FINANCIAL INCLUSION IN INDIA

 Financial inclusion has been a challenge to the rural development initiatives undertaken by the government of India.

 

Financial Inclusion can be defined as the process whereby it is ensured that viable financial services & products are provided to the weaker sections at prices that are affordable, through a transparent and just Institution.

 

 

Why Financial Inclusion? 

• It mobilizes savings that promote economic growth through productive investment.
• It promotes financial literacy of the rural population and hence guides them to avoid the expensive and unreliable financial services. 
• This helps the weaker sections to channelize their incomes into buying productive resources or assets.
• In the situations of economic crisis, the rural economy can be a support system to stabilize the financial system. Hence, it helps in ensuring a sustainable financial system. 

Retrospection and the outcomes so far 

• In 2009, the RBI pushed the commercial and public banks including RRBs and LABs to extend the Banking services. It suggested the Business Correspondent(BC) model wherein it permitted the banks to include the following as the BCs: 

1. The medical shops, Kirana stores or fair price shops
2. PCO (Public Call Office) owners
3. Agents of Insurance schemes
4. Owners of petrol pumps 
5. SHGs (Self Help Groups) 
6. Retired persons like teachers 

This was a substitute to banks for having “Branchless access” to the rural customers. As a part of the BC model, the RBI recommended that banks should own the BCs as agents providing services like micro-credit, small value savings, micro-insurance etc. It was estimated that the number of potential customers at that time was estimated at around 480 million. It was targeted that by March 2012, the banking services would cover 72,800 villages, with around 2,000 villagers being provided by one or multiple financial products. 

Outcomes

.The Swabhinman project was launched in 2011, under which it was targeted to improve financial inclusion by opening 5 crore NPA (No-Frill Accounts) by 2012. This was primarily an extension of the BCs model by achieving “economies of scale”. It was also decided to popularize the concept, EBT (Electronic Benefit transfer) would be implemented. The union budget 2011-12 targeted to penetrate 20,000 villages during this FY. It has been integrated with the other welfare programs like NREGA, Direct Cash Transfer Scheme and Pension Scheme. By incorporating this, it has been extrapolated that there would be nearly 2 lakh beneficiaries enrolled by March, 2012.

 In 2011, Haryana was the pioneer in implementing this project, in the area of the pension scheme. But the project failed due to reports of absence of BCs, delays of payments etc. Consequentially, the Government reverted to the village Panchayats, for payments to the villagers. This acted as the deterrent for banks like SBI to extend the project further. 

 

Socio-economic welfare and Financial Inclusion

 

The socio-welfare programmes like the NREGA, Direct Cash transfer, National Old Age pension Scheme are focused on implementing financial inclusion. This is primarily because it helps to ensure electronic cash transfers. The advantages involve: 

1. The payment process gets more simplified and convenient.
2. It reduces the cost of making the payments to the beneficiaries.
3. The process gets more transparent by checking the occurrence of fraud in the money or duplicate and fictitious beneficiaries.
4. It is because of this reason that Nandan Nilekani, head of the Unique Identification Authority (UIDAI) recently advised that the government make electronic payments for amount exceeding Rs. 1000. 

 Thus, we observe from the figure that the beneficiaries of these socio-welfare programmes are in lose-lose situation as neither are the banks interested in covering them and neither are they interested to have a bank account, posing a bigger challenge for the Government. While the reason for the unwillingness on part of the beneficiaries can be attributed to lack of financial literacy and lack of services in the vicinity, the aversion of the banks to include these people needs a proper understanding. These reasons in detail are:

Despite the efforts, the truth is that the performance was miniscule to what was expected. Let us unfold what went wrong.

 

1) No-Frill Accounts (NFA) 

• The major challenge for the banks was that the villagers could not provide the minimum cash balance which was otherwise required to open a bank account. To address this bottleneck, the NFA were provided which had a minimum balance requirement of Rs. 67 and also had a provision for overdraft. 
• The NFAs hurt the bottom-line of the banks Thus, the services provided by the banks were unsatisfactory.
• In 2011, the number of NFA accounts counted 50.6 million amounting Rs. 53,860 million. But only 20% of these accounts were actually in use while majority of them were inactive.   

2) Electronic Benefit Transfer (EBT) 

• This was under the state Government’s mandate as a part of the NREGA and Pension Scheme programme. This was also a measure to check the pilferage of the money. Under this, the EBT accounts were provided that were used by State Government to directly transfer the amount into the beneficiaries’ account. The EBT, unlike NFA had just the function of cash withdrawal available for the account holders.
• The issue here was that of “flat fee”. The banks were not paid enough by the state government (only 2% of the amount transferred) and the effect was further cascaded with banks paying lesser to the BCs (generally 1.75%). So the margins left with the banks were very small. 

3) The BC Model

This model suffered from many loopholes which affected the overall economics of this sector.

• The flat fee (or the revenue) for this segment was limited to 1.75% and also had no reasoning for the figure set forth. The low earnings showed upon the services delivered by them. 
• To keep their margins, the BC companies reduced the employee force which led to infrequent services as the beneficiaries per BC increased. Due to delayed showing up of the BCs, the villagers refrained to keep money with them as it became an unreliable source to park money.
• The Attrition rate of BCs is around 70-80%. This simply means that till a new agent is not appointed, the village loses the access to the financial services.
• This also had an adverse effect on the associated Government welfare programmes. For example: The payments under NREGA were supposed to reach the beneficiary within the stipulated period of 15 days but these were intentionally delayed by the BCs to earn interest on the payments.
• To check these malpractices, the government ordered the payments of pensions within first 4 days of the month. That meant huge employee requirements in the beginning of the month. So many of the BCs started to outsource these activities to meet the workload, which in turn meant further cost elevation.

4) Non BC model: Mobile Payments forums of India (MPFI)

  

The RBI has appointed the ‘Working Group on Mobile Banking’ to study the feasibility of Mobile banking in India focusing on parameters like technology, regulation, supervision, security etc. This model simply removes the BC from the system and the role is implemented by the customer himself with the aid of the mobile phone. technology enabled mobile phones can enable its users to carry out banking transactions. These include: 

1. Transferring of the funds
2. Money transfer
3. Ticketing (IRCTC, bus, taxi, air etc)
4. Payments like insurance premiums, credit cards or utility bills
5. Other transactions like mobile top ups, merchant payments, DTC recharge etc.  

The mode of transaction is similar to that of recharging the mobile phone. The mobile technology can help in m-banking and m-payment. The performance and challenges so far can be enumerated as:

• According to RBI reports, in January 2011, there were 724,682 m-banking transactions amounting to Rs.62.77 crore.
• In February 2011, it reduced to 707,496 transactions amounting to Rs. 61.61 crore, of which SBI alone accounted 74.81% transactions. 
• The biggest challenge is the confidentiality, authenticity and integrity of the data. Thus, Information Security would have to be ensured for the success of this model. 

Conclusion

 

Thus, challenges pervasive at every level of the chain have led to the system getting evolved on the principle of compliance and not transaction, hitting it at the very foundation level. This is further aggravated by the low quality infrastructure provided by these BCs and the absence of financial literacy to the rural population. Thus, It has to be realized by the RBI and other bodies working for this cause that unless the issue is addressed at the grass root level, the performance of these initiatives cannot be optimized.  So, the need of the hour is to ponder on these basic issues before building the edifice