Small and inclusive

Paper: GS-III

Topic: Issues relating to Growth & Development – Banking, NPAs and RBI

For Prelims: Inclusive growth in India, RBI and Inclusive growth.

For Mains: Challenges and Government Initiatives for Inclusive growth.

Why in news?

• INDIA’S central bank has often been criticized for being too conservative when it comes to lifting the entry barriers for new players in the banking sector.

RBI and Small Finance Banks:

• Three years after the RBI approved licenses to 10 small finance banks, the regulator has now issued the final guidelines for licensing such banks throughout the year or on tap, encouraged presumably by the performance of some of these entities.
• The bar has been raised for new entrants in terms of higher capital requirements Rs 200 crore now from Rs 100 crore earlier besides stiffer prudential norms on a continuing basis and a mandatory requirement to list after three years when the net worth tops Rs 500 crore.

New approach for Small finance Banks:

• The new approach to granting differentiated licenses to small finance banks and payment banks is welcome, especially given the current context where the established full service large banks are scaling back their franchises to reduce expenditure and in light of the collateral impact of the planned mergers of some of the state-owned banks.
• Small finance banks have the potential to provide an alternative to some of the existing institutions with their mandated focus on small and medium businesses, the informal sector, small and marginal farmers and thus on increasing financial inclusion and serving a variety of unserved clients in the hinterland and tier three and four cities and towns.
• The RBI itself has said that a review of the performance of small finance banks shows that they have achieved their priority sector targets and attained the mandate for furthering financial inclusion, building a strong case for the entry of more players.
• Early reports, too, indicate that though these banks account for less than 0.5 per cent of total deposits and less than a per cent of total advances, many of them have been growing their loan book at a good clip. But where these new institutions quite a few of which are former MFIs are going to be tested is not just in building a brand franchise but also in ensuring relatively low-cost operations by diversifying their loan portfolios and lowering the old legacy loan stock and wholesale deposits, which can be costly and putting in place robust technology platforms and modern risk management systems.
• The experience of the last two decades has shown that a competitive banking system can help foster a more inclusive financial sector. Small finance banks could well occupy the space being gradually vacated by some of the bigger banks and complement them too in segments such as micro and small businesses and the informal sector.
• Their success will, however, be contingent on asset quality, the trust they are able to build progressively, the level and standards of governance and regulatory oversight.

Financial Inclusion in India:

• In the Indian subcontinent, the concept of financial inclusion was first familiarized in the year 2005 by the Reserve Bank of India by releasing the Annual Policy Statement. Soon, the concept started to spread in every part of the nation.
• It was chiefly introduced to touch every corner of the country without ignoring any remote area. The concept addressed the absence of a formal financial system and banking system for catering to the monetary requirements of the poor people.
• In the year 2005, the Khan Committee Report was released which mainly discussed rural credit and microfinance. It spoke about how many people in the nation are missing out on the benefits of a professional and licensed banking system.
• The Khan Committee report laid an emphasis on providing access to essential financial services by helping them to open a bank account that does not come with any frills or complicated elements. All banks were asked to minimize regulations regarding account creation processes for the economically weaker sections of the society. Several banks were asked to work together towards 100% financial inclusion by taking part in campaigns started by the RBI.
• The Indian government also initiated the ‘Pradhan Mantri Jan Dhan Yojana’ with the sole purpose of motivating and encouraging poor individuals to open bank accounts. This Programme targeted at least 75 million individuals to open bank accounts by the year 2015.

Financial Inclusion Programmes Organized by the Reserve Bank of India (RBI):

• The Reserve Bank of India works on exclusive Programmes and plans in order to have financial inclusion in the nation effectively. It applies a bank-led strategy in order to attain financial inclusion smoothly.
• The central bank of India also has firm regulations in place that need to be followed by every bank. The RBI also is offering qualified assistance to every bank in the nation in order to attain its financial inclusion objectives.
• The RBI instructed every bank to have Basic Saving Bank Deposits (BDSD) accounts for the economically weaker sections of the society. These are no-frill accounts where account holders do not have to maintain any minimum balance or minimum deposit. These account holders can withdraw cash at any ATM or at the bank branch. They should also be given the opportunity to make use of electronic payment channels for receiving and transferring money to others.
• The RBI also asked banks to have simple Know Your Client (KYC) regulations for the less fortunate people of the society. There are many people in rural areas who are unable to open bank accounts due to strict KYC norms. Hence, the RBI wants banks to have simplified KYC requirements particularly if a low-income individual is interested in opening a bank account with an amount not above Rs.50,000. It also wants minimal KYC norms if the overall credit in the accounts does not go above Rs.1 lakh for 1 year. Recently, banks have been asked to accept Aadhaar Card as identity proof as well as address proof since most people belonging to low-income groups have made Aadhaar card in their names.
• Keeping in mind about the lack of bank branches in rural areas, the RBI has asked all banking institutions to open more and more branches in villages across the nation in order to provide good banking services to the villagers. There are many remote villages where there are no banks and also no good transportation services. It is very difficult for residents of these areas to commute to a far-off bank branch for availing banking services. Hence, with the compulsory rule of the RBI, banks are distributing the ratio of banks in villages and cities to have a balance.

Financial Inclusion Schemes in India:

• The Government of India has been introducing several exclusive schemes for the purpose of financial inclusion.
• These schemes have been launched over different years. Let us take a list of the financial inclusion schemes in the country:

1. Pradhan Mantri Jan Dhan Yojana (PMJDY)
2. Atal Pension Yojana (APY)
3. Pradhan Mantri Vaya Vandana Yojana
4. Stand Up India Scheme
5. Pradhan Mantri Mudra Yojana
6. Pradhan Mantri Suraksha Bima Yojana (PMSBY)
7. Sukanya Samriddhi Yojana
8. Jeevan Suraksha Bandhan Yojana
9. Credit Enhancement Guarantee Scheme (CEGS) for Scheduled Castes (SCs)
10. Venture Capital Fund for Scheduled Castes under the Social Sector Initiatives
11. Varishtha Pension Bima Yojana (VPBY)

Objectives of Financial Inclusion:

• Financial inclusion intends to help people secure financial services and products at economical prices such as deposits, fund transfer services, loans, insurance, payment services, etc.
• It aims to establish proper financial institutions to cater to the needs of the poor people. These institutions should have clear-cut regulations and should maintain high standards that are existent in the financial industry.
• Financial inclusion aims to build and maintain financial sustainability so that the less fortunate people have a certainty of funds which they struggle to have.
• Financial inclusion also intends to have numerous institutions that offer affordable financial assistance so that there is sufficient competition so that clients have a lot of options to choose from. There are traditional banking options in the market. However, the number of institutions that offer inexpensive financial products and services is very minimal.
• Financial inclusion intends to increase awareness about the benefits of financial services among the economically underprivileged sections of the society.
• The process of financial inclusion works towards creating financial products that are suitable for the less fortunate people of the society.
• Financial inclusion intends to improve financial literacy and financial awareness in the nation.
• Financial inclusion aims to bring in digital financial solutions for the economically underprivileged people of the nation.
• It also intends to bring in mobile banking or financial services in order to reach the poorest people living in extremely remote areas of the country.
• It aims to provide tailor-made and custom-made financial solutions to poor people as per their individual financial conditions, household needs, preferences, and income levels.
• There are many governmental agencies and non-governmental organizations that are dedicated to bringing in financial inclusion. These agencies are focused on improving the access to receiving government-approved documents. Many poor people are unable to open bank accounts or apply for a loan as they do not have any identity proof. There are so many people who live in rural areas or tribal villages who do not have knowledge about documents such as PAN, Aadhaar, Driver’s License, or Electoral ID.

Challenges of Inclusive Growth in India:

• ‘India’ is expanding business at global scale. The economy growing at a remarkable rate, combined with a booming democracy is making people sit up and take notice across the world. Still, India is far from reaching its true potential.
• The country remains shackled in dishonesty, red tape, traditional social hurdles and a bewildering lack of transparency. It is witnessed that growth is not uniform across sectors and large cross-sections of the population remain outside its purview.
• Numerous social, political and economic factors need to be tackled for sustaining a high rate of growth, as well as to make this growth inclusive. Indian society has to seriously introspect major issues such as eradication of child labour, women empowerment, removal of caste barriers and an improvement in work culture.
• Tackling corruption in high places, removing the ills of the electoral system, snubbing politics of agitations and keeping national interest above petty politics may not be too much to ask to the country’s policy makers.
• In order to accomplish major objectives for progression Indian government must focus on rapid growth in the rural economy, well planned and targeted urban growth, infrastructure development, reforms in education, ensuring future energy needs, a healthy public-private partnership, intent to secure inclusivity, making all sections of society equal stakeholders in growth, and above all good governance.

• The social limits of Indian democratic politics: In top business person around the globe, many Indian entrepreneurs are listed but the sarcasm still remains that there is a marginal farmer in many states of India who is struggling to feed his five children, the youngest of whom is a son, uneducated and unemployed, and the farmer cannot afford her daughter’s marriage.
• There are jobs escalating in the IT sector in big cities like Bangalore and Hyderabad, disposable income for the ‘Call Centre’ crowd, that is spurring on the foray of several luxury goods never before seen in the nation, is becoming all the more accessible but the poor are still poor even though the rich have become super rich and the previously not so rich.

Way forward:

• Important mechanism to deal with the corruption issue is to bring about greater transparency, both in the policy making and in the delivery systems. The Right to Information Act was a great step in this direction.
• Governments have been defensive in their thinking. They have failed to give full flow to the intentions of the framers of this Act. Information Commissioners, who have been appointed so far, both at the Central Government level, as well as at the State Government levels, have mostly been of the retired bureaucrats. There is need to balance out the Information Courts with the addition of people from other social and professional categories, be they prominent journalists or social activists or those distinguishing themselves in the non-governmental social organizations.
• Greater transparency will bring greater accountability, and hopefully a much larger percentage of money would eventually reach the intended beneficiaries of Government schemes. Corruption is one, of the most significant, but there are several other problems that need to be overcome and problems that need to be tackled.