Financial Inclusion for Inclusive Growth

Financial Inclusion for Inclusive Growth Institutions and Innovations Debesh Roy( I. Introduction An immanent pre-requisite for inclusive and sustainable growth is capital formation through faith and monetary service. enchantment the benefits of growth due to reforms in India, have intemperate in the hands of those already served by the formal pecuniary system, a large section of the artless and urban poor still do non have access to the formal banking channel. The backward regions of the country, too, lack basic pecuniary infrastructure.The Reserve Bank of India ( rbi) has, therefore, formulated the insurance policy of financial cellular inclusion with a view to cater banking services at an affordable price to the disadvantaged and poor-income aggroups. Financial inclusion makes growth broad based and sustainable by progressively encompassing the hitherto excluded world. The idea of financial inclusion in India has its roots in the co-operative movement which st arted in the year 1904. Historically, communisation of commercial-grade message banks in 1969 was the most significant effort towards financial inclusion, which direct to the spread of bank split upes in rural and semi-urban areas.The access to banking services has increase considerably, as may be gauged from the accompaniment that the average population per branch has decreased from 64,000 in 1969 to 13,400 as at the end of March 20111. However, there are still some under-banked states in the country like Bihar, Odisha, Rajasthan, Uttar Pradesh, Chhattisgarh, Jharkhand, westmost Bengal, and the North-Eastern States. Further, in spite of the enhanced come forthreach of banks in rural areas and the implementation of order credit, the growing credit needs of raiseers, rural artisans and entrepreneurs could not be adequately met from banks during the post-nationalization period.The run batted in, therefore, urged banks to review their existing banking practices to align them w ith the objective of financial inclusion. According to the run batted in (RBI, 2008) access to safe, easy and affordable credit and other financial services by the poor and vulnerable groups, disadvantaged areas and lagging sectors is recognized as a pre-condition for accelerating growth and reducing income disparities and p everywherety. Moreover, access to a sound-functioning financial system, by reating equal opportunities, enables economically and neighborlyly excluded people to integrate better into the providence and actively contribute to development and also protect themselves against economic shocks. NSSO data reveal that 45. 9 million farmer households in the country (51. 4 per pennyime), out of a aggregate of 89. 3 million households do not have access to credit, either from institutional or non-institutional sources (Government of India, 2008). Further, despite the ample lucre of bank branches, only 27 per cent of total farm households are indebted to formal sour ces (of which one-third also borrow from unceremonious sources).Farm households not accessing credit from formal sources as a proportion to total farm households is especially high at 95. 91 per cent, 81. 26 per cent and 77. 59 per cent in the north-eastern, eastern and central regions respectively. Thus, apart from the fact that exclusion in general is large, it also varies widely across regions, social groups and asset holdings. The poorer the group, the great is the exclusion (RBI, 2008). The RBI has discovered that out of 600,000 habitations in the country, only roughly 5 per cent have a commercial bank branch (RBI, 2010).Also only about 61 per cent of the population across the country has bank narration (savings), and this ratio is much subvert in the north-eastern states. Further, 18 per cent of the population has debit cards and about 2 per cent has credit cards (RBI, 2011). India has a significantly low level of financial penetration compared with OECD countries. Furt her, while the access to bank branches in India fares better than that of China and Indonesia it is worse off when compared with Malaysia and Thailand. However, in terms of financial access through ATMs, India fares poorly compared to select Asian peer group countries (RBI, 20102).In view of the poor level of financial inclusion in India, the RBI has accorded top-most policy priority to financial inclusion, by advising commercial banks, to formulate ad hoc Board approved Financial Inclusion Plans (FIP) and to act on them on a mission mode. Banks were also advised by the RBI to provide banking services tin every village having a population of over 2000 by 31 March 2012, through bank branches as well as through various ICT-based models including through caper Correspondents (BCs).Banks were also promote to cover the peripheral villages with population less than 2000. There has been some value in the status of financial inclusion in the country in the last couple of years. Yet the e xtent of financial exclusion is staggering. come forth of every 1000 persons, only 99 had a credit account and 600 had a deposit account as at end-March 2011. This underlined the need to substantiate the financial inclusion drive through well thought out policies (RBI, 2011).Against this backdrop this base attempts to examine and analyse policy issues related to the promotional material of financial inclusion through various institutional and product innovations, and their concussion on the achievement of widespread and sustainable inclusive growth. Rest of the paper is organized as follows incision II presents the status of financial inclusion in India. State-wise Index of Financial Inclusion (IFI) has been developed in Section III. Section IV analyses the role of institutions in promoting financial inclusion.Section V examines innovations in financial inclusion which could lead to inclusive growth. Demand side innovations for financial inclusion have been analyzed in Section VI. Section sevener concludes the paper and suggests policy initiatives for the achievement of inclusive growth through financial inclusion. II. Status of Financial Inclusion in India There has been a undifferentiated increase in the penetration of banking services in India in fresh years. However, the rate of increase in the penetration of banking services in the rural and semi-urban areas has been much lower than that in the urban areas.Further, penetration of banking services has been lower in the central, eastern and north-eastern regions of the country compared to the to a greater extent developed northern, southern and westerly regions. In order to distribute this issue, the RBI liberalized the branch authorization policy in December 2009, giving freedom to domestic scheduled commercial banks to open branches at Tier 3 to 6 centres (with population of up to 49,999 as per the Population Census of 2001) without having the need to take permission from RBI in each case, subj ect to reporting.The RBI has been encouraging banks to expand their network both through setting up of refreshing branches and through the Business Correspondent (BC) model by leveraging upon information and communication applied science (ICT). This has resulted in an improvement in the status of financial inclusion in 2010-11 over the previous year, as indicated in tabulate 1. However, the extent of financial exclusion is still quite substantial. This is evident from the fact that only 61. 2 per cent of the population had a deposit account, and 9. 9 per cent had a credit account.Hence, the extent of financial exclusion underscores the need to focus on the beef up of the financial inclusion drive through a planned, merged and innovative approach. hold over 1 Progress of Financial Inclusion in India Sl. No. Indicator 2009-10 2010-11 1 Credit-GDP Ratio 53. 4 54. 6 2 Credit-Deposit Ratio 73. 76. 5 3 Population per Bank Branch 14,000 13,138 4 Population per ATM 19,700 16,243 5 Percentage of Population having deposit accounts55. 8 61. 2 6 Percentage of Population having credit accounts 9. 3 9. 7 Percentage of Population having debit cards 15. 2 18. 8 8 Branches opened in Tier 3-6 centres as a per 40. 3 55. 4 cent of total refreshed bank branches 9 Branches opened in hitherto unbanked centres as 5. 6 9. a per cent of total new bank branches Source Report on Trend and Progress of Banking in India 2010-11, RBI During 2010-11 4826 new branches of scheduled commercial banks were opened. It may be observed from Table 2 that majority of the branches (66. 4 per cent) were opened in the more developed regions to wit northern (23. 2 per cent), southern (26. 2 per cent) and horse opera (17. 0 per cent). The less developed regions accounted for 33. per cent of new branches opened viz. central (18. 1 per cent), eastern (13. 5 per cent) and north-eastern (2. 0 per cent). Further, rural and semi-urban branches accounted for 22. 3 per cent and 41. 7 per cent of new branches, respectively. On the other hand, the cope of urban and metropolitan branches stood at 17. 9 per cent and 18. 1 per cent, respectively. Table 2 Distribution of New Bank Branches of Scheduled Commercial Banks across Regions and Population Groups (2010-11) Regions No. of new branches Population groups No. f new branches Central 874 (18. 1) Rural 1077 (22. 3) Eastern 650 (13. 5) Semi-urban 2011 (41. 7) North Eastern 97 (2. 0) urban 865 (17. 9) Northern 1120 (23. 2) Metropolitan 873 (18. ) Southern 1263 (26. 2) Western 822 (17. 0) Total 4826 4826 Note Figures in parentheses are percentages to total new bank branches. Source Report on Trend and Progress of Banking in India 2010-11, RBIA major instrument of financial inclusion is the Kisan Credit Card (KCC). KCC enables farmers to access credit at the right time, to consider their pre-sowing as well as well as post-harvest needs. Region-wise and institution-wise status of government agency of KCC as on 31 March 2011 is furnished in Table 3. It may be observed that the southern region accounted for the highest share of KCC issued (36. 3 per cent) and the amount sanctioned (32. 5 per cent), followed by the central region with 22. 8 per cent of KCC issued and 23. 7 per cent of the amount sanctioned.The eastern region was ranked third with 17. 2 per cent of cards issued, but was ranked one- quaternate with 10. 2 per cent of the amount sanctioned. The northern region which was ranked fourth (12. 6 per cent) in terms of cards issued, was ranked third in terms of amount sanctioned (23. 6 per cent). The more developed westbound region, however, accounted for 9. 5 per cent of cards issued and 9. 2 per cent of amount sanctioned. The to the lowest degree developed north-eastern region accounted for 1. 6 per cent of cards issued and 0. 8 per cent of the amount sanctioned.Government of India has launched a programme called Bringing Green Revolution in Eastern India (BGREI) in the states of Assam, Bihar, Chhattisgarh, Jharkhand, Odisha, Eastern Uttar Pradesh and West Bengal, with a view to address the constraints limiting the productivity of rice based cropping systems. BGREI is expected to raise the invite for agriculture credit and accordingly, banks need to give a special pigeon berry to issuing KCC in these states. Among institutions, the share of commercial banks was the highest in terms of the consider of KCC issued (54. per cent) as well as amount sanctioned (69. 4 per cent). While the share of cooperative banks in terms of the number of KCC issued was higher (27. 7 per cent) than that of RRBs (17. 4 per cent), the share of RRBs (15. 8 per cent) was higher than that of cooperative banks (14. 8 per cent) in terms of amount sanctioned. It is, therefore, imperative that in order to achieve greater financial inclusion, there should be a focus on strengthening RRBs and the cooperative credit institutions. Table 3 Kisan Credit Card scheme (As on 31 March 2011) (A mount in crore and Number of cards issued in 000) Cooperative Banks RRBs Commercial Banks Total Region Cards Issued Amount canonic Cards Issued Amount Cards Issued Amount Sanctioned Sanctioned high gear Financial Inclusion (0. 5-1) Punjab 1. 00 0. 85 0. 34 0. 61 1 6 Karnataka 0. 75 0. 59 0. 48 0. 59 2 9 Maharashtra 0. 61 0. 37 1. 00 0. 57 3 2 Kerala 0. 92 0. 85 0. 28 0. 57 4 10 Tamil Nadu 0. 74 0. 50 0. 9 0. 52 5 4 Himachal Pradesh 0. 86 0. 98 0. 16 0. 51 6 11 Medium Financial Inclusion (0. 3-0. 5) Uttarakhand 0. 71 0. 4 0. 15 0. 46 7 5 Haryana 0. 71 0. 65 0. 17 0. 45 8 1 Andhra Pradesh 0. 74 0. 46 0. 26 0. 45 9 8 All-India 0. 50 0. 35 0. 40 0. 41 Jammu & Kashmir 0. 57 0. 41 0. 24 0. 39 10 21 Sikkim 0. 7 0. 81 0. 07 0. 37 11 3 Gujarat 0. 54 0. 42 0. 17 0. 36 12 7 West Bengal 0. 44 0. 25 0. 29 0. 32 13 17 Low Financial Inclusion (