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Locus Classicus on Financial Inclusion - Outside View by S.S. TARAPORE
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Locus Classicus on Financial Inclusion
Jan 11, 2016

Report of the Committee on Medium-term Path on Financial Inclusion (Chairman Deepak Mohanty), December 2015, is a locus classicus on the subject. The merit of the report is that it makes specific recommendations for implementation which are monitorable. Moreover, the recommendations are based on back-up information and analysis. Furthermore, the great merit of the report is that it highlights cross-country experiences. Hitherto, financial inclusion was looked at in isolation resulting in focus on the number of accounts opened. The report dovetails financial policies with structural reforms where the government has a central role which would help deliver financial inclusion on a sustainable basis. While the report is extremely well documented, a glaring omission is that it takes no cognisance of the pioneering work undertaken by Skoch Consultancy.

Usage of facilities more important than access

The report highlights that the Pradhan Mantri Jan-Dhan Yojana, initiated in August 2014, is not merely a financial vehicle but has undertaken the character of a broader national development goal. The number of savings bank accounts increased from 329 million in 2006 to 1,070 million in 2015 while during the same period the amount of savings bank deposits rose from Rs 5.17 lakh crore to Rs 19.09 lakh crore. The Committee recommends that that there should be a scheme for crediting to the bank account of each girl child a specified amount on the girl child enrolling in middle school. It should be incumbent on the school and the lead bank to open bank accounts to enable social cash transfer.

Practical problems

The Jan-Dhan Yojana is a major effort to make the unbanked segments meaningful participants in the financial system. While the intent is impeccable, there are severe practical problems at the grassroots level. This can be illustrated by a single instance of an attempt to open a Jan-Dhan Yojana account in a metropolitan area. The depositor opened a Jan-Dhan Account and was assured of life and accident cover. On attempting to make a remittance to a rural area, the officials insisted that the bank's "system" required that a remittance could be sent only if the deposit holder had a cheque book facility. Once the cheque book facility was granted the Jan-Dhan facilities were withdrawn. It was claimed that once a cheque book facility was given, returning the cheque book would not enable Jan-Dhan to be restored. Thanks to the branch head's intervention, it was determined that the cheque book facility did not debar a depositor from the Jan-Dhan Scheme. It was further clarified that if there were more than four transactions in a month there would be a hefty penal provision. Per contra, if there were no transactions in a month, the benefits of accident or life insurance would be disallowed. All these complex rules are not made known to the depositor in writing.

The Banking Codes and Standards Board of India (BCSBI) and the RBI need to assess the grassroots operations via extensive in cognito visits. While all this is going on, the local Paanwala ( seller of betel leaves) sends a remittance of Rs 5,000 at the cost of Rs 100.This raises the old question- "Why banks?"

Cross-country experience

It is gratifying to see a RBI Report giving close attention to financial inclusion in other countries. Many years ago, I arranged a meeting of a foreign academic (who had undertaken considerable work on microfinance in China) with a very senior colleague in the RBI, who I greatly respect. When the visitor offered to leave a copy of his work for perusal, our colleague declined, saying that in India our knowledge is far ahead of that in all other countries. Given the attitude of yesteryear, it is good to see that the Committee gives serious attention to inter-country comparisons. The Report points out that in 2014, over 50 per cent of Indian adults held an account with a financial institution as compared to 70 per cent in other BRICS economies. In terms of remittances, over 60 per cent of adult population in Kenya received domestic remittances as compared with less than 10 per cent in India. Again, in India only 3 per cent of the rural population directly received wages into their accounts as compared with 14 per cent in Brazil and 23 per cent in South Africa. Furthermore, the percentage of deposit accounts with no deposit and no withdrawal in India in 2014 was over 40 per cent as compared with substantially low proportions in Brazil, China, Indonesia, Kenya and South Africa. The Committee takes note of a number of innovative initiatives in a number of countries and India could benefit from studying the experience of other countries.

Agricultural credit

The Committee points to the inadequacy of credit penetration in the agricultural sector in India. Of those working in the agricultural sector in India, 43 per cent do not have access to a bank account. Although agricultural credit has been rising, a predominant proportion of tenant farmers, share croppers and agricultural labourers are bereft of any access to the formal credit system. The Committee recommends that interest rate subsidies should be phased out and an affordable universal crop insurance system should be introduced.

MSME finance

The Committee notes that the MSME sector has 48 million units providing employment to 111 million people, accounting for 45 per cent of manufacturing sector's output and 40 per cent of exports. Notwithstanding this, the MSME sector faces a distinct inadequacy of credit. The Committee recommends a broad multipronged approach using new institutions/ intermediaries using innovative ways of providing finance to this sector. The Committee recommends that the structure of credit guarantee needs to be broadened with participation of private agencies.

Concluding observations

In addition, the Committee has made a number of other recommendations which deserve attention. A task force should be empowered to implement the Report.

Please Note: This article was first published in The Freepress Journal on January 11, 2016. Syndicated.

This column, Common Voice is authored by Savak Sohrab Tarapore. Mr. Tarapore, is an economist and he runs his own Multi-Language Syndicated Column. Mr. Tarapore's other column, which appears in The Hindu Business Line, is titled Maverick View.

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