In the context of Financial Inclusion, it is important to understand certain aspects of Economic Theory. Economists of the world describe that there are at least five different types of capital or resources in a country :
- Physical (roads, building, plant and machinery, infrastructure)
- Natural (land, water, forests, livestock, weather)
- Human (nutrition, health, education, skills, competencies)
- Social (kinship groups, association, trust, norms, institutions)
- Monetary (money, income, saving, investments)
Inadequate access to these resources can be the cause or the consequence of poverty and the accompanying backwardness of a country. Every economy strives to increase the different types of resources available for the welfare of it’s citizens and mankind.
Some broadly suggested measures which can improve the quality of life are:
- Human capital – Stress on health and education;
- Natural capital – Better utilization of natural resources;
- Physical capital – More investment infrastructure;
- Social capital – Develop institutions like Gram Panchayats, etc.
- Monetary – (to provide outreach of savings and credit to all sections of society ).
It is under the fifth measure that financial inclusion plays a prominent role.
Financial Inclusion in India – Overview
Financial inclusion is the delivery of financial services at an affordable cost to vast sections of the disadvantaged and low income groups. The purpose of financial inclusion is to provide equitable opportunities to every individual to avail the facility of formal financial channels for better life, better living and better income. It is crucial to innovate and provide means to include the financially excluded by way of ensuring access to financial services, and timely and adequate credit.
Financial inclusion is not an end in itself, but rather a gateway, a process. Financial inclusion can be described as the provision of affordable financial services, viz., access to payments and remittance facilities, savings, loans and insurance services by the formal financial system to those who are excluded.
The Micro-credit movement is global phenomenon. Generally, the micro credit movement is criticized for it’s nearly 100% focus on credit and absolute neglect of extending saving opportunities. However, since credit re-payment is on a daily or weekly basis, it amazes many about the earning and saving capabilities of vulnerable sections of society, even if it is of small amount.
It shows two important things;
1. Even the so called poor are able to save;
2. Lack of compatible facility and appropriate product at convenient location.
Current Status of Financial Inclusion India
The Indian banking industry has been able to penetrate to less than half of the population over the last few decades. The Reserve Bank of India (the regulator) has taken a number of steps to further expedite the process of financial inclusion. Its efforts in adapting to the changing needs of the economy and enabling greater access to financial services to the un-banked and less penetrated segments are praiseworthy. Broad based financial inclusion is a must,as there is hardly any instance where transition from an agrarian system to a post industrial modern society has happened in any economy without the setting up of a robust financial system.
Despite the aggressive growth in most financial segments since 2001 coupled with the successfully absorbing of the global recession of 2008, under penetration of banking facility and of most financial products/services is widespread in both rural and urban areas of India.
Even though Indian banking credit has enjoyed a significant growth since 2003,credit penetration remains well below global benchmarks,which is suggestive of healthy growth potential on one side and failure to achieve equitable distribution in society on the other. In India too ,the household sector generates more savings in comparison to the private corporate and public sectors. A significant proportion of household financial savings is routed through the banking system.
The statistics on financial exclusion in India provides a very depressing picture. Out of over 600,000 rural habitations in the country,only about 30,000 or just 5% have a commercial bank branch. Just about 40 per cent of the population across the country have bank accounts and this ratio is much lower in the north-eastern part of the country. The proportion of people having any kind of life insurance cover is as low as 10 per cent,and the proportion having non-life insurance is an abysmally low 0.6 per cent. People having debit cards comprise only 13 per cent and those having credit cards a marginal 2 per cent. However staggering these figures may seem, they still convey only part of the extent of financial exclusion in India.
Out of the total number of saving bank accounts the vast majority are dormant. Status of active ‘no frill accounts’ is altogether alarming. All across India, less than 10% of the ‘no frill accounts’ are active. In the absence of financial literacy, very few conduct banking transactions and even few receive credit from formal financing channels. Millions of people across the country are thereby denied the opportunity to increase their earning capacity and entrepreneurial talent and continue to struggle with their limited resources.
Things are changing in the country. 15 years ago, nobody would have thought that big corporates like ‘Novelis’, ’Arcelor’, ’Jaguar Land Rover’, ‘Corus’ will be taken over by Indian entrepreneurs. The world has also seen how the population explosion became a blessing in disguise and has now been transformed into the great Indian domestic consumption story.
Financial Inclusion and Economic Development
The world as also seen how the so called weak banks and financial institution of India came triumphant during recession of 2008. The way some of the things happen here are like miracles. Despite policy constraints, poverty traveling side by side to growth, handicraft happening side by side with technology and many more.The Indian growth story is being increasingly felt and admired with each passing year.
Poverty levels are declining and are bound to decline further. With this households will have greater levels of incomes and at the same time the number of first time savers, consumers and entrepreneurs are bound to increase. This segment will require easy access to formal financial systems to get into the banking habit. Banks need to innovate and devise newer methods to absorb such customers into their fold as these new prospective customers will turn into commercially viable customers. That is to say that the supply side should take the initiatives.
These are early times for micro credit, MFI’s and the self help group movements in India. Though they are gathering momentum, they still need support to spread to the length and breadth of India and to penetrate to different parts of India. If their greed remains under control, they will be able to successfully replace moneylenders (who are more harmful).
Businesses facilitators and correspondents have grown in numbers but to achieve desired level of financial inclusion, more innovations are needed. New entrants to the banking system perhaps need ‘home delivery ‘ or ‘near home delivery’ rather than stepping into the branches.
With increasing liberalization and higher economic growth, the role of the banking sector is poised to attain greater heights in India. The banks need to mobilize resources from a wider customer base and extend credit to business activities not financed by banks till now.
Increasing commercialization of agriculture and rural activities is bound to result in to cycle of higher income, higher consumption, higher savings and higher investment resulting into higher income. Growth is changing the face of rural as well as of urban India. Financial inclusion will strengthen financial deepening and provide resources to the banks to expand credit delivery. Thus financial inclusion is cause as well as outcome of economic development.