Research & Publications
Research & Publications
Financial inclusion
In recent years, the term ‘financial inclusion’ is widely used among policy makers and bankers as an important component of development strategy in India. Thorat (2006) defines financial inclusion as “the delivery of the financial services by the financial system at an affordable cost to the vast section of the disadvantaged and low income groups, where financial services include the provision of savings, loans, insurance, payments and remittance facilities”.
Efforts and current status of financial inclusion
Over the years, the government of India has taken various initiatives to reinforce the rural credit delivery system by building institutional frameworks which focused mainly on cooperative credit institutions, followed by nationalisation of major commercial banks in 1969, 1980 and establishment of Regional Rural Banks (RRBs) in 1975.
Mainstreaming the un-banked segment of the society was always consciously emphasized in the policy framework of the formal financial system which is evident in pro-poor programmes like including Swarnjayanthi Gram Swarozgar Yojana (SGSY) and SHG Bank Linkage programmes in the recent times. Though various measures were taken, the recent data on access to savings and loan facilities in rural India (leave aside other services like insurance, remittance) present various challenges, which are yet to be achieved in terms of financial inclusion.
Current Status
Census 2001 notes that despite its wide banking network and pro-poor policies and programmes, the total number of rural households availing banking services is about 30.1 per cent. Serious concerns about the role of the mainstream financial institutions are also noted in the recent reports of All India Rural Debt and Investment Survey (AIDIS) 2002-03. The report notes that though the percentage share of institutional agencies has increased over the years, from 19.7 per cent (1971-72) to 57.2 percent (2002-03), the share of non-institutional credit agencies in the overall cash borrowings of the rural households remains about 42.9 per cent for the same year.
In-depth analysis of the 2002-03 data further explains the divide between the rich and poor households in availing institutional borrowings, which in general indicates the exclusion of poor households by the formal institutional agencies to a great extent. The report notes that the households in lower asset groups (i.e., Rs. 15000 or less) were more dependent on non-institutional credit agencies than the households with asset holdings of Rs. 8 lakhs or more. The all-India data is supported by many state level studies conducted by various organisations which include both government and private agencies. For instance, the Rural Finance Access Survey (RFAS) conducted in two major states of India, viz., Andhra Pradesh and Uttar Pradesh in 2004 reveals that only 21 per cent of the rural households accessed formal credit and the proportion was only 13 per cent for household who are landless or holding less than one acre of land.
The above discussion clearly highlights the fact that success in reaching the poorest sections of the community has eluded most of the rural financial institutions. High transaction costs, formalities in terms of procedures and documentation, inability of borrowers to provide tangible collateral securities, announcements of interest or loan waivers vitiating the recovery climate of disbursed loans, are some of the often quoted structural impediments which affect the flow of institutional credit to the rural poor households.
Road Ahead
In the recent years various strategies, including microfinance, are being used by policy makers and the banking sectors to reach the as yet unreached segments of the society. Though the reach of microfinance intervention to the lowest segment i.e. people living below the poverty line, is still an open debate, the success achieved so far is unquestionable and needs to be replicated further.
In this situation, the following initiatives will help the mainstream institutions to achieve the goal of financial inclusion in the coming years:
References
All India Debt and Investment Survey (2003).NSSO 59th Round Report, Government of India.
Census of India (2001), www.censusindia. net
Rural Financial Access Survey (2003). Published by National Council of Applied Economic Research (NCAER), India.
Thorat Y S P (2006). ‘Financial Inclusion’ In Readings on Financial Inclusion (2006). Published by Indian Institute of Banking and Finance, Mumbai.