The Hindu Business Line : No-frills bank accounts: Financial inclusion is good economics

Financial inclusion means extending the banking habit among the less privileged in urban and rural India. But the path of financial inclusion is daunting.

The no-frills savings bank account introduced by several commercial banks a few months ago had all the potential to revolutionise India's rural agricultural economy, as well as usher in the banking habit amongst a large number of the less privileged population. However, the product was lost among a myriad of financial offerings and most banks have shown little verve and vitality in marketing it.

Thus, the trigger for greater financial inclusion is likely to remain the the country's aspiration at greater social and economic equity, rather than as a sign of things to come. There seems to be neither an inherent demand among the socially and economically deprived classes, nor a profit-driving urge amongst banks to market the new product.

Though the Reserve Bank of India promoted the no-frills savings bank account with the express intention of bringing greater financial inclusion among the people, banking continues to remain an elitist to lower middle-class pursuit, restricted mainly to urban India.

Favours urbanites

As financial inclusion continues to evade a large segment of rural and urban poor, the country's financial assets remain heavily skewed in favour of urban India. Recent figures from the centralbank reveal that the 85 commercial banks with their pre-dominant presence in urban India account for 78 per cent of the country's financial assets. The 3,000 cooperative banks account for just nine per cent and the Regional Rural Banks contribute a mere three per cent.

Compounding the problem, several cooperative and RRBs have been trying to gain a foothold in semi-urban and urban pockets, even as the commercial banks continue to shy away from rural India. But for the strict RBI guidelines and vigilant enforcement, rural banking would have remained a mere tokenism.

Does this mean that financial inclusion will continue to remain an enigma to the rural and under-privileged in India? Financial inclusion is an essential pre-condition to building uniform economic development, both spatially and temporally, and ushering in greater economic and social equity.

Financial inclusion also means extending the banking habit among the less privileged in urban and rural India and weaning them away from unorganised money markets and moneylenders. But the path of financial inclusion continues to be daunting, not just for India, but to the developed world as well.

What economic development paradigm has revealed is that equity is not axiomatic with economic development. The experience of several other countries reveals that conventional development models sometimes aggravated inequity. However, there are no shortcuts to financial inclusion.

One advantage that the country enjoys in the endeavour towards greater financial inclusion and equity is that as a late entrant into the realm of accelerated economic development, the country can learn much from the mistakes of other nations.

Additionally, the Government has no qualms in pursuing accelerated economic development even while wearing the trademark of greater equity and financial inclusion on its sleeve. This has not only proved to be good politics, but good economics as well.

Unsustainable plans

There are several government and non-government programmes aimed at reducing poverty and bringing greater equity in the country. But few have proved to be inherently productive and sustainable. Financial inclusion can transform some of them into productive and self-sustainable projects. The micro-credit programme launched through numerous Non Government Organisations has found fancy with the banking industry and can prove to be an excellent tool to bring in greater equity through financial inclusion.

Several of the micro-credit schemes have been eminently successful and have brought rich rewards to the beneficiaries. With hardly any NPAs in micro-credit disbursal, banks have begun to pursue and extend micro-credit aggressively. Some banks have been able to double micro-credit disbursal during the last one year even as some larger players are contemplating entering the arena in a big way.

Micro-credit: Plausible solution

Micro-credit should not only be used to redress poverty and usher in greater equity, but should prove a tool to bring the rural and urban under-privileged into total financial inclusion as well. Most of the beneficiaries continue to view NGOs and banks as conduits of credit.

But as a large number of the schemes are proving successful, it is time that banks started playing a more pro-active role. No-frills account should be promoted to plough back the returns from these projects into bank coffers, thus encouraging the savings habit and ensuring that banks act as a repository of savings and sources of credit.

There are several rural and urban development programmes promoted by the Government to eradicate poverty. If banks are also made an effective intermediary, greater financial inclusion could be one of the meritorious outcome. As some of the projects become successful and self-sustaining, greater financial inclusion would become possible. But the Government would have to do its homework thoroughly to identify projects where intermediation by banks is possible. The benefits will percolate not only to target population, but to banks as well. And then, good economics will prove good politics for the country.