India Is In Accelerating Phase of Financial Inclusion

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3 May 2011
Prathima Rajan
Inadequacies in rural access to formal finance and the seemingly extortion terms of informal finance for the poor provide a strong need and ample space for innovative approaches to serve the financial needs of India’s rural poor. The past decade has witnessed the emergence of several new channels to reach the last mile. However the impact of commercial banks on financial inclusion has been lesser than that of co-operative banks, regional rural banks and especially microfinance institutions (MFIs) operating with in the country. Technology for financial inclusion is accelerating world-wide and regulations are playing extremely significant role in shaping the future growth. India is at a very important juncture of financial inclusion as a huge number of regulatory and technological changes are on its way. India has bank driven inclusion model with business correspondent (BC) / agent banking model slowly catching up. The market is shaping up towards a more collaborative model as several other players join the race. In terms of the strategic aspects, RBI has asked banks to come up with a board approved Financial Inclusion Plan ( FIP ) for the next 3 years with enough flexibility in choosing the business model. This is stressed upon by allowing banks to develop a profitable business model for financial inclusion by providing basic bouquet of services with full geographic coverage in mind. Following are the accelerating factors that will further the growth of inclusion. Evolution of the agent model regulations: The recent amendment to BC regulation passed by Reserve bank of India (RBI) in 2006 has encouraged banks and other third parties to come up with profitable business model to facilitate financial access to the untapped. The new amendment allowed a range of service providers to act as BCs and permit banks to charge fees to customers for using BCs. This has motivated several players in the financial inclusion supply chain to offer better products and services, and is expected to do so in the days to come. The Unique Identification (UID) project: 2011 Union Budget has emphasized on issuing Unique Identification numbers with a view to improve service delivery, accountability and transparency in governance of various schemes. So far 200 thousand cards have been given and from 1st October 2011, one million cards will be generated per day. This will play a vital role in government initiated payment schemes and other financial inclusion programmes. Stringent MFI regulations: The recent Andra Pradesh Crisis has resulted in the central bank coming up with regulatory policy for reining in the negative implications of unrestrained microfinance growth, mainly by the formation of non-banking financial companies (NBFC-MFI) and thereby regulating this segment. Growth of G2P payments through direct cash transfer program: Indian government has decided to shit to direct cash transfer program instead of subsidy. A number of schemes like Public Distribution Schemes (PDS) that provides grains, food items, cooking fuel and fertilizers meant for poor families operated inefficiently. In order to overcome these inefficiencies and provide more structural distribution, government has now decided to transfer cash; this will certainly involve banks and business correspondents to reach the rural poor and therefore said to impact the financial inclusion in India. Issuance of new banking licenses: The set of new bank licenses that RBI is planning to issue will see more NBFCs in the Indian banking market. This move is expected to see stiffer competition in the market as well as more banks serving rural areas which is mandatory in Indian banking system. Postal Banking: As part of financial Inclusion, State Bank of India and the country’s postal department are gearing up to offer banking services to rural India. Currently India Post has the largest postal network in the world with 155,000 post offices, of which (89%) 139,000 are in rural areas. The post can thus work with the largest public or the largest private sector banks for distributing banking services to bridge the gap between banks and financially excluded.

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