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.