Dilemma and Dialectics of Policy Making on Financial Inclusion

While India has witnessed historic progress and growth in the past decade, large
segments of society remain excluded from the country’s formal financial system.
The Rangrajan committee categorically highlighted that access to finance by the
poor and vulnerable groups is a prerequisite for poverty reduction and social
cohesion. The facts that 35% of the country’s 1.2bn population is completely
outside the formal banking system; only 14 out of 100 adults have loan accounts on
an all India basis; six metros (Mumbai, New Delhi, Chennai, Kolkata, Bangalore and
Hyderabad) contribute 45 % to total deposit and 56 % to credit, indicating lower
penetration of banking service in other parts; 10% of Indians have life insurance
cover; and around 13% have debit cards and only 2% have credit cards reflect the
status of financial exclusion and the challenging task at hand. Recently, The GOI
constituted a committee on financial inclusion to correct this situation and extend
the reach of the financial sector to such groups by minimizing the barriers to
access. The current article briefly deliberates the Rangrajan committee
recommendation towards financial inclusion, highlights the flaws in the policies, and
recommends the need for new institutional architecture.

The task of financial inclusion has been core in the policy making process and the
policy makers have always stressed upon the mass banking as guiding principles in
drawing government policy. The Co-operative Credit Societies Act, 1904 was
passed by the Government in the beginning of 20th century and the Co-operative
movement was introduced into India. The rural credit societies were formed by
which the farmers could overcome their burden of debt and keep them away from
the clutches of the money-lenders. The cooperative credit system of India has the
largest network in the world and cooperatives have advanced more credit in the
Indian agricultural sector than commercial banks. The success story of Indian
Farmers Fertilizer Co-operative LTD (IFFCO) having operations through its more than
30,000 member co-operatives, National Agricultural Co-operative Marketing
Federation (NAFED) having over 5000 marketing societies, Gujarat Co-operative
Milk Marketing Federation Ltd. (GCMMF), which today is jointly owned by some 2.6
million milk producers in Gujarat are the leading examples of the cooperative
movement.

In 1969, Indira Gandhi Government drove the movement of nationalization of 14

major banks in india, and the in the same year Lead bank scheme was introduced.
Under the Scheme, each district had been assigned to different banks (public and
private) to act as a consortium leader to coordinate the efforts of banks in the
district particularly in matters like branch expansion and credit planning. In 1975,
regional rural banks were set up with an objective to ensure sufficient institutional
credit for agriculture and other rural sectors. In 1985, service area approach were
adopted wherein all rural and semi-urban branches of banks were allocated specific
villages, generally in geographical contiguous areas, the overall development and
the credit needs of which were to be taken care of by the respective branches. Bank
SHG Linkage movement started in 1980s and in the recent period Internet
Communication technology (ICT) based financial inclusion is the key focus area. The
government and the Reserve Bank of India has taken a number of initiatives to
make the ICT movement successful and to bring into the banking fold the people at
the bottom of the pyramid and expand the volume and outreach of banking
services.

We observe that the government has taken a series of steps to drive the mission of
financial inclusion but the achievement so far is not very encouraging. The series of
institutional set up and the type of instruments adopted to attain the financial
inclusion suffer from some serious limitations. Despite its growth, the overall
progress of cooperative movement during 100 years of its existence is not very
impressive. Some of the causes of poor performance of the movement include
excessive government subsidy and interference, mismanagement and
manipulation, inadequacy of trained personnel right from its inception. In the same
line, the diktat of the policy makers on banking institution to achieve the objective
of financial inclusion is contrary to the stakeholders’ interest of banking institutions.
The Banks in country is operating in the competitive business environment to
attract the scarce resources capital, manpower etc. and where excellence,
efficiency and high productivity parameters are given priority. It is difficult to justify
the loss caused by the financial inclusion to the stakeholders of the banking
industry. The objective of efficiency maximization has made it difficult for certain
population groups to access financial services, or has caused the exclusion of those
economic agents whose profile does not fit within the current standards. In
particular, intensifying competition, the rise of ‘customer value’ concepts, increased
customer segmentation and the pursuit of more affluent customers have been
especially significant in constraining the modern banking system to focus on the
mission of financial inclusion. It is important for the policy maker to appreciate
these constraints and should put effort in creating environment in which new
institutional framework should evolve with a primary objective of financial inclusion
and serving the bottom of the pyramid. We must not overlook the specific needs
and objectives of the people in the segment. To this end, the government may learn
from the valuable contribution made by Microfinance institution in reaching the
unreached area and making available the credit services to financial excluded
section of the society. The culture, experience, and the mission of the microfinance
institutions are suitably designed to serve the needs of the people at the bottom of
the pyramid without any class conflict.

Failure of Cooperative Movement

The term financial exclusion was first coined in 1993 by geographers who were
concerned about limited physical access to banking services as a result of bank
branch closures (Leyshon and Thrift, 1993). It was in 1999, that the term financial
exclusion seems first to have been used in a broader sense to refer to people who
have constrained access to mainstream financial services (Kempson and Whyley,
1999). Since then, a number of commentators have added their views of how
financial exclusion should be defined. These include both academics (for example,
Anderloni, 2003; Anderloni and Carluccio, 2006; Carbo et al, 2004; Devlin, 2005;
Gloukoviezoff, 2004; Kempson et al, 2000; Sinclair, 2001); and policy makers
(Treasury Committee, 2006a, 2006b; HM Treasury, 2004). The general consensus is
that it refers to people who have difficulty accessing appropriate financial services
and products in the mainstream financial services market.