Bhanoji Rao

Social cohesion and national unity are mere words unless backed by government action that ensures decent income levels and assets such as housing for each and every Indian family. If financial inclusion could contribute sufficiently to help improving the well-being of the citizenry, we can then declare that we have achieved something in the direction of moving towards a developed society.

Gravity of Exclusion

The Committee on Financial Inclusion (CFI) constituted by the Government of India in June 2006 under the Chairmanship of Dr C. Rangarajan, submitted its report a few months ago in January.

Financial inclusion is not merely having a bank account. The CFI defines it as follows: “Financial inclusion may be defined as the process of ensuring access to financial services and timely and adequate credit where needed by vulnerable groups such as weaker sections and low income groups at an affordable cost.”

How urgent is the financial inclusion issue? In this regard, the CFI report refers to the data from the National Sample Survey Organisation for calendar year 2003. About 46 million farmer households in the country, accounting for 51.4 per cent of total farming families (89.3 million) do not access credit, either from institutional or non-institutional sources.

Some 22 per cent borrow from informal sources and 27 per cent are indebted to formal sources, with a third of them also borrowing from informal sources. The accessing ratios for formal sources differ significantly across regions, and are especially low in the case of the North-East and the eastern regions at just 4 per cent and 9 per cent respectively.

The CFI has outlined the basic strategy for building an inclusive financial sector in terms of four components:

Effecting improvements within the existing formal credit delivery mechanism;

Suggesting measures for improving credit absorption capacity, especially amongst marginal and sub-marginal farmers and poor non-cultivator households;

Evolving new models for effective outreach; and

Leveraging on technology-based solutions.

Key Recommendations

Reflecting the strategy is a whole range of recommendations, some of the more important of which are as follows:

The most important recommendation is the launching of a National Rural Financial Inclusion Plan with the target of providing access to comprehensive financial services, including credit, to at least 50 per cent of the financially excluded households (55.77 million) by 2012 through rural/semi-urban branches of commercial banks and regional rural banks. The rest are to be covered by 2015.

To achieve the targets, the CFI recommends that the financial institutions “may set for themselves a minimum target of covering 250 new cultivator and non-cultivator households per branch per annum, …with clear emphasis on financing marginal farmers, tenant cultivators and poor non-cultivator households.”

The CFI recommendations include the formulation of district and State plans and targets for achieving inclusion.

The CFI has suggested that a National Mission on Financial Inclusion be constituted for achieving universal financial inclusion within a specific timeframe and for suggesting policy changes required for achieving the desired level of financial inclusion, and for supporting a range of stakeholders in the public, private and NGO sectors.

The excluded segments are to be covered via specially designed products in the areas of saving, credit and insurance.

There are also several complementary recommendations concerning bank staff motivation and incentives to achieve financial inclusion targets, and they are:

Special funds to help launch some of the suggested initiatives such as the setting up of farmers’ service centres, rural entrepreneurship development and self-employment training institutions, self-help groups, and technology applications for greater financial inclusion;

Simplification of procedures;

Ensuring viability of marginal farm holdings through supplementary activities such as poultry farming and dairy;

Capacity building of government functionaries;

Incentives for NGOs;

Self-help group operations, Nabard Act amendments;

Monitoring the operations of microfinance institutions; and

Building of data-bases.

The 178-page report, with an executive summary running into 27 pages comprising 179 paragraphs has not excluded anything that has direct or indirect relevance to the inclusion of the financially excluded.

Financial literacy

Start regularising illegal structures; there will be more to regularise. Start condoning black money; there will be more to condone. Start writing off debts; there will be more to write off. This is the well known phenomenon of moral hazard.

It will be especially strong if all the initiatives actually help those that do not deserve: the powerful — with muscle power and money power mostly. This is the phenomenon of adverse selection.

The CFI seems to have taken account of the problem since it says: “Credit within a specified limit can be made available in 2-3 tranches, with the second and subsequent tranches disbursed based on repayment behaviour of the first tranche. This is to ensure that the vulnerable groups do not get into a debt trap; it would also ensure good credit dispensation.” Of great import in this context is the promotion of financial literacy.

The CFI report, in an annexure dealing with RBI initiatives aimed at financial inclusion, also highlights the Bank’s role in promoting financial literacy and credit counselling. “A multilingual Web site in 13 Indian languages on all matters concerning banking and the common person has been launched by the Reserve Bank on June 18, 2007. Comic type books introducing banking to schoolchildren have already been put on the Web site. Similar books will be prepared for different target groups such as rural households, urban poor, defence personnel, women and small entrepreneurs. Financial literacy programmes are being launched in each State …A Centre for Financial Education and Excellence is proposed to be set up in RBI’s College of Agricultural Banking at Pune.”

The Economist (in its April 5 issue) has an article on ‘Financial literacy, getting it right on the money’. It is about a crusade to teach finance to the masses. It is about John Bryant and his non-profit organisation, Operation HOPE, founded in 1992. It is about giving the poor ‘a mixture of financial education, advice and basic banking’. The organisation offers a five hours course on personal finance. It offers mortgage advice to homebuyers.

In January this year, the US President constituted the Council on Financial Literacy. Among its initiatives are a new curriculum to teach MoneyMath to middle school students (with the very first lesson stressing the virtues of saving) and the establishment of a volunteer core to advise those in financial difficulties.

Nearer home, there is the Child Savings International launched by Ms Jeroo Billimoria. Her financial literacy programme will now be offered in many developing and some ‘developed’ countries. She believes in teaching the young — especially those in the age group 6-14. Again the emphasis is on saving.

In November 2006, the RBI Deputy Governor, Dr Rakesh Mohan, addressed the Annual Bankers’ Conference on the theme of financial inclusion. Commenting on international experience on financial exclusion, he said: “Typically, countries with low levels of income inequality tend to have lower levels of financial exclusion, while high levels of exclusion are associated with the least equal ones.”

It would seem that we must not forget to address fundamental and foundational problems while promoting development in general and financial inclusion in particular.

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