What is Financial Inclusion?

Ok..so before I run out of my josh to blog let’s get something useful here 🙂

So what is this ‘Financial Inclusion’ that the newspapers keep talking about?

Financial Inclusion in simple words is the idea of providing banking services at very low costs to the poor. So now the next question comes that why has it become so important all of sudden that every bank is talking about it? Well largely the reason why every bank is talking about it is because their banker i.e RBI wants them to do so!  The reason behind  this move is again pretty simple- the ratio of number of current & savings a/c to adult population in our country is still low (it is .59 as per the last census data of 2000 & no of a/c as of 2004). The urban population has a fair access to banking services, and since providing them these services is more profitable even the banks prefer serving the urban population. Now some stats to substantiate what we are trying to say- only 39% of rural adult population has access to a/c as compared to 60% in urban areas. Still worse, only 14% of Indian adult population has a loan account with a bank which again for rural population is as low as 9.5%!

Most of the commercial banks except for regional rural banks have stayed away from serving the rural population, the reason is quite apparent too- 44% of total deposits come from the top six metros! So, the grand daddy of all banks RBI steps in to tell them what they need to do in order to provide the poor in semi-urban & rural areas access to banking. Banks were told to offer ‘no-frills’ savings a/c to the poor and given targets to increase their number of accounts. There are many ways in which the RBI is trying to push the banks towards the goal of inclusion. It has relaxed the norms of KYC for a/c with deposits less than Rs. 50,000. Other important steps have been, allowing RRBs’( Regional Rural Banks) / Co-operative banks to sell Insurance and Financial Products, Relaxing norms for ATM, Kisan Credit cards etc. But the most significant thing that RBI is ‘banking’ on is technology! They are hoping things like mobile technology will help the banks to reduce their cost of providing the service, thereby making it a profitable proposition for them.

Now what has prevented the banks from doing that in the past? I guess it’s not difficult to understand the high transaction cost incurred by the banks in providing these services to the poor. Also there is a limitation in providing cash access points. But it’s not that this sector can’t be serviced profitably. We have had organisations like Sewa Bank of Gujarat which have shown that providing services to this segment can also be profitable. Then the world third world also witnessed great microfinance revolution, which again reinforced the idea. The main motive is to relieve the under privileged from the clutches of moneylenders, pawn brokers etc (how successful we are in that attempt we ll see that later). Now the aim is to provide services like credit, insurance, health care/life insurance to this segment at an affordable cost so that they can also join the growth run that we are having. Probably only then we can boast of our GDP growth rates in real sense.

Going forward I will try to touch upon what is microfinance and other related topics. My apologies for my myopic view on the topic, as it only talks about India. It is so because I intended to keep it that way 🙂 .