At Rs60,000 crore, equivalent to 1.1% of India’s national income, the debt waiver package for farmers announced by finance minister P. Chidambaram adds to the single largest such effort by the government to reach out to the country’s poor.
But, the 2008 Union Budget does little else to connect that enormous section of the population to the financial sector.
A large chunk of the farm loan write-off is aimed at marginal and small farmers but, according to the National Sample Survey, the government’s largest count of heads, nearly three in four farmer households have no access to formal sources of credit. Some 60% of India’s population is engaged in agriculture.
A committee headed by C. Rangarajan, former governor of the Reserve Bank of India or RBI, on so-called financial inclusion recently recommended the government adopt a National Financial Inclusion Plan in “mission mode” immediately. There was little evidence of that urgency in Friday’s Budget. The committee defined financial inclusion to mean “delivery of banking services and credit at an affordable cost to the vast sections of disadvantaged and low-income groups”.
“The financial inclusion schemes would go farther in helping the rural poor than the debt waiver scheme if you consider that a lot of this debt is with private moneylenders who are not going to waive their dues,” said Dharmakirti Joshi, principal economist at ratings agency Crisil Ltd.
Still, Chidambaram signalled the beginning of small efforts in direction of financial inclusion. He decided to implement, “to start with,” two of the Rangarajan committee’s recommendations. First, commercial banks, including regional rural banks, he said, will be asked to add at least 250 rural household accounts every year at each of their rural and semi-urban branches. Next, these banks will appoint individuals such as retired bank officers and defence personnel as business facilitators or credit counsellors. A business facilitator, under a scheme that was launched by RBI in 2006, acts as a medium between a bank branch and the uneducated poor who are held back by illiteracy and, at times, centuries-old discrimination from approaching a bank branch to open an account or avail of its services.
Banks, said Chidambaram, “will be encouraged to embrace the concept of total financial inclusion. The government will request all scheduled commercial banks to follow the example set by some public sector banks and meet the entire credit requirements of self-help group members, which are income generation activities, social needs like housing, education, marriage...and debt swapping.”
The finance minister has also sought to strengthen the arms of the three financial institutions that primarily fund the needs of micro-finance, self-help groups and other trusts or charitable societies, who in turn extend finance directly to the poor. To increase the resource base of the three--the National Bank for Agriculture and Rural Development or Nabard, the Small Industries Development Bank of India and National Housing Bank—he proposed to create four funds.
The first fund of Rs5,000 crore will be created in Nabard to allow it to refinance short-term cooperative credit institutions. Two funds of Rs2,000 crore each will be created in Sidbi, one for risk capital financing and the other for refinancing more loans to medium and small enterprises.
The last, a fund of Rs1,200 crore, will be set up at NHB to allow it to lend more to the rural housing sector. Each of these funds will work on the same lines as the Rural Infrastructure Development Fund, which too got a higher corpus of Rs1,400 crore.
These apart, a health sector scheme, which also serves the cause of financial inclusion is the Janashree Bima Yojana, which offers life and permanent disability cover to people in 44 categories with one-half of the premium contributed by a social security fund run by the government.
There are about three million self-help groups credit-linked with banks, but the Janashree scheme has only covered 35,000. The Budget allocates Rs500 crore to the fund’s corpus and asks it to include, beginning next fiscal, all the all-women self-help groups that operate in the sector.