Financial inclusion: still a distant reality?

Fri, 9 Mar Pre-Open

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Financial inclusion improves people's lives, in particular those of the poor. A small loan, a savings account or an insurance policy can make a great difference to a low-income family. They enable people to invest in better nutrition, housing, health and education for their children. They ease the strain of coping with difficult times caused by crop failures, illness or death. They help people plan for the future. However in India, even though the Reserve Bank Of India (RBI) has mandated Indian banks to lend 40% to priority sectors (32% for foreign banks), the results are not very encouraging.

In India, almost half the country is unbanked. Only 40% of the population has a bank account. In fact India has the highest number of households (145 m) excluded from banking. There is only one bank branch per 14,000 people. Just 18% have debit cards and less than 2% have credit cards. Only 10% of the population has life insurance cover. Banks are also lending to large and rich farmers to boost their priority sector advances because they lack the wherewithal to lend to small and marginalised farmers who need it the most. For example, a state-run bank, part funded a Toyota car to a wealthy Gujarat-based farmhouse owner and classified it as priority sector lending. Small and marginal farmers who constitute more than 80% of total farmer households in the country face exclusion from formal financial channels.

The government policies have also not helped to improve their cause. Agriculture often bears the brunt of the vote bank politics played by the government. Farmers are not reaping the benefits of development with the government still dominating the way products are priced. Whenever there's a price gain for farm products, the government jumps to curb it with many controls. It banned cotton exports where farmers would have reaped the benefits of rising global prices. These kinds of controls lead to defaults and the blame goes on the farmers. As a result they are not able to pay their loans back and banks are not willing to lend them.

Financial inclusion can go a long way toward breaking the vicious circle of poverty. Although several steps like Electronic Clearing Systems (ECS), Real Time Gross Settlement (RTGS) systems and other technological advancements have made a difference, but more needs to be done in order to make financial growth more inclusive.