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Financial Deepening Catalyst Growth with Finance

“There is an urgent need for including people from all strata in the mainstream banking system and for putting our country firmly on the path of overall growth and development,” said Finance Minister Pranab Mukherjee at a meeting between chief ministers and bankers in June. The meeting, the second in a series, only confirms that increasingly the UPA government is convinced and committed to the role of financial inclusion in achieving its overall goal of inclusive growth. Mukherjee also advised banks to convert savings from semi-urban and rural markets into financial assets through effective financial inclusion.

Undoubtedly, financial inclusion is one of the key elements that will give a thrust to financial deepening and thus economic growth, given that India has over 50 per cent of the population which has no access to banking. Financial deepening encompasses the increase in the stock of financial assets. From this perspective, financial deepening implies the ability of financial institutions in general, to effectively mobilise financial resources for development. This view accepts the fact that a financial system’s contribution to the economy depends on the quality and quantity of its services and the efficiency with which it performs them

“We cannot have depth in the market if the number of participants in the market place is not increased and that is why financial inclusion is related to financial deepening. We have to create an appropriate platform using technology and devise innovative products. The entire financial inclusion exercise is in mission mode so that we can achieve our ambitious goals,” says K C Chakrabarty, Deputy Governor, Reserve Bank of India.

The Bank for International Settlements in its 2009 annual report stated that it is useful to think of the financial system as the economy’s plumbing. And like the plumbing in a house, the modern economic system depends on a reliable flow of financing through intermediaries. Modern life requires the smooth operation of banks, insurance companies, securities firms, mutual funds, finance companies, pension funds and governments. These institutions channel resources from those who save to those who invest, and they are supposed to transfer risk from those who can’t afford it to those who are willing and able to bear it.

Mobilising Savings for Investment

“There are meso-economic determinants also, especially in terms of the infrastructure sector, in areas like energy, water, and other major intermediaries. And, to sustain a positive growth momentum and get the right kind of growth, we urgently need to undertake reforms in these areas.”
Vijay Kelkar

A high level of financial deepening is a necessary condition for accelerating growth in an economy. This is because of the central role of the financial system in mobilising savings and allocating the same for the development process. The financial system serves as a catalyst to economic development through various institutional structures. The system vigorously seek out and attract the reservoir of savings and idle funds and allocate same to entrepreneurs, businesses, households and government for investments projects and other purposes with a view of returns. This forms the basis for economic development. The financial system play a key role in the mobilisation and allocation of savings for productive, use provide structures for monetary management, the basis for managing liquidity in the system. It also assists in the reduction of risks faced by firms and businesses in their productive processes, improvement of portfolio diversification and the insulation of the economy from the vicissitudes of international economic changes. Additionally, the system provides linkages for the different sectors of the economy and encourages a high level of specialisation expertise and economies of scale.

Recently, C Rangarajan, Chairman, Prime Minister’s Economic Advisory Council, said “the role of an integrated financial infrastructure in stimulating and sustaining economic growth is well recognised. It is now widely accepted that financial intermediation is essential for both extensive and intensive growth.”

“Efficient intermediation of funds from savers to investors enables the productive application of available resources. The greater the efficiency of the financial system in such resource generation and allocation, the higher is its likely contribution to economic growth. Such efficiency creates a virtuous cycle of higher real rates of return and increase in savings resulting in higher resource generation. Thus development of the financial system is essential to sustaining higher economic growth,” he pointed out.

Santanu Paul, Chief Executive Officer & Managing Director, TalentSprint, said financial deepeners comprise technology, psychology and human capital and these should allow a financial institution to do one of two things, which will either help you reach new customers more easily and more readily or expand relationship with the existing customers more profitably.

It was also felt that as a developing country, the country that really needs to get its savings to its investors and not expose the country to external vulnerabilities. Ways of liberalising the financial sector needed to be explored rather than put in more regulation and make the cost of financial intermediation much higher.

According to Joseph Massey, Managing Director & Chief Executive Officer, MCX Stock Exchange, “financial deepening is the first thing for inclusive growth and if financial deepening is not happening to an extent we think it should, somewhere there is an issue dealing with competition.”

Chakrabarty also notes that financial sector development and deepening drives economic growth by mobilising savings and investing in the growth of the productive sectors. The institutional infrastructure of the financial system contributes to reducing information, contracting and transaction costs, which in turn accelerates economic growth and promotes pro-poor growth.

Opportunities for Banking Sector

New technologies such as mobile banking combined with innovative business models can deliver a stepchange in effectively servicing lowincome- customers. Institutional, policy and regulatory frameworks needed to evolve to provide a robust platform for further innovation. The challenge for regulators will be to reshape legislation in ways that protect the customer, but do not hamper the development of innovation.

Financial inclusion plans must be integrated with the normal business plans of the banks. Chakrabarty adds, “we believe that banking to the poor is a viable business opportunity but costs and benefit exercise needs to be attempted by the banks to make financial inclusion congruent with their business models.” While seemingly committed to financial inclusion, banks need to reorient their perspective and view it as a huge business opportunity and perfect their delivery models.

“One just had to travel to the countryside to see the difference between a policy, which is a very well intentioned and documented framework, and its implementation. There exist huge gaps and at times people don’t actually see those gaps and the difficulties at the ground level in terms of implementation.
Vinita Bali

In spite of taking several initiatives in the past, the Indian banking industry has been able to penetrate only a half of the population for easy and cheap access to institutional credit facilities. In this context, the RBI has taken a number of steps in the recent past which will further the process of financial inclusion. Its efforts in adapting to the changing needs of the economy and enabling greater access to financial services to the unreached and under-reached segments of our population have been particularly praiseworthy. There are in fact few, if any, instances of an economy transiting successfully from an agrarian system to a post-industrial modern society without broad-based financial inclusion.

Despite the aggressive growth in most financial segments over the past decade, there is still the underpenetration of most financial products/ services. Even though Indian banking credit has enjoyed a significant growth during the period 2003-08, credit penetration remains well below regional benchmarks, which is suggestive of healthy growth potential in the medium term. Indian financial sector offers structural growth opportunities and an expanding target market. In India, it is the household sector which generates largest savings in relation to the private corporate and public sectors, in that order. A significant proportion of household financial savings is routed through the banking system. As of 2008-09, while the household deposits accounted for around 54 per cent of the gross financial assets, bank credit accounted for around 94 per cent of household financial liabilities.

Although significant financial deepening has been taking place in Indian economy over the years as seen from the deposit-GDP ratio, bank assets- GDP ratio and credit-GDP ratio, the low levels of penetration in India can provide a medium term structural growth driver for banks. A noteworthy feature discernible in the Indian context is that the rise in indicators of financial deepening takes place along with a noticeable rise in the domestic savings rate. This has to be seen in the backdrop of financial sector reforms, rise in total farm productivity and investment boom which has led to acceleration in the growth performance.

Being convinced that technology is the key for improving in productivity, the Reserve Bank took several initiatives to popularise usage of technology by banks in India. Periodically, almost once in five years since the early 1980s, the Reserve Bank appointed Committees and Working Groups to deliberate on and recommend the appropriate use of technology by banks given the circumstances and the need.

Role of Financial Education

Delivering the inaugural address at an international workshop on ‘Delivering financial literacy: challenges, strategies and instruments,’ organised jointly by the Reserve Bank of India and the Organisation for Economic Cooperation and Development (OECD) in March this year, Finance Minister Pranab Mukherjee said that financial literacy is a prerequisite for effective financial inclusion, which will ensure that financial services “reach the unreached and under-reached sections of the society”.

Mukherjee said efforts to improve literacy should take into account India’s “divergent and multi-lingual framework”. The wide divergence in literacy levels across States and within States, the marked differences between rural and urban areas are also important issues in India, he said. The “perceptible variation in the penetration of banking across regions,” was also an important factor, he added. The focus of any discussion on financial education is primarily on the individual, who usually has limited resources and skills to appreciate the complexities of financial dealings with financial intermediaries on matters relating to personal finance on a day-to-day basis. Further, the process of educating may invariably involve addressing deep entrenched behavioural and psychological factors that could be major barriers.

In a country like India, with diverse social and economic profiles, financial education is particularly relevant for people who are resource poor and who operate at the margin and are vulnerable to persistent downward financial pressures. With no established banking relationship, the unbanked poor are pushed towards expensive alternatives. The challenges of household cash management under difficult circumstances with few resources to fall back on could be accentuated by the lack of skills or knowledge to make well informed financial decisions. Financial education can help them prepare ahead of time for life cycle needs and deal with unexpected emergencies without assuming unnecessary debt.


Establishing the Linkage

In the literature of development economics, it is generally held that the depth of financial development promotes economic growth in two ways. First, it facilitates resource mobilization, reduces the transaction costs of financing investments, and therefore, induces more investments (e.g., Merton and Bodie 1995). Second, it helps improve the allocative efficiency of financial resources, and thus lift the returns to financial resources, which raises productivity (e.g., King and Levine 1993; Beck et al. 2000).

Various studies have shown that there is a strong and positive relationship between the financial sector and economic development. According to Porter (1966) the level of financial institution development is the best indicator of general economic development. Furthermore, Goldsmith (1969) contends that financial institution development is of prime importance for real development because the financial superstructure in the form of both primary and secondary securities accelerates economic growth and improves economic performance to the extent that it facilitates the migration of funds to the best user.

Popiel (1990) conducted one of the most elaborate studies on financial deepening. According to him, financial markets are deep from a qualitative standpoint when:

  1. They offer savers and investors a broad range of financial instruments which differ in terms of liquidity, yields, maturities and degree of risk including debt instruments, equity instruments and in between quasi-equity instruments.
  2. They encompass a diversity of sub-markets, trading in different financial instruments.
  3. Mature, domestic financial markets are integrated into the international financial markets.
  4. Are linked together through financial instruments.
  5. Finally, the markets are linked together through various financial institutions which function as market makers and financial intermediaries.

Rajan and Zingales (1998) argue that financial development facilitates economic growth by reducing the costs of external finance to firms; their empirical evidence from a crosscountry study supports this rationale. Guiso, Sapienza and Zingales (2004) examine the effects of differences in local financial development that can explain the spread of entrepreneurship and economic growth


Need for Innovation

Finance Minister Pranab Mukherjee addressing at the SHG-Credit Linkage Programme, at Pondicherry on 3rd July 2010

The statistics on financial exclusion in India provide a dismal picture. Out of the 600,000 habitations in the country, only about 30,000, or just 5 per cent, have a commercial bank branch. Just about 40 per cent of the population across the country has bank accounts, and this ratio is much lower in the north-east of the country. The proportion of people having any kind of life insurance cover is as low as 10 per cent, and the proportion having non-life insurance is an abysmally low 0.6 per cent. People having debit cards comprise only 13 per cent and those having credit cards a marginal 2 per cent.

These statistics, staggering as they are, do not convey the true extent of financial exclusion. Even where bank accounts are claimed to have been opened, verification has shown that a significant portion of these accounts are dormant. Very few conduct any banking transactions and even fewer receive any credit. Millions of people across the country are thereby denied the opportunity to harness their earning capacity and entrepreneurial talent, and are condemned to marginalisation and poverty.

Who are the Financially Excluded

  • Poor
  • Socially under under-privileged
  • Disabled
  • Old as well as children
  • Women
  • Uneducated
  • Ethnic minorities
  • Unemployed
  • Low income self-employed
  • Agricultural and industrial labour
  • Those engaged in unorganised sector

Most Needed Services for Financially Excluded

  • Access to small loans or overdrafts
  • Check in accounts
  • Small savings products
  • Remittances & Payment services
  • Health insurance
  • Life insurance
  • Insurance against the failure of activity
  • Financial advisory services
  • Credit card
  • Entrepreneurship credit
“The role of an integrated financial infrastructure in stimulating and sustaining economic growth is well recognised. It is now widely accepted that financial intermediation is essential for both extensive and intensive growth. Efficient intermediation of funds from savers to investors enables the productive application of available resources.”
C Rangarajan

A sector that is begging for greater innovation is insurance. Within the sector, the top management is clearly seized of the matter. “The penetration rate of general insurance has been stagnant for the last decade. We need to reach out to large sections of the populace who are still not covered. There is huge potential. To tap this potential, we need to focus on affordability, reach in terms of low-cost models and diversity in the product portfolio,” says G Srinivasan, Managing Director, United India Insurance.

Product innovation may hold the key. As M Ramadoss, Managing Director, New India Assurance, points out, “To further financial deepening, we need to sell small-ticket policies at low cost. For this, IRDA should consider relaxing the need for paper policies where the premium is below Rs 1,000. There should also be some liberalisation in agent appointments as the probability of misselling is much lower in general insurance. Kirana shops should be allowed to sell small-ticket policies like cover for motorcycles.”

Remittances too have been identified as a potential catalyst for the financial deepening of receiving countries through higher access to banking services by migrants’ families. The entry of banks reduces the fees and increases the level of remittances, allows an optimal consumption smoothing and improves the welfare of migrants and their families, although it also increases the volatility of remittances.

Financial institutions need to provide simplicity, clarity, choice and control to woo the underbanked and non-banked into the traditional system. It is no secret that the basic challenges to financial inclusion are:

  • Coverage
  • Access to diversified financial products and services
  • Delivery model – day to day transactions

Once implemented, the Unique Identification Number (UID) Project of the Government of India will be a powerful instrument for helping the poor establish their identity to meet the banks’ KYC norms. This will reduce cash and non-cash transaction costs, both to the banks and to the potential customers.

“We cannot have depth in the market if the number of participants in the market place is not increased and that is why financial inclusion is related to financial deepening. We have to create an appropriate platform using technology and devise innovative products. The entire financial inclusion exercise is in mission mode so that we can achieve our ambitious goals”
K C Chakrabarty

Banks need to redesign their business strategies to incorporate specific plans to promote financial inclusion of lowincome groups treating it both as a business opportunity as well as a corporate social responsibility. They have to make use of all available resources including technology and expertise available with them as well as the MFIs and NGOs. It may appear in the first instance that taking banking to the sections constituting “the bottom of the pyramid”, may not be profitable but it should always be remembered that even the relatively low margins on high volumes can be a very profitable proposition.

Finance Minister Pranab Mukherjee has also urged public sector banks to increase their Kisan Credit Cards across the country by 20 per cent in 2010-11, both in terms of the number of accounts and the amount disbursed. Under his leadership, the government has set a target to provide banking facilities to areas with population above 2,000 by March 2012.

Greater co-operation between banks, policy-makers, nongovernmental organisations and technology providers is vital to improve access to financial services for the unbanked. The involvement of all stakeholders also implies the state administration at the grassroots level. As defined in these pages earlier, “Financial inclusion is fair, timely and adequate access to financial services that include saving, credit, payment and remittance facilities at an affordable cost, and in a transparent manner through institutional agencies.” To ensure, this, there is need to deepen the financial sector and reposition it for growth and integration into the global financial system in conformity with international best practices. In sum, financial sector development or ‘deepening’ involves the design and implementation of policies to intensify the degree of monetisation of the economy through increased access to financial institutions and services, their transparent and efficient functioning, and ensuring reasonable rates of return in real terms.


Spearheading the Inclusion Agenda

Finance Minister Pranab Mukherjee’s drive to increase the spread of banking services in the rural and far-flung areas is part of his more comprehensive agenda aimed at financial deepening

“Banks need to leverage modern technologies to provide banking and financial services to the rural populace and thereby create hitherto unprecedented economic opportunities for them. Financial inclusion and the extension of financial services to every citizen of the country is a priority for the government.”
Pranab Mukherjee

‘Last mile credit delivery’ appears to have become the new mantra that the UPA Government is spearheading and leading it in this march is Finance Minister Pranab Mukherjee. In fact, the agenda becomes clear if one looks at the manner in which the report card on completing the first 100 days of its second tenure is structured.

The report has been organised around 12 themes, starting with enabling human development, which focuses on education, health, child rights, social inclusion, food security, empowering women, empowerment and development of weaker sections,) an inclusive agenda for the minorities, and financial inclusion. These are all areas that are critical to its goal at promoting financial deepening.

For Pranab Mukherjee, deepening financial inclusion “To reach the benefits of banking services to the ‘Aam Aadmi’, the Reserve Bank of India had set up a High Level Committee on the Lead Bank Scheme. After careful assessment of the recommendations of this Committee, and in further consultation with the RBI, it has been decided to provide appropriate banking facilities to habitations having population in excess of 2000 by March, 2012,” he told parliament in his budget speech.

Reiterating Prime Minister’s pledge to give the country an effective, purposeful and responsive government, Mukherjee is leading the government’s efforts to seek new frontiers and new directions that strengthen the country’s social and economic foundations.

Addressing a joint meeting of chief ministers of central and west zone states and the heads of public sector banks and financial institutions in June this year, Mukherjee asked them to make serious efforts to improve the credit flow to housing, weaker sections and minority communities. “Though efforts are being made to improve the credit flow to housing, weaker sections, minority community and education loans, the credit growth in these sectors need closer monitoring in the state level bankers committees,” he said.

Mukherjee also emphasised that the financial inclusion plans for coverage of all habitations with banking facilities must be closely monitored. The statement of intent that lists annual goals that public sector banks sign with the government will have to indicate the targets for furthering financial inclusion and the time required to achieve the goals. While banks have been formulating their inclusion plans for some time now, it was Mukherjee who came out with a definite timeline for their execution.

Similarly in a meeting with the Chief Ministers of the north zone states and head of banks that have the lead bank status in the region, Mukherjee voiced his concern on matters that relate to the efficiency with which the banking system interfaces with the common man, the small farmer, students and micro entrepreneurs so as to ensure timely credit to the poor and the marginalised.

Mukherjee’s drive to increase the spread of banking services in the rural and far-flung countries is part of his more comprehensive agenda aimed at financial deepening. Delivering the inaugural address at an international workshop on ‘delivering financial literacy: challenges, strategies and instruments,’ organised jointly by the RBI and the Organisation for Economic Cooperation and Development (OECD), Mukherjee observed that “financial markets now offer complex choices to consumers, but literacy is essential for consumers to make informed choices.” According to him any effort to improve literacy should take into account India’s “divergent and multi-lingual framework”. The wide divergence in literacy levels across states and within states, the marked differences between rural and urban areas are also important issues.

The government has already started channelling more welfare payments through banks, including the payments made under the Mahatma Gandhi National Rural Employment Guarantee Act, its flagship scheme. This is expected to promote access to banking services to a larger number of the excluded. This, Mukherhee, feels will ensure equitable growth, enabling the people to derive the benefits of various government social security schemes and for bringing the savings of the poor into the system and investing them.

Mukherjee is also a stronger supporter of the greater use of technology in improving access to financial services by the unbanked. As he told a conference organised by the State Bank of India in Mumbai in February this year, “banks need to leverage modern technologies to provide banking and financial services to the rural populace and thereby create hitherto unprecedented economic opportunities for them. Financial inclusion and the extension of financial services to every citizen of the country is a priority for the government. The goal of financial inclusion cannot be achieved without the help of technology,” he added.

As of today, only 37.2 per cent of bank branches are in rural areas and only 40 per cent of the population has bank accounts. Financial inclusion is a priority, as it provides avenues to the poor to bring their savings in the common financial system, said a concerned Mukherjee.

It is not only the banking sector that Mukherjee has been looking at to deepen financial inclusion. As part of his budget speech this year, the finance minister proposed a further boost to the Financial Inclusion Fund (FIF) and Financial Inclusion Technology Fund (FITF) enhancing the size of their corpus to Rs 6 billion each.

As Mukherjee wrote in an article in India Today, “inclusive growth is a strategy where there will not only be growth but it will be achieved through certain instrumentalities so that the benefits reach the largest section of the society and that the maximum number of people are able to derive benefits from these developmental projects.”


Banking Imperatives

Financial inclusion is no longer only as a social necessity but as a business opportunity by the banking industry in the country, and efforts to achieve inclusive growth appear to have got a boost with the submission of a three-year inclusion plan by all banks. In fact, the increasing awareness about its imperatives has resulted in giving a mission-mode approach to financial inclusion.

However, for achieving the goal of financial deepening, it must be realised that the initiatives of the banking sector need to be complemented by the central government, state governments, agencies associated with the implementation of various developmental programmes, the technology providers, policy-makers and NGOs and civil society. This, according to K C Chakrabarty, Deputy Governor, Reserve Bank of India, will provide the necessary impetus to the whole process.

“ Transaction costs can be reduced only when we achieve the volume that gives us economies of scale and also when banks are able to market multiple products, like micro insurance and micro mutual funds”
M V Tanksale
“Banks must actively involve local cooperatives and self-help groups in spreading the message of the advantage of financial inclusion”
A K Srivastava
“Banks and other interested parties, like technology providers, civil society and the government have to create the necessary ecosystem to ensure inclusive growth”
S Sridhar

Chakrabarty, who was chairing the panel on ‘Financial Deepening -Banking Imperatives’ at the 23rd Skoch Summit held in Mumbai, said that “we need to achieve this goal (of financial inclusion) not for any other reason but for the sustenance of society. But it has to be a viable business model for everyone involved-from the banks themselves, the technology providers, the banking agents as also the customer.”

Concurring with Chakrabarty, S Sridhar, Chairman and Managing Director, Central Bank of India, pointed out that financial inclusion did not mean just opening of no-frills accounts in the hitherto unbanked areas of the country or by individuals who had so far stayed away from the formal banking system. “Instead, strategies must be drawn up to convert these no-frills accounts into productive assets. It is only if this is done that the banks will find such operations viable. This means that the banking sector will have to offer a host of products, or other income streams and not just from loan, but also insurance services.”

According to Sridhar today the subject of inclusive growth had come to the centrestage of all governance efforts. As a result, the banking industry in the country was forging alliances and partnerships with different players, like technology partners, the civil society and even with certain government departments. It is the three-year plan that banks have submitted to the RBI that involves a huge scale of operations that has necessitated such alliances. “Banks and other interested parties have to create the necessary ecosystem to ensure inclusive growth,” he added.

Agreeing that the process could get a big boost if the banking industry implemented the business correspondent/ facilitator (BC/BF) model in the right earnest, Sridhar, however, pointed out that a major concern here was imparting the right training to such facilitators. “Today, we in Central Bank, have restricted ourselves to appointing only Section 25 companies as BCs/BFs. But when it comes to appointing individuals, there is concern over issues relating to enrolment, training, supervision and monitoring of such facilitators.”

According to M Narendra, Executive Director, Bank of India, apart from issues related to training and supervision, the banking industry could create the necessary eco-system by promoting the setting up of rural development and training institutes, which could impart necessary training to the BCs/BFs while also helping people develop employment-generating skills, thereby giving a boost to the rural economy. “For this, the private sector must also be involved because unless we create the necessary infrastructure, necessary demand, necessary selfempowerment, only then will we create a good market for all rural entrepreneurs, thereby boosting the financial system,” he added.

In this context, Narendra pointed out that the Bank of India is initially setting up five Kisan Vikas Kendras in the country, which will become the convergence point for efforts by government, non-government and other related agencies, serving as a centre of delivery, of management of BCs, of agri-management, rural health and rural literacy. This apart, Bank of India had set up 24 rural development training institutes in the districts where it is the lead bank.

“Only when we create economic opportunities for those millions of people who are not under the banking fold can we reduce inequality”
K Ramakrishna
“When we create the necessary infrastructure, necessary demand, necessary selfempowerment, only then will we create a good market for all rural entrepreneurs, thereby boosting the financial system”
M Narendra
“A satisfied customer can help increase awareness about the importance of banking services in ways that no product or service can”
Santanu Paul

Here, M V Tanksale, Executive Director, Punjab National Bank, pointed out that limiting appointment of BCs/BFs to only Section 25 companies was a limiting factor in increasing the spread of banking services in the unbanked areas. “Section 25 companies do not have the scale of operations that is the need of the hour. For example, PNB plans to have at least one lakh banking touch-points in the unbanked areas. And if each touchpoint was to cover about 600 customers, it would mean that over 6 crore customers would be covered. For this, the bank would need a workforce of at least 75,000 BC/BF agents. Such a number can only be managed by bigger organisations,” he added.

Raising the issues of finding suitable technology providers for taking banking services to the people, Tanksale said that PNB had initially started with eight technology service providers, but could sustain long-term relations with only three of them. Here, a major issue was the cost that a technology provider charged for a single transaction.”If to such costs, we add the returns that BC/BF expects, the total transaction cost is today not viable for taking banking services to the unreached. The transaction costs can be reduced only when we achieve the volume that gives us economies of scale and also when banks are able to market multiple products, like micro insurance and micro mutual funds. These should be in addition to suitable saving products, recurring deposits, remittance products and credit products.”

Taking a different cue, K Ramakrishnan, Chief Executive, Indian Banks’ Association, said that just offering these different financial products would not necessarily promote inclusion. “Such products must result in increased economic activity in these areas. Only when we create economic opportunities for those millions of people who are not under the banking fold can we ensure that there is equal opportunity and equal access to all, thereby reducing inequality. Bankers therefore have to take another step beyond just providing access to banking services.”

According to the IBA chief, the challenge here for banks was to create a cadre of officials at the rank and file level who understand this concept in its totality and would make determined efforts to facilitate inclusion not only through bank finance but also by identifying activities that improve the economic potential of the places where they are posted.

On the technological front, Ramakrishnan said that lastmile connectivity was a crucial link to ensuring inclusive growth. Yet another link was the issue of cash management by the BCs/BFs. “So far, the practice was the banks managed their finances within their system. But under the BC/ BF model, the cash will reside outside their system, raising concerns over liability, management and security.” According to him, the appointment of banks as registrars under the mammoth Unique Identification Number project could be a bid boost to financial inclusion as this would help bring more and more people into the banking fold, helping banks meet the KYC norms and standardise the BC model.

For Santanu Paul of TalentSprint Ltd, the need of the hour was not just creating more economic activity but also creating suitable financial products for the unbanked, even as it was ensured that such economic activity sustained the uptake of such financial services. Picking up on customer relationship management (CRM) as another enable of financial inclusion, Paul said that “a satisfied customer can help increase awareness about the importance of banking services in ways that no product or service can.”

Advocating a shift from a purely bank-led model for financial inclusion, A K Srivastava, CGM, NABARD, the foremost thing is to ensure financial literacy, education and information. While some steps had been initiated in this direction by certain private bodies, it was time that the banking industry played a proactive role in this regard. Emphasising on the need for products like micro-insurance and micro-pensions, Srivastava said that banks could actively involve local cooperatives and self-help groups in this context. “The advantage of cooperatives and SHGs is that they are ground-level institutions that already have some membership and local connectivity. As BCs, they can help increase the spread of banking services in a manner that no external body can and substantially help reduce transaction costs.”

Summing up, Chakrabarty said that it was evident that transaction cost was a major impediment to the efforts of deepening financial inclusion. “But, all agreed that banking for the poor was very viable option provided one had a suitable business model and delivery system to do that.” Banks have a vested interest in the growth and development of the society and while this adds value to society, it also improves the growth rate, making more people bankable, improving the overall economic environment, he added.


Sustaining the Growth Turnpike

The Indian growth story hinges on two critical sectors -infrastructure and agriculturewhich is where regulation and governance can become the growth drivers

The twin challenges that India today faces are improving agriculture productivity and developing the infrastructure sector. Today, agriculture needs to grow at 4 per cent per annum if we are to be able to ensure food security and tackle poverty. Similarly, infrastructure, especially the power sector, needs to be developed on a war-footing if we are sustain a growth rate of over 9 per cent. Importantly, as a developing country, the country really needs to get its savings to its investors and not expose the country to external vulnerabilities. Ways of liberalising the financial sector need to be explored rather than put in more regulation and make the cost of financial intermediation much higher.

The Indian economy in recent years has been consistently performing with flying colours. This uninterrupted expansion is assisted by markets restructuring, huge infusions of FDI, increasing foreign exchange reserves, boom in both IT and real estate sectors, and a thriving capital market.

According to Vijay L Kelkar, Former Chairman, 13th Finance Commission, the determinants of long-term are normally seen from the perspective of being macro-economic or micro-economic nature. However, there are meso-economic determinants also, especially in terms of the infrastructure sector, in areas like energy, water, and other major intermediaries. “And, to sustain a positive growth momentum and get the right kind of growth, we urgently need to undertake reforms in these areas.”

“I think the great need is institutional deepening for improving the economic governance of a country. Our institutions were created some time back. They served well but now require a great amount of retooling specifically in the strengthening of the third tier of the governance structure,” said Kelkar. He was speaking at the 23rd Skoch Summit held in Mumbai recently.

The process of globalisation and the process of integration of India’s external trade with the rest of the world have not caused any problem to the Indian economy, instead it has strengthened it.

Talking about the policy preconditions necessary for sustaining double-digit growth, S S Tarapore, Distinguished Fellow, Skoch Development Foundation, said one fundamental necessity was higher savings. This is because higher savings can lead to higher investment, which sustains growth. “Here it is also necessary to look also at the quality of growth and at distributive justice. Mere growth, particularly if it is a jobless growth, will not be enough. For this, the incentive/disincentive structure for savings needs to be revamped.”

Pointing out that Indian growth story was here to stay, James Shapiro, Head-Market Development, Bombay Stock Exchange, said “We almost have to do things spectacularly wrong to derail the kind of momentum that is built up in India for continued growth. But, the focus of policy makers should be on getting the competitive environment right. This is because competition will drive innovation and entrepreneurial activity, which in turn will drive growth.”

Agreeing with Shapiro, Ajit Ranade, Chief Economist, Aditya Birla Group, said that the only factors that could impede the Indian growth story were regulation and governance. According to him, “while at the macro-economic level, there is savings and sector accumulation that drives growth, at the micro economic level, it is individuals, productivity and innovation that do the same. And, this is something where the country has ample resources.”

But, there can be no sustained economic development without strong successes in both human development and economic growth. Development strategy therefore requires major public commitments to social sectors (especially health and education) and to improvements in the business environment in order to promote large-scale private investments needed for economic growth.

On governance, Vinita Bali, MD, Britannia Industries, pointed to the disconnect between policy and its implementation. Saying that “actually very little has happened in terms of productivity or increases in output and one just had to travel to the countryside to see the difference between a policy, which is a very well intentioned and documented framework, and its implementation. There are huge gaps that exist and a lot of time people don’t actually see those gaps and the difficulties at the ground level in terms of implementation.”

Agreeing that the country’s growth trajectory would remain upward, Joseph Massey, Managing Director & Chief Executive Officer, MCX Stock Exchange, “a little bit of pessimism arises when we look at the last mile. And, I think this is the challenge for all of us that while we have policies on paper, what will actually drive growth is their implementation at the last mile. And we have to be able to sustain such implementation over the long-term.”

For Naveen Surya, Managing Director ItzCash Card, a major growth driver was financial deepening of which financial inclusion is a part. “Financial deepening includes areas like innovation, products, service delivery mechanisms, regulations, all of which combine to create an ecosystem and an environment where we can sustain this growth.” This applies to both rural and urban areas.

India’s urban population is expected to rise to 40 per cent of the total population by 2020, placing increasing strain on the country’s urban infrastructure. Future growth is likely to concentrate in and around 60 to 70 large cities having a population of one million or more.

Emphasising that regulation in policy was only one part of the story, Vidhu Shekhar, Vice President, National Stock Exchange, said that unless we have strong institutions that are able to support the needs of the community as they grow, as the needs of the economy grow, we will not be able to deliver on the potential. “So we have to pay as much attention to the institution building process as we are paying to policy and macroeconomic policy processes.”

Striking a more optimistic note, Ashima Goel, Associate Professor of Indira Gandhi Institute of Development Research, said that it was the deep-rooted feeling that things happen differently in India and that our growth story too will be different. “While there are policy constraints, what is really spurring the Indian growth story is the increasing diversity of the economy, both from the demand and the supply side.” Bringing the focus back on agriculture being a major challenge that could derail the Indian growth story, Jahangir Aziz, Chief Economist of JPMorgan, said that a mere 4 per cent annual growth in the sector would not be enough. “We have to account for the population growth also. So, one of the things that I think we are probably not paying as much attention as we are paying to infrastructure is getting agriculture on a much higher growth trajectory.”

The issue of poverty can be addressed only by maintaining a higher rate of growth. Achieving a higher rate of growth will enable us to generate surpluses that can be used meet our socioeconomic goals.

The current debates in India about the goals of development and about the appropriate models for growth are good for enabling the alignment that we need to accelerate economic growth. For Urjit Patel, President (Business Development), Reliance Industries, the Indian growth story was increasingly similar to that seen in East Asia, and not a South Asian economy. “Our growth rates powered by investment and savings that are now close to East Asian levels and are converging, and I think this is the real international mindset change that has happened.”

One factor, however, that ran through the summit was the country’s demographic dividend. India, speakers noted, is going to become younger and younger as opposed to many other countries, which are going to age. The key, of course, remains how are we going to provide or convert this very raw labour force into a skilled labour force and which is where education reforms become very important.

Team Inclusion

INCLUSION is the first and only journal in the country that champions the cause of social, financial and digital inclusion. With a discernable and ever- increasing readership, the quarterly relentlessly pursues the three inclusions through its rich content comprising analysis, reportage, features, interviews, grassroots case studies and columns by domain experts. The magazine caters to top decision makers, academia, civil society, policy makers and industry captains across banking, financial services and insurance.
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