The efforts to usher financial inclusion have been recorded since nationalisation of State Bank of India in 1955 followed by nationalisation of other banks in 1969 and later in 1980. Other important measures included instituting priority sector lending, and issuing Kisan/General Credit Card. In the earlier years, urban areas had significantly large number of bank branches compared to rural areas. As the urban areas were concentrated with numerous bank branches, this resulted in higher absorption of bank credit in the urban areas. Such a condition continued in the country until the RBI rigorously started pursuing financial inclusion model in the mid-2000s.
Despite these various measures undertaken, financial inclusion has remained a distant dream with a majority of Indians still struggling with lack of access to banking services. Census 2011 reveals that, in India, out of 24.67 crore households only 14.48 crore (58.7 per cent) households had access to banking services. In the rural areas, out of 16.78 crore households only 9.14 crore (54.46 per cent) were availing banking services. During the post liberalisation period, there was a substantial progress in the economy but still majority of the sections of the society were not benefitting from such a progress. The percentage of indebted agricultural households, a proxy for credit penetration, in different states of India in 2013 was not encouraging (Table 1).
In order to overcome this grim situation, government rigorously pursued financial inclusion and there was substantial increase in banking network, opening of accounts and growth in deposits and credit (Tables 2 and 3).
In addition, there were nearly 28 crore accounts in post offices with savings account numbering more than 13 crore and recurring deposits of more than 11 crore (Other accounts in post offices include time and fixed deposits). Although, various initiatives had been undertaken in order to financially include all sections of society, the success of such measures had remained partial.
In August 2014, the GOI initiated Pradhan Mantri Jan Dhan Yojana (PMJDY), which aimed at ensuring universal access to financial services, viz, banking and deposit accounts, remittances, credit, insurance and pension in an affordable manner. Among various measures initiated by GOI, PMJDY has been successful in opening nearly 13.17 crore accounts in the rural areas (Table 4).
PMJDY is also included in the JAM trinity, i.e., Jan Dhan Yojana-Aadhaar-Mobile Number, which focuses on providing support to the poor households in a targeted way. The main objective of the JAM trinity is linking the Aadhaar number to an active bank account in order to implement income transfers. Also, with the introduction of PMJDY, the total number of bank accounts is expected to increase and thereby targeting transfer of financial resources to the poor households.
Challenges of Financial Inclusion
1. Accounts are not operative- Most of the bank accounts are not operative due to lack of funds with account holders. The cost effectiveness aspect, given low balances in accounts, in implementing technological advancements is a matter of concern.
2. Lack of financial literacy - The rural households do not have adequate financial literacy resulting in lack of awareness of many financial services provided by financial institutions.
3. Too large volumes of Accounts- There is a need for technical and institutional infrastructure for e-payment systems to service large number of new and existing accounts.
4. Need for Manpower planning- There is a requirement of sufficient technical skill development and training for banks and institutional staff.
5. Secure Environment - The security of electronic transactions is a matter of concern especially with large number of new accounts.
6. Malpractices - Illustratively, in some locations, people were persuaded to pay an amount ranging between Rs1,000-3,000 while opening a bank account under PMJDY.
7. Ease of transaction - Lack of ease in transaction related activities in banks is clearly demonstrated by repetitive behavior of rural households’ persistence in taking loans from the moneylenders.
8. Low penetration of banks - Also, there is lower percentage of new bank branches opened in the unbanked areas and lower percentage of ‘no-frills’ accounts with overdraft facility.
9. Low level of credit extended against accounts - Metropolitan centres accounted for more than half of the total banking business of the Indian banking sector whereas rural areas accounted for only a small proportion of credit (8.4 per cent as of March 2014).
10. Need for greater use of technology - On the operational side, despite the convenience offered by ATMs in providing banking services, the debit card penetration continued to be low with only 30 per cent of deposit account holders having a debit card.
11. Demand Side Factor - Factors such as lower income or asset holdings, lack of awareness about the financial products, perceivably unaffordable products, high transaction costs, products, which are not convenient, inflexible, not customised and of low quality are the major barrier for gaining access to the financial system.
12. Costs and risks in using technology - Costs in terms of increasing expenditure on IT deployment and risks in terms of monetary loss, data theft and breach of privacy are a concern. Thus, banks need to be extremely cognisant of such risks.
13. BCs high attrition rate - High attrition rate of BCs is another challenge of financial inclusion, which needs more focus and attention.
14. Cyber Security - Nearly 21 crore new accounts that have been opened up are mostly first time users and dilution of KYC norms can be a significant cyber security threat.
15. Overlapping Instructions - The creation of MB would require that the existing regulators need to ensure that there are no overlapping of guidelines and instructions, so that implementing agencies at grassroot level are not confused.
20 year Plan
The scenario for the next 20 years may have to take into account the following:
Success of financial inclusion depends upon the commercial sustainability of the operations and not on subsidies and incentives. Therefore, to achieve sustainability, volumes through suitable instruments are necessary.
Charan Singh is RBI Chair Professor of Economics, IIM-Bangalore and Honorary Fellow, Skoch Development Foundation.
The author would like to thank Shara Bhattacharjee for assistance.
(The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of INCLUSION. Comments are welcome at firstname.lastname@example.org)
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