One of the more impressive aspects of India's growth story relates to the expansion of the banking infrastructure. Between 1969 and now, the banking network has grown ten-fold — from 8,000 branches to 80,000. The number of rural branches has increased phenomenally, from 1,443 to 32,000. This expansion was triggered by nationalisation, first in 1969 and again in 1980.
However, it is a sad reality that, for all the impressive growth, nearly 40 per cent of the households in the country — many of them rural — do not have a bank account. This ‘exclusion' of a vast segment of the population — comprising mostly marginal farmers, agricultural workers, and casual labourers — is perceived as an impediment to ‘inclusive growth.' “Financial apartheid” is how Muhammad Yunus, reputed founder of Bangladesh's Grameen Bank movement, called this exclusion of the poor from the banking network. The term ‘financial inclusion', therefore, means delivering banking services such as savings, credit and insurance facilities to the left-out social strata.
This book, by a senior RBI official, looks at the problem in the overall context of the country's economic policy and examines the strategies adopted over decades to tackle it. To start with, Joshi dwells at length on poverty and development theories and the need for providing access to financial services to the low income groups, and goes on to discuss the RBI's post-nationalisation initiatives to extend the banking network in the rural areas.
The central bank placed the commercial banks under regulatory obligation to open rural branches and to sponsor the Regional Rural Banks. Every bank was required to advance 40 per cent of its lending portfolio to certain specified sectors categorised as “priority sectors”; they included agriculture, lending to which must constitute at least 18 per cent. This stipulation enabled farmers to borrow for buying inputs. The RBI's “service area approach” by which the responsibility of meeting the rural credit needs of a specific area was assigned to a particular branch, and the provision of refinance facility by NABARD were among the other significant steps.
The Central Government's Integrated Rural Development Programme (IRDP) and Swarna Jayanthi Swarozgar Yojana (SJSY), launched as part of the poverty alleviation endeavour, also brought about considerable attitudinal change among bankers towards lending to low-income households, although these subsidy-linked schemes met with only a partial success.
What stood in the way of the poorer sections accessing bank credit was that their level of savings was so low that they were unable to provide collateral security for their borrowings. This barrier was overcome by creating the institution called ‘Self-Help Group' (SHG), an innovation of the 1990s. The banks lent money to the SHG, which in turn gave loans to its members. The SHG idea caught up fast and gained wider acceptability from the banks quickly. The NGOs also played a part in giving a push to the SHG movement by acting as sponsors and inculcating the savings habit in the poor and thus making them more ‘credit worthy'. Remarkably, loans to the SHGs were repaid more promptly than those under the poverty alleviation programmes, although they carried higher interest rates and had no subsidy component.
The success of the SHG movement, particularly in south India, led to the emergence of a large number of microfinance institutions, promoted by NGOs as well as private entrepreneurs. That the proliferation had a negative fallout — what with some of the MFIs resorting to sharp practices that got the borrowers into a debt trap — and the Central Government has had to step in and come up with legislation to regulate the microfinance sector is another story; it's a development this book has not covered.
The advent of National Rural Employment Guarantee Scheme, under which wages payable to workers are routed through banks, has rendered ‘inclusive' banking all the more imperative. “No-frills” bank accounts without the requirement of a minimum balance and “Business Correspondents” for carrying out simple banking transactions in villages using ‘smart cards' are the two steps taken more recently towards financial inclusion. As it turns out, however, the thrust of the policy initiatives aimed at financial inclusion has been on the supply side. The demand side has not received adequate attention. For instance, the RBI's effort to spread financial literacy among the rural population and stimulate the demand for banking services is yet to gather momentum. Joshi has elaborately, and somewhat repetitively in patches, dealt with the various policies and programmes initiated for reaching the bank services to the rural parts, but has refrained from analysing them critically. Moreover, since the ‘last mile' is critical for financial inclusion, the value of the book would have been enhanced considerably, if the author had drawn material from field studies rather than rest content with summarising official reports.