Sunday, December 23, 2007

Bank on banks

Financial inclusion can bridge the socio-economic divide

The Indian banking system has remained primarily elitist. Though post nationalisation the state-run banks achieved a commendable feat in providing banking and financial services to millions of Indians, eventually the focus was shifted towards the urban middle and upper middle classes, completely neglecting the rural masses. Figures from RBI reveal that just 85 commercial banks, with an overriding presence in urban India, account for a staggering 78% of the country’s financial assets whereas 3000 cooperative banks account for just 9% and Regional Rural Banks (RRBs) contribute a mere 3%. It's not just that. The more critical issue is that on account of bottom-line pressures, more and more cooperative banks and RRBs are trying to get a stronger foothold in urban India, reducing rural banking to mere symbolism.

No doubt, India poses a classic case, when it comes to its socio-economic development, wherein the benefits of growth have just touched only urbanites, leaving out millions of their rural counterparts behind. In the given scenario, Indian banks were possibly in the best position to act as catalyst in arresting this rural-urban divide (as it has been universally observed that economies with lower financial exclusion are also lower income inequality), by financially including every adult, irrespective of his or her background and social status. The fact is, only a mere 30% of adult Indians are financially included (as quoted by Mr Y. V. Reddy, the Governor of RBI, recently). This shocking revelation in itself puts a big question mark on the basic paradigm of banking as an institution in India. Knowing the very fact that at a micro level, financial inclusion not only helps in developing banking habits and therein liberate them from the clutches of the unorganised money-lending mafia, but at the macro level too, a robust and pervasive financial system provides opportunities of financial access to those who do not have sufficient finance themselves. In effect, the growth process becomes all-encompassing and inclusive. And in its absence, a vast majority of people, small entrepreneurs and enterprises stand completely marginalised. In fact the developed countries too, actively promote financial inclusion – in the US for example, the Community Reinvestment Act prohibits any discrimination by banks. In France too, having a bank account is a legal right.

Mass financial inclusion, at this point in time, is even more critical as India is going through a decisive phase, and availability of finance can only fuel the growth of the enterprise, at all levels. Otherwise it is going to not only alarmingly further skew the growth but dwarf it as well. But then it is also a fact that it is going to be a daunting task as such large-scale expansion of banking services might hit their bottom lines. So to make it a win-win proposition, policy makers can use the banking network, to promote the myriad development programmes, wherein the benefits not only permeate rural households, but banks too, and make such expansions, economically viable for them. This in turn would enable the much needed overall financial deepening, as well as make the growth more equitable!


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