Financial Inclusion: Long due, but is India ready yet?

By Suhani Gupta

The greatest fad in the financial sector these days is ‘financial inclusion’ with almost everybody talking about it — be it in seminars, press conferences, articles in newspapers and magazines, research papers, television debates, parliament, and whenever there is some time for other things beyond scam discussions. Financial institutions are the catalyst in the economic development and progress in the modern era. In this respect, there is a rapid push for financial inclusion, more so in emerging economies, such as, India.

The tale of Indian banking is a gigantic one. Post the first wave of nationalization in 1969, India saw rapid multiplication of bank branches making banking services available to the masses. The RBI first raised the topic of financial inclusion by setting up the Khan Commission in 2004. The recommendations of the Commission were integrated in the mid-term review of policy in 2005 and 2006. The RBI urged the banks to make a basic no frills account available to the people in an attempt to widen the ambit of inclusion in the country.

An innovative step in this direction has been the decision of the RBI to employ Business Correspondents in rural areas. The work of business correspondents might be unknown to many. ABC is generally provided with a hand-held device that stores and transmits data relating to a customer. To secure the transaction, the customer is usually provided with a smart card. But structural problems such as inadequate finance, costly inspection, technical errors, etc. usually play a spoilsport. Also the use of technology for financial inclusion is taking myriad forms. While, on the one hand, there are low-cost automated teller machines (ATMs), on the other, we have smart cards, biometric cards and handheld devices. These technologies have enabled doorstep banking for the customers. Sometimes a bank branch may be at quite a distance from the village, so traveling to the bank could mean loss of one day’s earnings!

Despite several steps being taken – recommendations of the Khan Commission in 2004 and subsequent initiatives to promote the ‘ No- Frills accounts’, Business Correspondents, IT driven initiatives in rural, semi- urban as well as urban areas of the nation, the situation remains quiet grim. Currently, only 5 per cent of around 6,00,000 habitations in the country have bank branches, and just about 40 per cent of the country’s population has bank accounts. The penetration ratio in life insurance sector is 4.4% and 0.76% in the non-life segment, which means that a vast majority of the population does not have insurance cover.

State of Financial Inclusion In India

State of financial inclusion in India                                                                                 If four decades of nationalisation of banks, co-operative banks, thousands of regional and rural bank branches, non-banking finance companies, chit funds, foreign banks, private banks, business correspondents, of course, the crisis-hit micro finance institutions, could not take banking to more than half the population, then there is definitely something vital that is lacking in the efforts. The answer is ‘financial literacy’. One cannot aim for 100% inclusion until and unless the entire populationis financially educated and aware about the ways of banking. The first step in thisarea should always have been, making the rural sections of the country aware of the kinds of banking services that are available and accessible to them and more importantly the benefits of using such services. For instance, it is important to make a poor man understand the advantages of keeping whatever little amount of money he possesses, in a saving account rather than securing it in some corner of his house. The key to financial inclusion is therefore nothing else but financial literacy.


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