Being
the second most populous country in the world, India has enormous potential to
become the global power house. Even though we have come a long way, the bigger
hurdles are yet to overcome. One of them is poverty. Amartya Sen once said
"Poverty is not just lack of money.
It is not having the capability to realize one's full potential as a human
being". The government has been trying to address the issue of poverty
since independence, but still one third of our population is below the poverty
line. This poses a question - Is addressing poverty is that difficult? Or are
we addressing it in a wrong way?
The
conventional approach of government towards addressing the issue of poverty is
through subsidies and public distribution system.
But
the majority of the spending gets absorbed into our complex bureaucratic system
through corruption, red-tapism, and implementation delays. Transforming the bureaucratic
regime is a cumbersome process. Is there any other alternate way where we can
address the issue of poverty and achieve the sustainable development of our
nation?
The
one word solution is "Inclusive
growth through financial inclusion"
Inclusive
growth can be defined as providing equitable opportunities and a level playing
field to all citizens thereby sharing the benefits of economic growth even
handedly. Financial inclusion is the stepping stone towards achieving inclusive
growth.
Leveraging the hidden potential of the
bottom of the pyramid section of our nation
As
per the Rangarajan Committee report on financial inclusion, financial inclusion
can be defined as “the process of
ensuring access to financial services and timely and adequate credit where
needed by vulnerable groups such as weaker sections and low income groups at an
affordable cost”. In India, the concept of financial inclusion was
introduced a decade back by Mr. K C Chakrabarty. Mangalam, a small village from
the state of Tamil Nadu was the first to be brought under the financial
inclusion plan and subsequently banking services were provided to all the
villagers.
Financial
inclusion can act as a stepping stone towards inclusive growth because of the
following reasons.
1. It
provides a level playing field where one can access the formal financial system
for borrowing and lending.
2. The
cost of borrowing will reduce drastically and as a result economic growth and
prosperity will be achieved.
3. It
promotes the saving habits of people thereby increasing the capital formation
of the nation.
4. It
will help in increased transparency, elimination of middlemen and facilitate
huge inflow of money into the formal banking system.
5. It
will act as an impetus in eliminating poverty, unemployment and income
inequalities in the long run.
 |
Figure 01 - Source
of data – World Bank, The global Findex database 2014
|
Key observations from the report
Nearly
half of the population in India still does not have access to formal financial
institution. The situation is even bleaker when it comes to females and the poorest
section of the society.
As
per the policy research working paper published by World Bank, less than 5
percent of adults around the world reported borrowing from a private informal
lender. But in India, the percentage of borrowing from private informal lender is
a whopping 12.56%. The percentage of informal borrowing increases when it comes
to rural areas (15.36%) and people without having primary education (16.14%).
Education
level positively influences people in taking decisions. Almost 64 percent of
people who have completed secondary education have an account at a financial
institution and only 8.51% of people who possess secondary education or more
borrowed from a private informal lender.
From
these figures it is evident that the current situation is not so encouraging.
What have we done so far? -
Transformation in the financial services
The
recent announcement from the central bank giving fresh banking licenses almost
after a decade to two entities (IDFC and Bandhan Finance) with a strict rural
focus can be seen as a welcome move. At the same time the introduction of
payment banks, small savings banks, white label ATMs and Digital Banking are
going to act as stimulants. Another major transformation can be achieved
through JAM Trinity
JAM
trinity refers to Jan Dhan Yojana, Aadhar and Mobile. This is going to be one
of the biggest path-breaking reforms, if implemented effectively and will act
as a pillar in achieving financial inclusion and inclusive development. It can
deliver the subsidy and other benefits to people directly thereby eliminating
the inefficient distribution of subsidies.
Challenges & Road ahead
It
is laudable that the government has already taken significant steps in
achieving financial inclusion. But there are several challenges also.
As per the latest
financial stability report from RBI, credit growth of scheduled commercial
banks (SCB) is at 9.7 percent and the deposits growth is at 12.9 percent which
is way below compared to past time. At the same time the gross NPAs of SCBs is
at 4.6 percent. These problems can have adverse impacts on achieving equality
in credit disbursements and government should formulate viable solutions to
tackle these issues.
 |
| Figure 02 – Credit growth & Deposit growth Source – Financial Stability Report, RBI |
Under
Pradhan Mantri Jan-Dhan Yojana, we have opened 18.47 crores of accounts (11.21
crores in rural areas, as on 23-09-2015). But the success of this scheme will
depend on how often people make transactions using these accounts. This is
extremely important considering the fact that India has a dormancy rate of 43
percent and accounts for about 195 million of the 460 million dormant accounts
around the world. As per the latest statistics, around 41.31 percent of the
accounts which is opened under PMJDY scheme have zero balance. Even though we
have witnessed a dramatic reduction in the zero balance accounts over the last
year (Refer Figure 03), the government should work more in order to bring all
the people under the umbrella of the formal financial system.
Achieving
financial inclusion by transforming the financial services is the best way to
make people competitive across all the sections of society and thereby
achieving inclusive development. Of course this will take time and we should
not depend on short term fixes. As the honorable governor of the RBI, Raghuram
Rajan pointed out “We have to have the
discipline to stick to our strategy of building the necessary institutions and
creating a new path of sustainable growth where Jugaad is no longer needed. For
this, what we need is the understanding and cooperation, not impatience and
pressure for quick impossible fixes. Only then can we realize our true
potential as a nation.”
Regards,
Harikrishnan
Views are personal
References
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