One of the time-proven observations of mankind has been that nature loves balance. This cardinal principle is also equally applicable in economics. In reality, there are wide gaps beyond a threshold level that have substantial potential to fuel social disparity. The extent of this wedge can be gauged by the fact that nearly 40% of the world?s population earns only 5% of the global income, around 2.5 billion people live on under $2 a day and the rich 10% of the global population accounts for 54% of the global income.
India is also a part of the above scenario. It is rather paradoxical that while India is now rightfully considered one of the fastest-growing economies; the same growth has created challenges in terms of the need for equitable distribution of wealth. It is a cause of concern that 60% of India?s population still doesn?t have bank accounts and nearly 90% don?t get loans. The proportion of people with any kind of life insurance cover is as low as 10% and the proportion with non-life insurance is abysmally low at 0.6%. Out of the 89 million farmer households, 73% don?t have access to formal credit. It will not, therefore, be an exaggeration to say that millions of people are still denied the opportunity to harness their earning capacity and entrepreneurial talent, resulting in their continued marginalisation.
To beat the complex situation, ?financial deepening? assumes the role of an essential and core measure more today than anytime before. The banking system has a pivotal role in creating an inclusive society and is now keen to utilise it. Banks are the beneficiaries of inclusion initiatives in three ways. First, financial deepening ultimately promotes economic growth by increasing the efficiency of allocation of savings and enhancing the potential customer base. Second, it improves the financial stability by facilitating better risk management through the availability of diversified financial products. Lastly, these initiatives ensure lowering of transaction costs that ultimately benefits the customers.
Inclusive banking is a challenging assignment and the basic challenges involved relate to reach, technology, movement of cash, cost mitigation, selection and supervision of business correspondents, viability at initial stages and spreading financial literacy. For the last few years, Indian PSBs have been devising strategies to create presence in unbanked villages, either through opening a branch or branchless banking. Some of the underprivileged sections are also being offered customised products to suit their requirements and pockets. For example, PNB introduced a product for rickshaw pullers and milk vendors to bring them out of the clutches of moneylenders. RBI has encouraged the banks to use IT-enabled financial inclusion by leveraging on smart cards/mobile technology, which is steadily gaining momentum. However, it has been noticed that lowering transaction costs has emerged as the key challenge and the system would be viable only when volumes grow and costs per transaction/customer decrease.
The banks are now fully aware of the immense banking potential lying untapped in rural and semi-urban India. The biggest factor working to the advantage of banks is a favourable demographic profile for the next decade. Incomes of these sections will provide a large source of banks? deposits, besides creating a corresponding demand for loan products. Alongside this, a huge migrant workforce provides the banks with an opportunity to capture their remittance flows. The government?s welfare programmes (e.g., NREG) have received a big boost that again offers banks an unimagined extent of opportunity via handling of electronic benefits transfer. Another emerging key tool at the national scale is the UID, which will help poor people establish their identity. This would reduce cash and non-cash transaction costs, both to the banks and potential customers, besides simplifying procedures.
Inclusive banking will prove to be an extremely important programme that will enable India to be recognised as an egalitarian superpower. Inclusion will create an all-important feel good effect internally and a positive shift in perception externally.
?The author is CMD of Punjab National Bank