New Delhi: Financial inclusion has been the buzzword in India’s banking industry for the past four years, but the goal of delivering basic banking services to the poor in urban and rural India remains distant.
Just 44.9% of Indian earners had bank accounts in 2007, with coverage rates varying widely in individual states, according to the Invest India Incomes and Savings Survey of 2007 by the research firm IIMS Dataworks. Just 38% of paid workers in villages had accounts, compared with 62% of their urban counterparts, the survey found.
Delhi topped the survey with as many as 86% of earning individuals living in the national capital having bank accounts. Click here to access the bank coverage of India’s paid workforce.
Miles to go: A file photo of the New Delhi office of the Reserve Bank of India. Photograph by Harikrishna Katragadda / Mint
Tamil Nadu brought up the rear, with only 18% of its earning population being covered by banking services, below Bihar (28%), Chhattisgarh (31%) and West Bengal (35%)—all trailing “dramatically below the national figure”, said IIMS Dataworks. “Concerns in government circles in relation to a financially inclusive banking sector therefore are well based at the aggregate level..,” the research firm said.
The Union government and the Reserve Bank of India (RBI) have been pushing financial inclusion, or giving access to savings and credit avenues for the unbanked population, since the Congress party-led United Progressive Alliance, or UPA, came to power in 2004. The UPA won power on the plank of improving the lives of Indians who hadn’t received their fair share of the dividend from economic growth, which has averaged almost 9% in the past four years.
A committee was set up under former central bank governor C. Rangarajan in 2006 to recommend ways to spur higher financial inclusion. The panel called for the introduction of no-frills bank accounts for making and receiving payments, savings products tailored for poor households, small loans and overdrafts and insurance products.
“Not only is financial inclusion essential because of its implications for the welfare of citizens but it needs to be stressed that it has to be an explicit strategy for fostering faster economic growth in a more inclusive fashion,” deputy RBI governor Rakesh Mohan had said at a banking industry conference in 2006.
Banking growth has been restricted because a large part of the population is still steeped in poverty, and falls under the so-called informal sector that is not regulated by economic or legal institutions, said D.K. Joshi, principal economist at rating company Crisil Ltd.
“With 80% of the population living on less than $2 (about Rs85) a day, what kind of banking services will they avail?” Joshi said, adding that those employed in the informal sector also had a tendency to approach informal institutions such as local moneylenders.
Limits such as a minimum Rs5,000 account balance specified by private banks also restrict the ability of the poor to open accounts, Joshi said.
“Neither my driver nor my maid has a bank account because they don’t have Rs5,000 in cash at any one point of time. If you want financial inclusion, such limits must go.”
The IIMS Dataworks survey, which found that one in 10 bank customers had accounts with more than one bank, said “convenience banking” is a factor in a customer’s choice.
“Accordingly, as more banks establish themselves in a local geography the proximity of a bank branch to a customer’s place of work or residence of itself can cause them to open an account with a new bank for convenience’s sake,” it said.