grand success and subsidy on account of this scheme has increased from R3,283 crore in FY12 to R13,000 crore in FY16.
But this could be deceptive and a potential agri-credit scam. There is reasonable evidence that suggests that a significant proportion of crop loans granted at interest rates with subvention is not reaching the targeted beneficiaries. A farmer who receives loans at a concessional rate of 4% can easily deposit at least a part of it in fixed deposits at a bank, earning around 8% interest or even become a money-lender, giving out loans at 15-20% interest rates to those who don’t have access to institutional sources of finance. You don’t need bigger proof than the fact that short-term credit from institutional sources reached 110% of the total value of agricultural inputs in 2014 (Source: NAS-2015), and at the same time, All India Debt and Investment Survey data shows that 44% of loans were from non-institutional sources in 2013. This suspicion is reaffirmed when one looks at the month-wise disbursement of agricultural credit—this spiked to 62% of annual disbursement in the last quarter of FY14, with no corresponding spike in agri-production activities at that time.
No wonder, the RBI committee recommends phasing out interest subvention scheme—lest it explodes as a scam—and moving towards universal crop insurance. The latest crop insurance scheme is expected to cost the Centre around R9,000 crore. This could easily be financed by releasing funds allocated to interest subvention.
The report also states that meaningful financial inclusion will be elusive without social cash transfers under the government-to-person (G2P) route. Recognising large leakages in various welfare and anti-poverty schemes, many countries have moved from price support to income support. However, India uses price policy (subsidised inputs) to support farmers and PDS grains for consumers. Such policies are inefficient and, at times, regressive, as they promote leakages and sub-optimal use of scarce resources.
Recent policy interventions utilising DBT in LPG subsidy have yielded good success. Similar efforts are needed for food and agri-input subsidies. Using the JAM-trinity (Jan Dhan, Aadhaar and mobile technology) and digitising land records will be significant drivers of financial inclusion.
The challenges of implementation will remain unless the government displays same vigour and perseverance as it did in opening accounts under the Jan Dhan Yojana. Will the government rise to this challenge? Only time will tell.
Gulati is Infosys chair professor
for agriculture and Terway is a research assistant at ICRIER.
Views are personal