We all want 10% growth in GDP for India, but for it to be sustainable, it has to be equitable and inclusive. And inclusive growth requires, among other things, financial inclusion. The finance minister and the Reserve Bank of India (RBI) governor have both, in the recent past, expressed their concern that a large majority of India’s citizens do not have access to basic financial services. While this concern began with the lack of access to institutional credit, which less than 20% of households were able to get from banks, it is now widely recognized that access to saving services through a bank account is the gateway to financial inclusion. Banks have started responding to this challenge, but we need to examine some additional ways to enhance financial inclusion.
A part of the problem is caused by the inappropriate architecture of our banking system. With few exceptions, all banks try to provide all kinds of services to all kinds of customer segments. Thus while one part of the State Bank of India (SBI) has several thousand rural branches and caters to lakhs of SHGs of poor women, another part of SBI is engaged in large corporate lending and yet another in international banking with overseas branches. This leads to a situation where a small customer, whether rural or urban, is not a priority. She receives indifferent service, facing delays and rude behaviour from the staff, who like to serve bigger, urban customers.
Any bank which caters to the large and the small, the corporate and the individual, and the urban and the rural, will eventually show a bias in favour of the large, corporate, urban customer. The best staff will gravitate to those departments and the worst will be left to provide some indifferent service to the less preferred customers.
The disinterest of banks to serve poorer clients gets further magnified by the fact that politically imposed interest rate controls on small loans make it unprofitable for banks to cater to the small/rural customers. Thus both the individual proclivity of the bank employee and the institutional incentive coincide to ensure that today’s banks can never, never cater to the financially excluded.
How have the other countries addressed this problem? The United States, arguably the most advanced economy in terms of financial services, has had a long tradition of a financial eco-system comprising several tiers of banks and non-bank financial institutions. This included neighbourhood Savings and Loan Associations, credit unions, local community banks, regional banks and only a few nationwide banks.
The international banks such as Citi for which the US financial system is well known, are just a handful, and unlike in India, they do not engage in retail operations in rural areas. In addition to banks, the average American citizen is able to use a wide network of credit cards and ATMs. Of course, in spite of all this, the US banking system does leave out the bottom 15%, who are often prone to predatory lending practices by credit card companies and banks specializing in “subprime”markets.
In France, since 2001, there is a law making a bank account a legal right of every citizen. If a citizen is not allowed to open a bank account by a local bank, he can approach the Bank of France, which will then assign a nearby bank to the potential customer.
In Indonesia, the banking system is multifarious, with simultaneous existence of commercial banks in big cities, branches of provincial banks in small towns, the Unit Desa (village banks) of Bank Rakyat Indonesia (BRI), the local community banks, cooperative banks and private rural banks (BPRs). The entry level capital for a BPR was fixed at $50,000 which resulted in over 8,000 BPRs being set up. The average Indonesian citizen thus has a lot of choice across banks.
Coming back to India, an analysis of RBI data shows that as many as 139 districts suffer from massive financial exclusion, with the adult population per branch in these districts being above 20,000 and only 3% with borrowings from banks. The NSS 59th round shows that only 27% of farm households have access to bank credit.
Thus, there is no escape from having local banks for local people. Only then can the asymmetry between the user and the service provider be reduced. Otherwise, one has the situation where a poor, illiterate customer has to deal with a large, indifferent institution, whose performance and its employees’ prospects do not depend even an iota on whether it provides any service to this customer or not.
As the current banking architecture has not been able to provide a vast majority of the citizens with access to basic banking services, RBI must create not only a multi-tiered banking system, but also encourage privately owned banks. Local Area Banks must be allowed to come up, may be as many as 200 to cover all the districts.
In addition, RBI guidelines enabling banking beyond branches, through the “business correspondent” model, must be implemented with full gusto. Coupled with the use of technology such as biometric cards, mobile phones and low-cost ATMs, such “business correspondent” outlets can enhance financial inclusion massively, the same way as STD PCOs revolutionalized access to telephones since 1990.
I began by saying that inclusive growth requires financial inclusion, and I have suggested several ways by which financial inclusion can be enhanced. However, we should not make the assumption that by itself, financial inclusion will lead to inclusive growth. For growth to happen at “the bottom of the pyramid”, to use C.K. Prahalad’s much-cited phrase, we need to enhance access by the poor to not just financial services—savings, credit, insurance and remittances—but also to a broad range of opportunities and resources to enhance and secure their livelihoods. This includes access to land and water, basic infrastructure, health care, education and skills. Thus, financial inclusion is a necessary, but not a sufficient, condition for enabling the poor to participate in the “Indian Century”.
(Vijay Mahajan is chairman of BASIX Group, which works for promoting livelihoods of the poor. He is a member of the committee on financial inclusion.)
(The Indian Century is a special series of guest columns that will run in this space throughout 2007, the 60th anniversary of India’s independence. We invite influential thinkers, academicians and policymakers to write on the opportunities and challenges that lie ahead in the next century. We also welcome your suggestions on people you think ought to contribute to this series. Do write to us at theindiancentury@ livemint.com)