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An essential step to inclusive growth

The case for pursuing financial inclusion as an integral part of official policy has never been stronger. In several respects, the concept is not alien to either the government or the Indian financial sector. Since nationalisation in 1969, banks were practising some form of financial inclusion by taking banking and other financial services to geographical areas and people who had little or no access to such services. However, the degree of emphasis has tended to vary from time to time. With the onset of financial sector reform in the early 1990s, Indian banks, including the public sector ones, had to reorient their goals. Practices such as opening branches in remote, unbanked areas or opening accounts with meagre balances were never officially given up, but they were pushed down in the list of priorities as a result of the banks’ new orientation towards profitability and consolidation. And the consequence, though unintended, was the neglect of the small and medium customers. Competition among banks for high value clientele has been such that in many instances even the government-owned banks lowered the bar for opening deposit and loan accounts alike. The other defining feature of financial sector reform, large-scale technology adoption, has also in the first instance favoured the well-heeled rather than the common man. Internet banking, telephone banking and so on have in other countries extended the reach of banking. But in India banks initially targeted the rich, marketing these as value-added features of their basic products.

Just as the use of an automatic teller machine (ATM) has become common, it is expected that other forms of technology-based products and services would be accessible to practically every type of customer. Technology in fact might hold the key to making this possible. The expectation is that, over time, financial technology will lower the transaction costs still further. The reach of the financial sector is now constrained by the inability of banks and other financial institutions to open viable branches especially in the rural areas. This could be overcome by using technology and delegating parts of their core business to locally based, licensed intermediaries. There is everything to be gained in making the financial sector adopt more inclusive practices. Economic growth could possibly be at an even higher rate if access to financial services and products becomes widespread. For many vulnerable sections of the society, financial inclusion may well be a means to more livelihood opportunities.

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