Financial Inclusion

FINANCIAL INCLUSION, BANKS AND POVERTY ALLEVAITION India with her competent manpower is making her presence felt all over the world. Her new found confidence allowing to her to take risks, to stand with her head held high among the mightiest, for battling out all adversities, for manoeuvring the path of being on the top and most importantly to dream big has sprung up from the fact that her economy is booming like never before showing greater results with each passing day. One just can’t ignore the role the banks are playing in building a strong financial infrastructure by maintaining monetary and financial stability leading to economic management. However, being a developing and emerging economy India expects her banks to shoulder the additional responsibility of promoting growth and development through a proactive role. Despite making significant improvements in all the areas in relation to financial viability, profitability and competitiveness, there are concerns that the banks have failed to include the vast segment of population, especially the underprivileged section of society, into the fold of basic banking services. The strategies to ensure financial inclusion can truly lift the living standards of the deprived class and provide them an opportunity to make their life worthwhile. Financial Inclusion basically means delivery of banking services at an affordable cost to the vast sections of disadvantaged and low income groups. An unrestrained access to goods and services is a prerequisite of an open and efficient society. As banking services are in the nature of public good, it is necessary that the entire population without discrimination of any kind should be facilitated with banking and payment services. This could be achieved either by state intervention through law enactments i.e. by making it a statutory right to have a bank account or through initiative of the banking community itself to figure out various plans and programmes for admitting people from all layers of society within ambits of banking sector. The present scenario of financial system shows innumerable instances of social inequality. Till now only the affluent customers have been able to enjoy the unrestricted access to wide range of financial services and products while many have been denied the luxury of even the most basic financial products. Remaining others utilise the banking services only for deposits and withdrawals of money. Disclaimer of banking rights or financial exclusion of the underprivileged has caused extreme imbalance in the society as a whole. It has led to higher incidence of crime, general decline in investment, difficulties in gaining access to credit or getting credit from informal sources at exorbitant prices and sufferings of small

business due to loss of access to middle class and higher income consumers. Internationally the problem of financial inclusion has been dealt with effective planning and stringent laws. For instance a civil right law, Community Reinvestment Act (CRA) in United States prohibiting discrimination by banks against law and moderate income groups or Financial Inclusion Task Force has been set up in UK for the purpose of financial inclusion, viz., access to banking, access to affordable credit and access to free face to face money advice. Coming back to the Indian scenario, the growing banking industry has caused a paradigm shift in the focus of banking from class banking to mass banking. The branches of commercial banks and Regional Rural Banks have increased from 8321 in the year 1969 to 68,282 branches in the year 2005. However, the ratio of deposit accounts to the adult population is only 59%. Within the country there is a wide variation across states. For instance the ratio for the state of Kerela is as high as 89% while in Bihar its only upto 33%. In the North Eastern Stares like Nagaland and Manipur, the ratio is meagre 21% and 27% respectively. The Northern Region comprising of states of Haryana, Chandigarh and Delhi has a high coverage ratio of 84%. Compared to the developed world the coverage of our financial service is quite low. Analysing the issue of building sustainable financial services systems for poor men and women from the point of view of financial sector development, it can be seen that including the people who have not been integrated into the formal financial sector because of low incomes, gender or remote locations, often represent a large and potentially profitable market if somehow the costs and risks of serving them are controlled. From the perspective of poverty reduction, access to reliable saving facilities can improve the economic security of misfortunate. Once economic security is attained they could opt for credit facilities provided by the banking sector, thus eventually helping them to move out of the vicious circle of poverty. In order to accomplish financial inclusion, barriers created by remoteness, poor infrastructure, a stagnant economy, illiteracy or social factors like caste and gender bias needs to be strictly dealt with and removed. Furthermore, formal financial markets may invest in developing the human resource among the clients and in establishing local structures that help them link with financial institutions. Proper target groups that define the invisible line between the poor and the poorest needs to be recognised in order to properly identify the features of poverty alleviation programmes. Adequately defining the target clientele can help in setting correct standards of performance for programmes and in selecting appropriate mechanisms in poverty alleviation and income enhancement efforts. The recognition of the

heterogeneity of the poor should lead to deepening of downward reach of banking institutions. Till 1980’s the steps towards financial inclusion included establishment of cooperative networks and organisational forms like Regional Rural Banks, focussing more on credit rather than other financial services like saving and insurance, interest rate ceilings, government subsidies channelled through the banks and cooperatives and a dominant perspective that finance for rural and poor people was a social obligation and not a potential business opportunity. The improvements in financial access to masses have increased but still there is a tremendous scope for financial coverage to ameliorate the standards of the deprived classes. A recent step in the direction has been taken by the Reserve Bank of India. It has urged the banks to make available a basic banking ‘no frills’ account either with nil or very minimum balances as well as charges that would make such accounts accessible to the common man. All banks are exhorted to give wide publicity to such no frills accounts in order to achieve greater financial inclusion. The banks need to do away with the notion that the policy of social inclusion is impossible and domain of big banks. They should realise that mass banking can become a win-win situation for both the parties equally. Banks are required to adopt a holistic approach and create awareness about financial services, education, money management, debt management and savings and affordable credit. Strategies for achieving financial inclusion need to be evolved. One of the ways could be forming linkages with microfinance institutions and local communities. Technology can be a very valuable tool in providing access to banking services even in remote areas. ATM machines could me made more user friendly and could be modified to remove language barriers. They should utilise all available resources including technology and expertise. The need of the hour is to take risks and think out of the box in order to make possible the emergence of financial inclusion as a profitable venture.