It impacts the lives of millions of unbanked. The strict guidelines and statements emanating from the RBI can affect the business of NBFCs and non-formal institutions on the one hand. While on the other, as a report by the European Foundation for Financial Inclusion warns, the new payment systems can lead to financial exclusion of vulnerable groups such as people with low income or high debt, migrant labour, old and disabled people. We will contribute in the formulation of the right policy mix by providing a medium for the affected parties to share their problems and views with the policy formulators.
Easy access to credit in times of need should form an important pillar of financial inclusion edifice. According to the RBI, more than Rs 2, 481 crore of deposits were lying unclaimed in 1.1 million bank accounts as on December 31, 2011. These dormant accounts reflect the small role of bank accounts on the larger canvas of financial inclusion. The Crisil Inclusix has revealed that only one in seven Indians have access to banking credit. The number of savings bank accounts stands at 624 million but the number of loan accounts is nearly a fourth of that at 160 million. It also found that despite an improvement in branch coverage and in the number of people depositing their money in banks, credit delivery remains poor. The bottom 50 districts have only 4,068 loan accounts per lakh of population, which is nearly one-third of the all India average of 11,680, the report states. In rural areas, against a population of 830 million, there are only 210 million savings bank accounts.
Data from Census of India 2011 reveal that between 2004-05 and 2009-10, the share of formal institutions (government, banks and cooperatives) in funds borrowed by rural labour households increased to 37 percent. But this means that 63 percent are still borrowing from non-formal institutions, including 33 percent from moneylenders. This when giving loans accounts for more than 80 percent of business for Indian banks in the absence of a deep bond market.
NSSO data has shown that the share of households without cultivable land in outstanding debt from banks has been steady at 39 percent between 2004-05 and 2009-10. The data show that banks and cooperative societies trail moneylenders in lending to borrowers without cultivable land.
Hassle-free and quickly-processed loan tops the wish list of the unbanked in India. They often set up contributory groups which neither pay nor charge any interest but allow the member immediate access to funds. The success of government schemes such as Aadhar-based direct benefit transfer depends on financial inclusion being spread wide.
Recommendations for the next round of world development goals were released by a high-level panel of eminent persons on the post-2015 development agenda. The panel, headed by David Cameron, Ellen Johnson Sirleaf and Susilo Bambang Yudhoyono, included financial inclusion along with other forms of infrastructure. According to this panel financial services provide the infrastructure which enables people to make the most of their resources. Elisabeth Rhyne, managing director of the Center for Financial Inclusion points out that financial services help people in managing their economic lives while handling the impediments of time and distance and the risks associated with such transactions. Financial inclusion provides people access to services which can help them become self-sufficient and thus reduces the subsidy burden on the government. This could be in form of a bank account, loan or even health insurance. Rhyne lists benefits of a strong financial services structure. For example, a loan to a woman gives her increased economic status in the family and the community. Savings and credit help families pay for school. And in the context of Indian government’s focus on food security, financial services help farmers purchase inputs, manage the seasonal flow of their incomes, and cope with agricultural risks.
According to an Indian commentator, all financial services and not just bank accounts need to be provided to the poor and low-income strata of the society. India’s financially-excluded stratum is mostly made up of farmers, small entrepreneurs in the unorganised sector, hawkers, slum dwellers and migrants in urban areas. They are denied access to banks and formal lending institutions and become easy prey for moneylenders. The usurious rates prevent them from breaking the vicious grip of moneylenders. The expert points out that for a poor person approaching a bank for loan can be costlier than borrowing from a moneylender. A visit to a bank would include the cost of travel and documentation, and loss of wages. This cost could add up to between 28 percent and 29 percent of the loan that he is seeking as the loan is usually given after 3-4 visits. The cost could rise to 35 percent of the loan if it takes more visits to the bank. This cost-benefit analysis makes it cheaper and easier for him to borrow from the moneylender.
A financial inclusion effort must focus on co-opting the marginalised section. This means the financial service provider must be ready to take more risk, adapt to the local environment and needs of the financially excluded, and be less focused on profits.
(Disclaimer: The information has been aggregated through secondary research. IFIE is not responsible for errors if any)