Where Angels Prey

Where Angels Prey is a novel by Ramesh S Arunachalam. Please refer to www.whereangelsprey.com for more information

Thursday, October 3, 2013

Urgent need for RBI to focus on quality and impact of financial inclusion efforts

Ramesh S Arunachalam

While Dr Raghuram Rajan, the new governor of RBI emphasising on inclusive growth and development is good news, the central bank needs to focus on quality and impact of financial inclusion services that would be easy to access and  compatible with the needs of customers

Dr Raghuram Rajan, the governor of Reserve Bank of India (RBI) in his inaugural speech, talked about the central bank’s “two other important mandates; inclusive growth and development, as well as financial stability. As the central bank of a developing country, we have additional tools to generate growth – we can accelerate financial development and inclusion. Rural areas, especially our villages, as well as small and medium industries across the country, have been important engines of growth even as large company growth has slowed. But access to finance is still hard for the poor, and for rural and small and medium industries. We need faster, broad based, inclusive growth leading to a rapid fall in poverty.”

This needs to be strongly appreciated as it brings into focus the critical issues of quality and impact of financial inclusion, which have hitherto been ignored so far. But before we get to this, let us first understand the scope of financial inclusion in India, as of today. Typically speaking, the scope of financial inclusion (FI) in India involves the following and related services (not exhaustive):
  1. Access to accounts: a) Savings (No frills etc); and b) Current accounts.
  2. Access to  deposits: a) Fixed deposits; and b) Recurring deposits
  3. Access to transaction banking: a) Use of cheques, demand drafts and other such instruments; b) Receiving of social security (NREGA and other) payments through bank accounts; c) Transfer of money through RTGS or NEFT and remittance services; d) Debit cards and ATM usage; e) Credit cards including KCC and GCC; f) Bill payments through technology banking - mobile banking, internet banking etc
  4. Access to credit facilities: a) Typical priority sector loans for agriculture and allied areas etc; b) Post harvest, post production loans; c) Loans for marketing of agricultural and other produce etc; d) Traditional working capital limits; e) Traditional MFI loans under priority sector; f) Traditional SHG bank linkage program loans; g) Loans from specialised credit and other cooperatives; h) Traditional MSME loans backed by credit guarantee from Government of India; i) Housing/mortgage loans; and j) Various kinds of overdraft facilities and so on;
  5. Access to risk management services: a) Life insurance; b) Health insurance; c) Asset insurance; d) Crop and weather insurance; e) Livestock insurance; f) Other such products such as credit insurance; and g) Micro-pensions
  6. Access to other Services: a) Deposit insurance; b) business facilitators (BF) and business correspondents (BC); c) financial literacy services and credit counseling (FLCC) centers; d) grievance redressal, ombudsman and legal aid services; e) credit bureau; and f) Other services
The above services can be acquired through various institutions such as (but not limited to) the following: Commercial Banks, Regional Rural Banks (RRBs), Cooperative Banks, Local Area Banks (LABs), Post Offices, State Cooperatives, Mutually Aided Cooperatives, Multi-State Cooperatives, Investment Grade NBFCs, NBFC MFIs, BCs/BFs, Other MFIs, SHGs and so on. Not all services can be provided by all institutions but that is an issue that I deal with later, in a separate article

Having set the broad context, I want to emphasise the fact that we urgently need comprehensive baseline data regarding the number/proportion of mutually exclusive individuals/households (among low income people) and mutually exclusive small businesses who have accessed the above financial inclusion services from various institutions in any given year! Apart from serving as an important baseline, such data would also help us understand which of these financial inclusion services and institutions are preferred by different groups of low income people. So, this is an important task for the RBI under Dr Rajan. Therefore, instead of wasting time on organizing yet another financial inclusion committee and managing its cumbersome administration, the RBI would perhaps serve the nation better by setting in motion processes that would help in the above. That is not all

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