Banking system to Catalyse Inclusive Growth

Pranab Mukherjee

An effective and efficient banking system is the most important requirement for a growing economy to grow further

It is the UPA Government that has made inclusive growth one of the main planks for socio-economic transformation. The launch of Swabhimaan at the hands of the Chairman of the UPA is an indication of our commitment to this process.

Today, only about 38% of bank branches are in rural areas providing coverage to 40% of the country’s population. Though strides have been made in expansion of bank branches from around 8700 at the time of bank nationalisation in 1969 to present number of 85,300, rural areas have only 32,000 branches. To address this shortfall I had given a target in 2010 to all banks, to provide appropriate banking facilities to habitations having population in excess of 2000 by March, 2012 using various models and technologies including branchless banking through Business Correspondents. The Banks have worked out their plans accordingly. We intend to cover at least 73,000 new habitations with a population of 2000 and above and we will open at least 5 crore new accounts by March 2012. For the year 2010-11, we have set a target of rollout in 20,000 villages. I am confident that this target will be achieved. 
The Swabhimaan Programme’s success will depend on the proper utilisation of the Business Correspondents or Bank Saathis, who are persons engaged by Banks to create a closer relationship between the formal financial system and the people living in the rural hinterland, far away from brick and mortar bank branches. The BCs reach banking facilities to these interior areas through various handheld mobile devices and other technologies that reduce cost and have the ability to record banking transactions and to communicate the record of such transactions to the Bank using the internet facilities / GPRS. 

The BC’s are the face of the bank; indeed, they are the bank as far as the rural customers are concerned. Therefore the banks have to be conscious of reputational risks that might arise if the wrong kind of BCs or those who are providing technology as backup are selected
The facilities provided through banking outlets will enhance social security by facilitating the availability of allied services in course of time like micro insurance, access to mutual funds, pensions, etc. Banking facilities like savings bank, recurring deposits, fixed deposits, remittances, overdraft facility, Kisan Credit Card (KCCs), General Credit Cards (GCC) and collection of cheques will be provided. 

India’s role in driving the global economic recovery and the focus by our institutions on improving access to financial services — savings, credit, payment services and remittances, and insurance — signifies the central role of financial inclusion for poverty reduction. While strong economic growth has benefited hundreds of millions of Indians and lifted many out of poverty, growth alone is not enough. Growing inequality accentuates poverty incidence. In India, 51.4% of farmer households are financially excluded from both formal and informal sources of credit and overall 73% of farmer households have no access to formal sources of credit. At the same time, it is a matter of pride that the Indian economy is poised to grow by 8.6% during the current fiscal year as per the latest CSO estimates. What is most heartening is that the agriculture sector is poised to grow at 5.4% against 0.4% a year ago. This is a big improvement and is partly due to the tremendous growth in bank credit to the agriculture sector, which is expected to cross the target of Rs 3,750 billion set for the year. 

The Swabhimaan programme will increase the demand for credit among the millions of small and marginal farmers who will benefit by having access to banking facilities. I have learnt that 83% people enrolled under the Aadhar Programme, have responded that they would like to have bank accounts. The banks are working together with the UIDAI for enrolment and opening accounts. In addition we also need to use the facilities provided for transfers of government subsidies and other payments.

I have requested all Chief Ministers in the regional meetings held last year to give due attention to Swabhimaan programme and personally monitor progress through the SLBC mechanism. The Chief Ministers were requested to sensitise the District Magistrates to ensure proper monitoring of programme and coordination of efforts of all stake-holders. The State Governments were also requested to route all Government benefits and social security payments through the banking system such that the benefits reach the beneficiaries timely and efficiently and leakages are reduced substantially. The progress is being monitored closely by my department. I am happy to report that my officers have told me that the banks have taken the programme to heart and have already opened a number of outlets.

Financial exclusion is a universal issue. A lot has been debated on the relationship between financial inclusiveness, economic growth and poverty reduction. Studies suggest that “affordable access to financial services helps poor households plan for routine expenses, cope with sudden external shocks, better cover unanticipated expenses and also contribute to facilitate better access to more stable and productive activities”. We must understand that the financially excluded sections require products which are customised to their needs. We need to find ways to effect improvements within the existing formal credit delivery mechanism and evolve new models for extending outreach. 
Indiraji’s decision to nationalise major commercial banks acted as a catalyst in providing momentum to the efforts of leveraging the commercial banking system for extending agricultural and other rural credit. The outreach of banks was enlarged considerably within a relatively short period of time. Nationalisation gave a boost to expansion of banks in rural areas and marked a paradigm shift in the focus of banking with public sector banks becoming important instruments for advancement of rural banking and changing lives of rural populace. This in turn made it easy for people in villages to save money, which helped boost India’s savings rate, which rose dramatically between 1969 and 1979. Banking policy stepped up lending to the priority sectors vis. agriculture, small-scale industry, self employed and small business sectors and weaker sections within these sectors. As a result, the share of rural branches of scheduled commercial banks recorded a 3-fold increase since nationalisation in 1969.

Some of the initiatives taken towards an inclusive financial sector include setting up Regional Rural Banks in different states with equity participation from commercial banks, Central and State Governments, establishing NABARD for consolidating various arrangements made by RBI for providing banking and channelising credit to rural areas and introduction of Local Area Banks. 

While public sector banks have achieved substantial broadening in branch outreach, their effectiveness has been constrained by high cost and inefficiencies, inadequate incentive structures, limited staff and inadequate technology use. Further, while cooperative credit structures and microfinance institutions demonstrate proximity to client and ability to customise services, their ability to scale up and effectively manage risks remains weak. However, technology today has become an enabler for improving the reach of banks to the unbanked at an affordable price. Mobile banking has the potential of changing lives in a way that may be difficult to imagine. 

Excerpts from Finance Minister Pranab Mukherjee’s speech at the launch of Swabhimaan, February 2011, New Delhi

(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

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