Large is not necessarily beautiful. This is obviously one inference from the recent global financial meltdown. The concept of ?too large to fail? has generated both controversies and moral unease. The new measures to strengthen regulatory framework in the US and Europe are one obvious consequence. No one has however debated the social and economic relevance of ?too small to fail?. In a sense, this is embedded in the concept of inclusive banking, which enables the benefits of financial intermediation as a driver of growth with multiple multiplier effects, including equity, agricultural productivity and poverty amelioration. Credit access is not an issue any more in the more mature economies. For them, it is rather a more classic issue of prudential norms, risk appropriation and the quality of the regulatory framework. In India, in spite of the acclaim for our banking system, unfortunately inclusive banking both as a concept and a driver of growth has been a late-starter.

It is thus ironic that in spite of a trillion dollar economy with the highest number of billionaires in Asia, nearly two-thirds of India remains unbanked. Consider the following:

* Only 34% of the population is engaged in formal banking.

India has the highest number of households (145 million) excluded from banking.

* 50% of the population does not have a bank account, especially in remote villages where only 17% of population has any credit exposure.

* Of 6 lakh villages in India, only 50,000 have access to banking and a mere 10% of India?s 1.1 billion people have any kind of life insurance cover and just 9.6% any non-life insurance.

* Notwithstanding many initiatives taken by our government, the apathy of banks for going rural is evident from the fact that in 2005-06 the PSU banks opened 486 new branches but not a single rural branch. Further, in 2007-08 of 1,014 branches opened by PSU banks only 69 were in rural areas. As per the banking statistics, banks opened only 381 rural branches out of a total of 2,514 branches in 2008-09.

So, I do believe that innovative banking strategies can bring 30 million poor households, which means 120 million people into formal banking in the next three years by using innovative means. This indeed is also the outcome of the report by the Boston Consulting Group titled The next billion customers?a road map for expanding financial inclusion in India. The ingredients of any government roadmap would no doubt include all the various facets on inclusive banking, namely no frills banking, incentives offered by RBI to open branches in rural areas, expanding the reach of telecom platform, appointment of business correspondents, increasing overdraft limits above the current Rs 4,000 limit, extending kisan credit cards to cover all farmers and extending the reach of microfinance institutions.

For all that to happen, it is now increasingly recognised that inclusive banking cannot be driven by the government alone. In the past, fund starved banks being forced by the government to expand rural bank branches has led to repetitive recapitalisation of banks but shows sub-optimal results. The new paradigm can bring opportunity and profitability through innovative strategies. After all, if 72% of India?s population lives in rural areas, the trickle-down effect of a sustained GDP growth of 8-9% leading to a per capita income growth of over 7% per annum compounded over half a decade is likely to lead to a dramatic increase in the purchasing power of rural India. So there is a huge opportunity. I think a credible path forward would include the following ingredients.

* Analysts have correctly pointed out that more than low income it is the ?volatility of income? (most of the unbanked people are non-salaried and have wide monthly variations in income) that keeps them outside the parameter of financial services. This makes it hard for banks to assess their creditworthiness. However, banks need to use a flexible payment schedule for people at the bottom of the pyramid and shared services could easily bring 30 million households into the banking fold. An insurance scheme for the agriculture and unorganised sector has been discussed but never formalised. The cost of social security services in rural areas would be small compared to its multiplier benefits.

* The electronic transfer mechanism to prevent leakages of financial support extended to the poor, under different social schemes, needs active encouragement. The synergy between data from the Census and the Unique Identity Scheme of Nandan Nilekani could facilitate a more aggressive use of electronic transfer mechanisms.

* Given deeper penetration of mobile telephony, more aggressive use of no-frills account and vigorous use of general purpose credit cards can improve the banking operations significantly.

* The states must be encouraged to help inclusion, while RBI can further loosen restrictions on hastening bank expansions.

Land record digitisation will lend clarity to land titles.

* Getting corporate sector to contribute positively by offering a basket of services must be encouraged.

* Banks, instead of cross-subsidising by increasing the cost to greenfields, must consider lowering the cost of financial intermediation looking at the enormous benefit of a bouquet of services from education loans, health loans and environmental sustainability loans to name a few.

We increasingly believe that the current growth momentum can continue irrespective of the exogenous events. This may be somewhat of an exaggeration. It is true that unsaturated domestic consumption, particularly demand emanating from the agricultural sector and unleashing demand through retail outlets would continue to bolster the growth process. However, efficient financial intermediation and adequacy of credit for multiple micro-activities would be central to sustaining the consumption-led growth. Inclusive banking, thus, may be small but is a key component in our growth strategy. Indeed inclusive banking is too small to fail.

The author is a Rajya Sabha MP