Financial inclusion is no longer an option; it has become a compulsion, says Dr. C. Rangarajan
Extract from the Special Address “Indian Financial Sector: Prospects and Challenges” by Dr. C. Rangarajan, Chairman, Economic Advisory Council to the Prime Minister at BANCON
December 04, 2010: The term financial inclusion has many dimensions. First, it relates to bringing within the ambit of the organized financial system the vulnerable sections and people with low incomes. Second, it denotes inclusion of all sectors of the economy – agriculture, industry and services. Third, it also implies the extension of the organized financial system to all geographical regions. Thus, it has social, sectoral and regional dimensions. However, the term financial inclusion has largely been used to indicate the need to bring within the scope of the organized financial system people in the bottom deciles of population. It is herein equitable growth comes in.
While banks have achieved a higher growth in the provision of credit to agriculture and allied activities in recent years, this momentum has to be carried further. And this is particularly necessary when it comes to the provision of credit to small and marginal farmers. They constitute the bulk of the farmers and account for a significant proportion of the total output. Today, the proportion of institutional credit going to sub-marginal and marginal farmers is far lower than for other classes of farmers.
Thus, a critical issue is how to meet the credit requirements of marginal and sub-marginal farmers. For a solution, banks are today looking at the business `facilitator’ and ‘correspondent’ models, which have a great potential to reach out to small borrowers and depositors. And if we are to ensure greater financial deepening, a re-look at the organisational structure of our rural branches is also called for. Banks need to think deeply on how to meet the challenge of meeting the credit needs of the marginalised. As I have said on an earlier occasion, financial inclusion is no longer an option; it has become a compulsion.
As far as banks are concerned financial inclusion has two dimensions. One is in terms of providing deposits and payment facilities to the disadvantaged and under-privileged. The second relates to the provision of credit facilities to such people. In some ways it is easier to tackle the former than the latter. Technology has opened up the opportunities for providing improved facilities in terms of depositing and withdrawing cash. The business correspondent model combined with the new technology should be able to take these banking facilities to the interior parts of the country and to people who have remained un-banked so far.
But the provision of credit facilities to the people of low incomes is a much harder task. Once credit is granted, the business correspondents can take over but the grant of credit itself requires some fundamental changes in the way the rural branches of banks function. In taking credit to persons with small means, banks will have to play a proactive role in organising self help groups. This experiment so far has proved to be useful. The scale and scope of activities of the SHGs must be enlarged and this would enable the banks to reach out to people with low incomes, including marginal farmers. Thus the two key instruments for widening the ambit of the organised financial system and making the banking system more inclusive will be the business correspondents and SHGs.
Banknet's 7th Annual Conference on Payment Systems will be organized on 19th January 2011 at Mumbai Plenary session will give an insight into emerging applications and approaches, Holistic view of the latest developments in the retail payments industry, Supporting financial inclusion measures etc.
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