Despite an enviable growth rate in the last few years and significant increase in the savings and investment rates, inclusive growth has eluded us. The Approach Paper to the 11th Plan admits that “the rate of decline in poverty (levels) has not accelerated along with the growth in GDP”. It is not surprising, therefore, that the Plan targets not just rapid economic growth, but also inclusive growth, “a growth process which yields broad-based benefits and ensures equality of opportunity for all”. These goals are desirable, but will remain elusive unless there is easy, convenient and low-cost access to financial products and services. In recognition of this need, the central bank has widened the definition of financial inclusion as not just opening of bank accounts, but also provision of financial services such as credit, remittance, overdraft facilities and so on.
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After at least four decades of social ownership of banking operations, establishment of regional rural banks (RRBs) and the National Bank for Agriculture and Rural Development, and emphasis on priority sector lending, financial exclusion is glaring. One-third of the total paid workforce takes loans from traditional and usurious moneylenders. This is significantly larger than the number of earners who borrow from banks and cooperative financial institutions. Nearly three-fourths of the total farmer households in the country do not access institutional credit. It is thus apparent that the policymakers should look beyond the “no-frills bank accounts” approach to achieve financial inclusion. The Rangarajan committee has recommended a savings product suited to the seasonal income pattern of rural households, money transfer arrangements, small credit facilities, life and non-life insurance cover and other financial products and services as necessary for comprehensive financial inclusion. The committee has also suggested a National Rural Financial Inclusion Plan, an elaborate structure to operationalize this plan district level upwards and a National Mission on Financial Inclusion. It is of the view that RRBs should extend their services to unbanked areas and increase their credit to deposit ratio. Similarly, the self-help group–bank linkage initiative needs to be carried forward and non-governmental and company microfinance institutions should be enabled to source debt and non-debt funds.
The gradual removal of supply-side constraints and the expansion and deepening of financial infrastructure have not given the desired results; demand-side issues should be addressed simultaneously. Low income levels limit financial inclusion. According to the Invest India Incomes and Savings Survey of 2007, 24% of the total paid workforce was in the low-income category. This means nearly 80 million earners are in the low-income group. This survey further reveals that the average annual income of low-income earners was Rs21,000, with rural earners getting only Rs18,000. It is not surprising that with this level of earnings, financial inclusion will remain limited. While sustained high rates of economic growth will go a long way in improving income levels, the government needs to provide greater incentives for savings, particularly long-term savings, as retirement savings are not given priority by households in India. The New Pension System (NPS) needs to be encouraged by government co-contribution, tax incentives and statutory backing. The savings behaviour of individuals also requires to be modified to include diversion of savings towards higher yielding financial instruments such as equity. NPS offers this opportunity to low earners. High transaction costs, especially in insurance and mutual fund products, discourage inclusion. Cheap and effective sales and distribution channels that extend to low-income earners and to hitherto unaccessed parts of the country will enhance inclusion.
While the National Rural Employment Guarantee Scheme and the latest initiative to give cash and not foodgrains through the public distribution system will raise income levels, two areas that can give a push towards greater financial inclusion are technology and education.
Use of technology in delivering financial services through ATMs, money transfers and other online transactions, debit/credit cards, and so on has not yet induced greater inclusion. Technology will result in participation of larger numbers in financial activities only if it is low-cost, accessible and consumer- friendly. It is hoped that the Unique Identification project will have a beneficial impact on inclusive growth.
Explaining the life cycle of money in a person’s working life, with earning, spending, budgeting, saving, investing and use of credit as key areas of work is a complex task, more so in respect of low-income earners. A government-appointed expert committee has recently given a road map for a financial education programme for improving financial literacy levels. Knowledge of basic concepts of money and finance will help people in creating and protecting their wealth.
Efforts by several bodies to address the supply and demand side of the equation have benefited the people. However, these have been intermittent and do not add up to a national strategy. Hopefully, the coming Budget will give due importance to the goal of financial inclusion.
D Swarup is former chairman, Pension Fund Regulatory and Development Authority.
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