Access to finance at the grassroots level, particularly to the disadvantaged sections of society, continues to remain a mirage despite being on top of government’s agenda for equitable growth. This is even as growth in financial intermediation appears to have outstripped economic growth for several years now, reflecting increased financial deepening.
But has this financial deepening been equitable? Not really, says Arvind Mayaram, Additional Secretary, Ministry of Rural Development, pointing out that the problem really lay in ensuring access to institutional finance. Today, a majority of the 350 million poor in the country access finance from moneylenders and local traders at exorbitant rates of interest. And, in cases where the infrastructure for institutional finance exists, the poor have limited access to such resources, either because such institutions are at uneconomical distances, or the needy are unable to fulfil the conditions to access such finance. Today, over half of the country’s rural people are without bank accounts; the number rises to over 80 per cent when one just talks about the rural poor. Similarly, nearly three-fourth’s of the country’s population is without life insurance while health insurance is practically non-existent.
“With wages for employment under the MGNREGA being compulsorily paid through bank accounts, this has brought more people under the ambit of the banking system than any other government scheme.”Arvind Mayaram
Conceding that wherever access to formal systems of finance has improved, local economic growth too has witnessed an upswing, Mayaram pointed to the Mahatma Gandhi National Rural Employment Guarantee Act, which he said is the biggest-ever inclusion initiative undertaken in the country. With wages for employment under the MGNREGA being compulsorily paid through bank accounts, Mayaram said that this had brought more people under the ambit of the banking system than any other government scheme. “The impact of this has been that the quantum of money which has actually reached the hands of the poor has been much higher than what it used to be and this has impacted the rural economy in a very positive manner. During the recent global financial crisis, growth in the country’s rural areas continued to be logged at about 14 per cent because the consumption power of the people in the rural areas did not significantly go down.”
But such efforts continue to touch only a small fraction of the financially excluded, who include street vendors in urban and rural areas, home-based workers like beedi workers, labourers, child care providers, small producers such as the local farmers, milk producers, etc. It is this segment of the excluded that represents the majority of the workers in our country. More importantly, unlike the financial needs of the well-off or the urban majority, this segment does not have the necessary savings to ensure their credit-worthiness to access institutional finance. Also, their credit needs are governed by shorter need spans, for purposes that are more immediate and vital to daily life, and to meet expenditure on issues like sickness and expenditure. These short-term needs are met with loans at high interest rates leading to long-term debt.
As Renana Jhabwala, President, SEWA Bharat, points out: “we started our own cooperative bank to meet the short-term needs of our members, who are all women. But, micro-savings, micro-loans or micro-credit cannot solve what is a macro problem. This is because even formal institutions providing such credit facilities are charging interest rates that are much higher than what the formal banking institutions charge.” But these micro-finance institutions are only playing a small role, having become only lenders to short-terms borrowers. “The products they offer are limited to loans and savings, with no schemes on pensions and insurance or even micro-investments. And even in the products that they are offering, their reach is limited. This then raises the need to have more intermediaries that can offer a range of financial products to the unreached.”
While the authorities have all along realised the role that IT and community-based organisations, including NGOs, can play in expanding banking outreach, there continues to be some haze on the cost of using such intermediaries, the services they can offer, and even the regulations that will cover them. In fact, already there is some cloud on the role of MFIs as financial intermediaries, with many states limiting the interest rates that can be charged by such bodies. Increasing outreach of the formal banking system and scaling up the number of accounts will require bankers to move out of their branches and source clients and then look at low cost delivery alternatives.
It is this cost element, R Chandrashekhar, Secretary, Department of Telecommunications said, that can be successfully met by information technology and improved connectivity. An issue that arises here is that there is need for a complete handshake between the sectors involved in taking inclusive growth to those excluded. “Unfortunately, that is easier said than done, because it is not only the government which is structured in silos, with one department looking after technology, another communications, and yet another rural development. Even the banking sector and the financial sector look at inclusion from their own perspective.”
In fact, it is because of this disconnect, many feel, that technology is yet to become an essential element of inclusive growth. Thus, the banking sector continues to have its concerns when it comes to the use of mobile telephony in taking services to the people. These include things like credibility of the banking institution, its responsibility and liability apart from the need for direct relationship and interaction with a customer, says Chandrashekhar.
Agreeing that there was a need to reconcile the role of technology, the role of business correspondents and the role of financial institutions in a more creative way, Mayaram pointed out how account holders had collectively started using intermediaries to conduct banking operations to save individual cost and time. “This is a model that the banking sector is seeking to replicate through the use of banking correspondents, biometrics and other available technologies,” he added. An issue of concern here was improved connectivity in the unreached areas of the country. To this, Chandrashekhar agreed that it was connectivity that would have a major bearing on all growth and equity-oriented programmes, and financial inclusion programmes across the country.
Yet another factor that could give inclusive growth programmes a push, according to Ashish Kumar Chauhan, Deputy CEO, Bombay Stock Exchange, was the need to automate processes and systems. The banking system was no longer just a brick and mortar institution, technology had brought in automation. “From a non-monetised world, we are today seeing increasing monetisation, and automation could actually take the process to all the people. There is a lot of talk in the government and in the banking industry on the need for increasing the number of bank branches,” Chauhan points out.
Technology, experts feel, can also enable the formal institutions to shed their legacy infrastructure. It has also enabled institutions like the stock exchanges and equity funds to lower the cost of transactions to a level where volumes ensure turnover and revenue, and the user fees. Such practices, says Ravi Narain, Managing Director & CEO, National Stock Exchange, can actually be leveraged by the policy-makers to introduce new and modern products into the financial system. “Thus, one can use existing institutions like banks and the postal department, or add new bodies like local traders and shopkeepers to offer new products, including insurance, banking, credit, deposit and even mutual funds, to those currently out of the financial system. While some security procedures certainly need to be put in place, the resultant volumes will certainly drive both the risks and costs down.”
As Mayaram notes, financial freedom aids economic growth, but financial freedom has its costs and it is these costs that are today determining how the message of equitable growth travels through the country. “More importantly, banking institutions and financial service providers are increasingly realising that the poor are much better borrowers than in many cases the rich or the industrial sector.” But the poor make for better borrowers only if they are able to access the institutionlised financial system to meet their needs. It is well-known that the poorer one is, the less likely is that one will have access to formal systems. Conversely, the chances are that increasing poverty increases access to the more expensive and onerous informal system.
Calling for the need to shed legacy processes and thinking, Naveen Surya, Managing Director, ITZ Cash Card, said it was important to take inclusion beyond simply a bank account perspective. “Only then will costs move down, making it economical and profitable for the financial system to look at the hitherto untouched areas.” Product innovation, which means allowing different products – including banking, insurance and health – to flow out from one basket, can lead to scale of operations that are currently only imaginable. “It is not because of the increasing capital base in the rural areas that consumer companies are moving into the hinterland; it is the size of the market that is giving them operating levels they never had earlier,” adds Surya. The challenge here, Chandrashkehar says, is to make different stakeholders, different industry players and different delivery mechanisms start working together in an integrated way.
As M Govinda Rao, Director, National Institute of Public Finance and Policy, says financial deepening is only one of the factors that can lead to equitable growth, but a crucial one at that. He quotes Nobel laureate Amartya Sen to say that: development is freedom and if development is freedom, building capabilities is extremely important to earn such freedom, and capabilities are something you cannot build without inclusive governance.