Speeding Financial Inclusion

This study sought to collate primary research based on our grassroots experiences from several project sites and field visits; and views from all stakeholders so as to arrive at key interventions and intermediations to speed up the process of financial inclusion, and thereby poverty alleviation. Apart from providing key recommendations in the form of a roadmap to speed up the process of financial inclusion, the study also sought to determine the viability and cost effectiveness of the business correspondent (BC) model and has identified several options to make the model viable.

Preface

There are many things that can be said in order to improve the organisational efficiency of banks and other financial institutions. Importantly, there is a need for a change in the attitude of the people who serve in the banks. Empathy with the poor, empathy with those who need credit must be established and here,
perhaps, improved training will help. Also, rural branches must go beyond providing credit and extend a helping hand to farmers in terms of advice on a wide variety of matters relating to agriculture and other allied activities. We should look up on the rural branches of commercial banks as not merely pure
financial institutions but also as advisory institutions. There is no denying that we need to open more branches in the rural areas as there are still pockets which are unbanked in our country. And, in these areas, the traditional brick and mortar branches may still be needed. There is also the need for simplification of procedures in order to enable farmers to obtain credit more easily from the organised system. In establishing a strong relationship between the organised financial system, like commercial banks, and those people who need credit, the Bank-SHG linkage scheme is of extreme importance. Self-help groups have become a very established institution in our country. Here, I am indeed happy that I have had some role to play in the initial evolution of the relationship between banks and self-help groups. It was in 1992 when I asked the banks to provide credit to such SHGs even though they were not legally recognised. The SHGs are still not recognised as legal entities. To go back, I think the experience with the working of the self-help groups has been extremely good. Their repayment ethics has been good and they have been able to repay promptly loans granted by commercial banks. There are of course a lot of improvements that are required. We need to increase the number of self-help groups in all parts of the country. Today, they are largely concentrated in the Southern region. Also, the self-help vi groups need to graduate from one level to another level. So far, they have been largely devoted to meeting the consumer credit needs of their members. It is only now that some of them are progressing towards becoming productive organisations. I think that this is a development which is extremely important. While recognising that self-help group members do need consumer credit, we cannot keep them at that level. It is important that such self-help groups become productive entities also, contributing to the local economy. Then there is the question about the rate of interest. Some state governments have provided subsidy in terms of reducing the rate of interest offered to self-help groups. I feel that the rate at which commercial banks even normally lend to a
SHG is reasonable and the interest rate subsidy is not really required. In fact, if state governments do want to support SHGs, they should do so in trying to help the SHGs organise themselves better, provide marketing facilities, and provide other kinds of advice on productive activities. I think the role of the state
government will be better served in providing these necessary additional facilities, which will make self-help groups more efficient rather than providing interest rate subsidy. There is also the question of federating the SHGs. To some extent, there has been progress in this area in some states where the SHGs have been federated at the village level, at the taluk level and also at the district level. Here, I feel it is important that the SHGs should see a felt need for federating, it should not be imposed from outside. If self-help groups find it worthwhile to come together so that they can reap some synergic benefits, then this should be promoted. Here, the role of such federations must be more in the form of a facilitator rather than
as a credit intermediary. Self-help groups should obtain credit directly from commercial banks and federations must facilitate this process rather than becoming another intermediary in the chain itself.
vii The other important thing is the role of the business correspondent and business facilitator. The business facilitator and the correspondent model needs to be effectively implemented. In order to increase the outreach of the banking sector, the Reserve Bank of India permitted banks to use the services of specified institutions as intermediaries for providing banking services. However, this scheme has not taken off. This model has a high potential. Banks must take the initiative to remove the obstacles that come in their way for a more extended use of facilitators and correspondents. The list of people who can become facilitators can be expanded to include even people like ex-servicemen. There is also the possibility of allowing Section 25 companies to become correspondents. There is also the possibility of allowing different types of institutions, like village cooperative credit societies, to become facilitators or correspondents for
commercial banks. Therefore we have to explore the possibility of finding appropriate institutions that can serve as a good link between commercial banks’ rural branches and farm households. There have been several studies which have been done in order to strengthen the village credit cooperative societies. Many of them are in a moribund state. We need to revive them. The Vaidyanathan Committee had made specific
recommendations for reviving both short-term and long-term cooperative credit, and these also should be addressed so that the cooperative credit movement again becomes a vibrant movement. But the critical question, and one that the study by Sameer Kochhar has also raised, is the cost of such intermediation through business correspondents and who is to bear this cost. As the study reveals, there is a cost involved in such intermediation and if this cost is not covered, then the viability of the system of business correspondents itself is in question. Let us recognise the fact that by introducing the business  orrespondent model, we are ensuring a closer relationship between the poor people and the organised financial system. viii Today, in the task of making banking services available to everyone, technology
has come to have an important role to play. It is technology that has made it possible for business correspondents to deal with commercial banks. The required outreach into the interiors with low operational cost is only possible with the use of appropriate technology. But this technology, though simple in one way, still has a cost and therefore the question that arises is who will meet the cost. As
the report of Kochhar shows that while alternative technologies -- smart card, plastic card and so on-- are available, there is a significant viability gap and unless this viability gap is filled in by the banks or by any other mechanism, schemes to widen financial outreach will not take off. The Report on Financial Inclusion had suggested two separate funds--one for the promotion of financial inclusion and the other as a technology fund. While the former must be utilised for the promotion of the business facilitator and correspondent model as well as for the promotion of self-help groups, the technology fund can be used primarily to help the banks meet the cost for inducting the technology necessary for these models to succeed. In a sense, what we really need today is the development of a variety of institutions. As far as commercial banks are concerned, the two pillars which will help the organised banking system to widen its outreach is the strengthening of the Bank-SHG linkage scheme and the strengthening of the business correspondent model. But, the larger issue that remains is that we really need to see economic growth and social development going hand in hand. Social development cannot be sustained for a long period unless there is strong economic growth. But if economic growth by itself does not result in social development, it may not be of much use. Therefore, the two must go hand in hand. Economic growth and social development are the two legs on which a nation must walk. Any strategy of development which ignores any one leg will
mean that the country will only limp along. Equity and efficiency should not be posed as opposing considerations. They must be weaved together to produce a ix coherent pattern of growth. Here, financial inclusion has an important role to play. Financial inclusion is no longer an option but a compulsion.