Financial inclusion is the rage these days. Bankers make appreciative noises about it, seminars debate the best method of attaining it, central bankers and ministers make speeches pushing it. The Right to Bank could soon take its place besides the Right to Food.
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But banks have always played a big role in India’s rural development. Immediately after nationalization, they were forced to fan out into the countryside, open branches, welcome the great unbanked masses and lend freely to them. “Priority sector” lending is a legacy of those revolutionary days. By the eighties, a vast network of rural branches had sprung up and banks were at the forefront in disbursing loans under a bewildering number of government programmes. Banks became important development agencies. And slowly but surely, these programmes laid the foundations of a new middle class in small towns and villages. To be sure, there was a cost attached. The banks increasingly resembled government departments, bad debts piled up and loan melas proliferated. But many rural folk, especially the relatively better-off class, and small businesses did gain access to bank credit.
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Many of the innovations of those days bear striking similarities to today’s practices. While sanctioning agricultural loans, many obtained what was called a group guarantee, with several members of a group guaranteeing each other’s loans. The same practice is today touted as one of the reasons why loans given by micro-finance institutions are repaid promptly, due to peer pressure. There used to be a scheme called the Janata Deposit, where a deposit collector used to collect money from villagers and deposit it in the bank branch. That’s the business correspondent model the Reserve Bank of India is now so enthusiastic about. This time, though, the idea is not to subsidize rural credit but to devise means of lowering costs so that it’s a viable business proposition. Hence the higher interest rates and the search for technological solutions.
Between 1972 and 1989, the share of rural deposits in total bank deposits went up from 6.5% to 15%. The share of the metropolitan centres, on the other hand, went down from 46.2% in 1972 to 38.6% in 1989. Similarly, the share of rural credit increased from 4.6% of total credit in 1972 to 16.3% in 1989. Credit made available in the metropolitan areas went down from 60.2% in 1972 to 43.5% in 1989.
But that trend changed decisively after liberalization. After 1991, the share of rural India in deposits and credit started to fall and that of metropolitan India started to rise. By March 2009, rural deposits constituted a mere 9.3% of total bank deposits. Part of the reason was a re-classification of bank branches and a rise in urbanization.
But what’s striking is that the proportion of deposits from the metropolitan areas went up to 56.2%. A similar trend is seen in the credit numbers. The proportion of rural credit had declined to 7.3% by March 2009, while credit granted in the big cities went up to 67.3%. The changes in these figures since liberalization underline the fact that while growth has certainly been higher, it has also been more centred in the big cities and has led to rising inequalities.
Consider also the proportion of bank credit that goes to the poorest states. The share of the North-East in total bank credit went up from 1.27% in 1972 to 1.97% in 1989. By 2009, this was down to 0.86%. Or take Madhya Pradesh, which earlier included Chhattisgarh, the region currently facing a tribal rebellion. Madhya Pradesh’s share of total gross domestic product (GDP) went up from 2.07% in 1972 to 4.28% in 1989. By 2009, this share (including that for the new state of Chhattisgarh) had fallen to 2.9%. Or take Uttar Pradesh, the country’s most populous state—its share (including Uttarakhand) in total bank credit went up from 5.6% in 1972 to 7.26% in 1989, but was down to 4.75% in 2009.
What has been the United Progressive Alliance (UPA) government’s record so far? Well, in March 2004, just before the UPA took power, the share of rural deposits was 12.9%—it’s now down to 9.3%. The share of metropolitan deposits was 47.5%—it’s now 56.2%. There are similar trends on the credit side. Uttar Pradesh’s share has fallen from 5.16% to 4.3%. The proportion of credit to the north-eastern states has fallen slightly. Ditto for Bihar and Chhattisgarh. Despite its populist rhetoric, the trends since liberalization have remained intact under the UPA.
The last time the government went in for financial inclusion in the seventies and eighties, it resulted in far-reaching changes, not just in the economy but politically as well. The new-found prosperity of the middle classes in rural and semi-urban India was reflected in the rise of the middle castes. This time, financial inclusion is targeting the poorer classes and castes, with the hope of a political dividend. But the first wave of financial inclusion was founded on the basis of it being the central task of the banks. This time around, financial inclusion is being seen as corporate social responsibility, part of a trickle-down philosophy. This is history repeating itself, not as tragedy, but as farce.
Manas Chakravarty looks at trends and issues in the financial markets. Comment at email@example.com