In simple words, financial inclusion means providing financial services to the least advantaged section of the society. Most people in rural India are aloof to banking services. The goal of financial inclusion is to provide such people with affordable financial services. And till now banks were the only financial institutions that were entrusted to fulfill this job. However, they have not fared well.
This can be said from the fact that roughly 50% of the Indian households still do not have access to any kind of banking service. This comes as a surprise considering that co-operative banking system is numerically stronger and much more penetrative into rural hinterland than commercial banking system. This means that banking penetration should have effectively increased in rural areas. But this has not happened. In short, banks have not been able to bring in financial inclusion.
Thus, there is a strong need to look for other financial intermediaries. If private sector intermediaries are allowed to accept deposits it would be a huge step towards financial inclusion. However, the banking regulator is apprehensive of allowing such intermediaries to raise uncollateralized deposits. It possibly fears that this may destabilize the financial system by allowing unprecedented credit expansion with no proper risk management systems in place.
However, the exposure of non-bank credit to low income households or small businesses has been very low. In fact, it is less than 1%. This means that non-bank credit is not expanding rampantly in rural areas to destabilize the financial lending or borrowing market. On the other hand, allowing such institutions to lend to low income households may result in credit expansion. This would help small businesses and households who are in need of credit but have no access to it.
The regulator (RBI) is worried that allowing non bank intermediaries to accept deposits and offer loans will destabilize the financial markets due to inappropriate controls. Hence appropriate regulations need to be put into place. This would mean that credit is available to the weaker sections of the society and there is no compromise on the risk management front. In short, non bank financial intermediaries are the need of the hour if regulator is seriously considering tackling the challenge of financial inclusion.