The case for financial inclusion, which means providing financial services to the vast sections of the population not covered by the formal banking system, is very strong. In India, it implies providing access to a bank account backed by deposit insurance, access to affordable credit and the payments system. For a number of reasons, it is the banks rather than the non-bank intermediaries that should take the lead. The financial agencies operating in the unbanked areas of rural India have not been equal to the task and in any case they offer a limited range of activities compared to banks. If financial intermediaries have to deliver affordable services, they need to scale up and use technology for which they require large capital. It stands to reason that lenders and investors will repose greater trust when the entity is regulated. And when it comes to credibility, banks score because they are tightly regulated. Recent experiences in India and elsewhere also show that regulation and financial inclusion far from working at cross purposes can go hand in hand. In fact, a number of inclusive practices have been fostered by the regulator, the Reserve Bank of India.

Priority sector lending mandated by the central bank has financial inclusion as one of its objectives. Licensing laws have been tweaked to persuade banks to open branches in remote areas. Since access to a bank deposit is considered a public good, the RBI has directed all banks to open “no-frills” accounts, characterised by low minimum balances and charges, but limited facilities. To further improve the access, the RBI has licensed business correspondents and other agents to undertake branchless banking. Newer regulatory guidelines, especially the Know Your Customer (KYC) norms, have stood in the way of financial inclusion because low-income earners and migrants rarely have acceptable identity papers. While the KYC rules have been relaxed selectively, the issue is yet to be fully addressed. Over the medium term, it is hoped, banks will rely on the Unique Identification Numbers (UID) to comply with the KYC rules. Technology is critical for the spread of banking among masses because it carries the promise of reducing transaction costs. By leveraging Indian strengths in mobile telephony with the UID, the reach of banks can be increased manifold. Yet technology has to be harnessed in a way that will benefit all types of customers. The benefits of inclusion will be nullified if technology creates a wall between the customer and the bank.

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