Financial Inclusion: Alternate Model

Financial Inclusion: Alternate Model

Introduction

Financial Inclusion seems to be the latest buzzword of Indian Financial Sector. However, this much talked about concept presents a conflicting view. The phrase raises question as to if this is yet another kind of social responsibility, originally of government that is being now thrust upon the banks especially nationalized banks, or is it a financially viable propositions for these banks, the ones that make economic sense.

Research Methodology

Secondary data collected from RBI and NABARD database are analyzed with help of statistical tool to show current status of financial inclusion in the country. The results also showcase the overall impacts of FI policies.

Financial Inclusion

"Financial Inclusion (FI) is the delivery of financial services to all the people in a fair, transparent and equitable manner at affordable cost. FI has the potential to improve the standards of life of the poor and the disadvantaged. Financial services permit individuals and households to manage risks and uncertainties to save on better terms, to invest in a business venture or property or to cope with unforeseen expenses."

Once access to financial institutions improves, inclusion affords several benefits to the consumer, regulator and the economy alike. Some of them are listed below:

 Customers avail benefits of variety of standard, safer financial products provided and supervised by credible regulators

 The regulator benefits such as audit trail is available and transactions are conducted transparently in a medium that can be monitored

 The economy benefits, as greater financial resources become transparently available for efficient intermediation and allocation

Present status of Inclusion in India

A median household in India borrows 75% from informal sources, and only 12% from formal sources. This is for credit and it is also true for the saving accounts. Despite the RBI's attempt to get universal savings account, impact is very little. The percentage of household holding stocks and debentures reveals that the penetration is just 5%.

A snapshot of coverage of various financial instruments:

Item Extent of coverage

 Check in accounts 70.00%

 Insurance 10.00%

 Financial Assets 2.00%

 Assets Insurance 2.53%

 Health Insurance 0.20%

 Credit Card 3.00%

 Debit Card 5.66%

 Small Overdrafts 3.65%

 Entrepreneurial credit 2.06%

*RBI Report on FI

The following data provided by RBI highlights the concern on financial exclusion

Sl. No. % of Financial Exclusion States

1 > 75% Meghalaya, Mizoram, Jharkhand, Uttarakhand, Arunachal Pradesh, Assam

2 51 - 75 % Bihar, Orissa, Chhattisgarh, Himachal Pradesh, Jammu and Kashmir, Uttar Pradesh, Nagaland, Tripura and Sikkim

3 25 - 50 % Karnataka, Kerala, Madhya Pradesh, Maharashtra, Punjab, Tamil Nadu, West Bengal & Rajasthan

4 < 25 % Andhra Pradesh, Delhi, Goa and Pondicherry

Key issues in FI

 Achieve Wider coverage

 Promote economic growth

 Higher transaction cost because small sized loans are disbursed to numerous groups/individuals

 Difficulties in including private/public sector bank, MFIs, SHGs, Co-operative banks stack holders in the mission of FI

 Unsustainable default rates

 High infrastructural costs associated with rural penetration

Steps taken by RBI

Establishment of regional rural banks (RRBs) in 1975, introduction of Self-help Group (SHG)-Bank Linkage Program in 1992, formulation of KCC (Kissan Credit Card) scheme in 2001 are the initial measures. Then a committee on FI (Chairman: Dr. C. Rangarajan) was constituted by the Govt of India in June 2006 to recommend a strategy to achieve FI, general purpose credit cards and artisan credit cards which offer collateral-free small loans were introduced.

KYC (Know your customer) norms were simplified for opening a 'No frill' account. Individuals can open 'No Frill' account without identity proof and address proof now. They can be introduced by an existing customer whose full KYC norm procedure has been completed. The introducer must have a satisfactory transaction record for at least 6 months.

From January 2006, banks are permitted to use service of NGOs, SHGs and other civil society organizations as intermediaries to provide financial/banking services.

IT-enabled services have been introduced to meet the challenges of FI such as lack of adequate infrastructure, higher transaction costs and low volumes of transactions.

An advisory mechanism in the form of credit counselling is encouraged to help distressed borrowers.

Banking Codes and Standards