India had scored poorly on financial inclusion parameters when compared with the global average, said the Reserve Bank of India in its annual report.
The report quoted a World Bank study in April 2012, which had shown half of the world’s population held accounts with formal financial institutions. The study said only nine per cent of the population had taken new loans from a bank, credit union or microfinance institution in the past year. In India, only 35 per cent have formal accounts versus an average of 41 per cent in developing economies.
India also scored poorly in respect of credit cards, outstanding mortgage, health insurance, adult origination of new loans and mobile banking. “Financial inclusion remains a substantially unfinished agenda,” said the report.
RBI has admitted that they have faced criticism from extreme votaries of strong interventionist policies to promote financial inclusion and it was argued that such directed lending rates leads to mis-allocation of resources. However, the central bank said it has striven to ensure a balance between equity and efficiency considerations so that financial inclusion is furthered while not compromising on the financial health and the lending capacities of the banks.
Latest figures indicate that there are over 110,000 business correspondents employed, which is not a large number in context of the number of banked villages, RBI said. However, the regulator said, they have taken several initiatives to make financial inclusion high on the agenda of Indian banking in the recent years. It required banks to provide no-frills account, tried to improve the outreach of banks through the business facilitator and business correspondent (BC) models and set up goals for banks to provide access to formal banking to all 74,414 villages with population over 2000.
RBI also adopted the information, communication, technology-based agent bank model through BCs for door-step delivery of financial products and services since 2006. However, in its annual report, RBI said the BC model has not been effective in addressing financial inclusion needs. “The model, by itself, cannot serve the financial inclusion objective. It cannot substitute the services and the customer confidence that the brick and mortar bank branches provide,” said RBI in the report.
RBI said that there is a need for mainstreaming financial inclusion. “To improve the access of the poor to banking, banks need to open branches to provide low-cost intermediation with simple structures, minimum infrastructure for operating small customer transactions and supporting up to 8-10 BCs at a reasonable distance of 2-3 km,” said RBI.
It said that the medium-term strategy for banks would need continue with a multi-facet approach with activities woven around linking of bank finance with self-help groups through microfinance institutions or otherwise. “It is in banks’ medium- to long-term interest to do so, as financial inclusion may be a short-term pressure on banks’ profitability, but over the years could increase the size and scope of banking in India. It will add to the banks’ revenue stream, making it commercially viable,” the regulator added.
