Financial Inclusion

What is more important than Financial Inclusion in India?

By Seema Sahai

The policy landscape in India is marred with an obsession for targets in terms of number. People below poverty line, income level for poverty line, workers in informal sector, number of school drop-outs and number of mal-nourished children, all these have been just reduced to figures in books and speeches of politicians.

Qualitative analysis of the problems facing the country and finding solutions has not yet emerged as the norm. This is similar to our claim to be the “Largest democracy” on the basis of number of voters, without realizing whether we can pass the basic test for “spirit of democracy”, where criminals still shamelessly contest, win the elections and go on to become ministers.

Financial Inclusion in India

The emphasis on financial inclusion for over eight years now has been beset by a similar approach. If it can be implemented with the limited and already hard pressed resources that we have, it may serve the practical purpose of transferring direct benefits to the accounts of beneficiaries. But the proposed over-draft in Jan Dhan Yojana without the resilient security of JLG model may well prove to be a nightmare for bankers.

Financial inclusion has not been the reason for development in the history of any developed nation. Beneficiaries of Micro Finance Institutions (MFIs) and SHG bank linkage programs are good examples to understand the role of financial inclusion in helping poor. More importantly it needs to be understood as to what actually drives the growth of these beneficiaries so that interventions can prioritized accordingly.

financial inclusion map india 2014

Financial Inclusion Map of India . Img-credit:

Microfinance in India

Micro finance has been identified as an instrument of financial inclusion by the government as well as the RBI in India. A large numbers of clients are served by MFI’s today.

After the crisis in 2010 the microfinance sector has bounced back and is all set to achieve a double digit growth year on year. This reflects the genuine need for funds and capital at the bottom of the pyramid. At the same time studies across the world including India have shown that micro-finance (read ‘micro credit’ because credit still dominates the sector) has not been able to create any significant positive impact on household income.

Similarly the SHG-Bank linkage program in India has also helped link more than 4 Crore households to banks – a really huge number. Though it is claimed to have enhanced income level by 23%, with an average loan amount ranging from Rs 4000 to Rs 6000 it is practically not possible to make substantial impact on this income level.

If these two credit based financial inclusion schemes, which are deemed as “Success Stories” have not created any substantial impact then one has to take stock of the reasons as to why these schemes could not create much impact. There is a need to reinvent the wheel – we have to learn from the successes and failures of existing systems.

Beneficiaries of MFI’s are usually found in the informal sector, comprising of micro-enterprises operating at the household level which are involved in the sale and production of goods and services. This segment represents almost half of the informal sector population. If given an enabling environment they will not only sustain themselves but also create employment for others. An analysis shows that there are many other easily doable, more important policies which can help micro-enterprises sustain themselves profitably.

Micro-enterprise Development in India

First of all it is the availability of opportunity. With low investment, low technology and highly labor intensive activity, most of the activities carried out by micro enterprise have a low entry barrier.

This results in a crowded marketplace for example: Home based tailoring, Kirana stores and Dairy farming. But liberalization has opened up ample opportunity for micro enterprises. The Private sector constantly focuses on cost cutting and outsourcing. Even the government is turning to contractual work and outsourcing in the name of labor reforms and minimum government.

There is a need to match the supply with demand. Once the opportunity is there then the demand for skills will follow. Demand for skills arises only when opportunity is visible. In their constant struggle to run the household, the poor don’t have much time and resources to invest in learning new skills which may be useful for the future.

That explains why the government and MFI supported skill development are supply driven and there are no takers for the same.

On the other hand we have examples of village after villages learning Zardozi embroidery and turning into Zardozi clusters near Lucknow even when it was not their ancestral profession. With agents reaching out to villages and bringing work to the door step each family is involved in Zardozi work. Similar is the case for handicrafts and embroidery work in Jaipur. Banjara youth going down south to sell sarees learn functional English on their own initiative so that they can sell the Sarees to a larger audience.

In all these cases the source of skill training is informal- either on the job training or learning skills from neighbours or family members. It is the access to opportunity which is driving the growth in income, neither financial inclusion nor government sponsored programs on skill development. The role of micro credit in these cases is limited to a small part of the total fund requirements.

A connection with value chains is the easiest way to link these enterprises to a larger market. These enterprises can be involved in low technology, labour intensive work with low investment activities. If the value chains involving such activities like food processing, handicraft, assembly units could be linked to villages based on a development blue print, other things would fall in place.

The other way of connecting to larger and assured demand could be a sustainable industrial township. But even today India cannot boast of any newly developed Industrial Township except for those developed decades ago.

Similarly newly developed industrial clusters are amiss from the development scenario. Old caste based clusters are still able to sustain because of the inherent resilience in the concept of clusters. An assured forward and backward market developed over generations; scope of learning the job as apprentice thus learning not only the skills but also the tricks of the trade; strength of a collective bargaining power; these are few strong benefits of clusters which help its members grow.

The Government has recognized this long back and has developed specific cluster development programs but these programs are aimed at MSME clusters- which actually have got nothing to do with the large number of informal micro enterprises who are left on their own.

Further a substantial investment also ensures that the entrepreneur can have access to better demand and is capable of catering to that demand. Loan amounts disbursed by MFI’s are small and has not reached a level where it can impact business operations substantially. Moreover no new activity can be started with such small amount.

It further raises the basic question of whether it is best to allocate resources in small amount to small clients or develop SME’s to make a more efficient use of resources and generate more employment? Or, whether SHG’s can be developed to work as SME’s with profit sharing among members and generating employment. This question actually needs to be debated from a policy perspective.

Further the lack of information is enormous. Poor are not aware about existence of opportunities. Same applies to the awareness about policies for development of poor. A simple visit to the ground makes it clear that poor are unaware of the policies which are much discussed among the academia, policy makers, multilateral bodies and forums. These entrepreneurs- both rural and urban are unaware that the government is working for the skill development or entrepreneurship development. It is difficult to comprehend that when so much money is spent on these policies why can’t there be some mechanisms to ensure that information about these schemes reaches the ears of those for whom it is intended?

Micro credit policies are not designed to bring substantial impact and none of the micro enterprises owe their growth to micro credit. Those who are able to sustain profitability and generate employment are doing so due to either their access to opportunity by being part of a value chain, or cluster and due to their entrepreneurial skills.

Financial Inclusion as provided by micro credits has not really been found to be the reason for growth of micro enterprises. It may serve a purpose but much more is required and it can only play a supplementary role.

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