Financial Inclusion in India Financial inclusion, one of the cornerstones of inclusive growth, aims at the extension of banking services

to the deprived and marginalized sections of society, who have so far been denied access to credit facilities by banks. It is to be achieved by ensuring timely availability of cheap credit to the needy, particularly those below poverty line. Other aspects are likely to include extension of banking services such as bank accounts (savings, checking), insurance, mortgages and financial planning. Indian economy has been growing at a rapid pace. It witnessed a GDP growth rate of 7.4% in 2009-10 [1], the second highest among sizeable economies of the world in that fiscal year, and was only marginally affected by the recessionary trends in the developed world. To make the growth more equitable and to ensure that the benefits of economic growth trickle down to the deprived sections of society, the Government of India has adopted a multi-pronged approach to facilitate inclusive development. Various schemes targeting rural employment, education, access to information, financial inclusion, rural electrification, healthcare and sanitation, rural infrastructure and food security have been launched to enable the masses, especially those below poverty line, to empower themselves and become both a beneficiary of and a contributor to the Indian growth story. Currently, approximately ten percent of Indians hold ninety percent of the resources. While loans are easily available to the affluent, banks are generally unwilling to give loans to the poor because of the costs and risks associated with the recovery of debt. Thus, the poor have no other option than to knock at the doors of unscrupulous local money lenders, who charge exorbitant interest rates. Unable to service the interest, they lose all their possessions, fall into a debt trap, and at times end up working as bonded labor or even committing suicides. Lack of education &general financial awareness exacerbates their condition. Credit might be needed either to meet some exigencies or to pursue entrepreneurial ideas. In the latter case, many enterprising individuals, with viable entrepreneurial ideas, are unduly denied opportunities to pursue their dreams for lack of funds. Several questions need to be addressed to identify the scope of financial inclusion in India: a) How much is the Government of India, with a fiscal deficit of 6.6% [2] in 2009-10, willing to invest in this initiative? What should be its role? b) What should be the criteria for loan approval or rejection? c) Is financial inclusion through business correspondence model, as proposed in the Union Budget, a viable idea and what is the profit potential? d) Should there be some laws and regulations? Or can banks be incentivized into lending? e) Who bears the responsibility for bad debt, the bank or the government of India? f) What infrastructure, technology, and supplementary changes are needed to support this initiative? g) What should be the mode of development? Should it be public led, private led or through PPP?

The 2010-2011 Government of India budget provides for recapitalization of regional rural banks, increased targeted agricultural credit flow, allowing people affected by natural calamities more time to pay their debt off, extension of banking facilities to habitations having population of more than 2000 by 2012, insurance and other services to be provided through Business Correspondence model, and augmentation of Financial Inclusion Fund and Financial Inclusion Technology fund [3]. Therefore, the government, despite its current focus on reducing fiscal deficit, looks committed to the cause of promoting balanced growth. It should develop plans to monitor the implementation of the schemes so that corruption is minimized and taxpayers' money is well utilized. The UIDs could be used to introduce greater transparency in the overall lending process. Generally, the person seeking loan is too poor to offer anything as collateral. Also, the interest rate has to be low, unlike in the subprime loans provided in the US at high interest rates. Therefore, banks should base their lending criteria on the viability or sustainability of the proposed utilization of funds and not on the basis of personal wealth of the individual seeking loan. A delicate balance has to be struck between easy approval process of the loans without much red tape and examination of the potential of credit recovery. Single window clearance facility for loan approval should be setup. The banks must be friendly and flexible even if an idea is not viable to be supported, and must encourage the loan seeker to come up with more viable alternatives, instead of discouraging him/her by out rightly rejecting the loan. Banks should also be flexible to extending the deadlines for paying off the debt on a case to case basis.

The Business Correspondence model ([3], [6]) has the potential to be viable in the long term. The model will work through a local financial services provider, called the Business Correspondent (BC), who will have a tie-up with a regional unit of a bank. According to the current RBI guidelines, NGOs, mutual fund institutions, companies, post offices, retired bank employees, ex-servicemen and retired government employees can act as BCs of banks [7]. Thus, through the BC model, the loan seekers can have easy access to financial services with the bank not having to invest in infrastructure to reach the unbanked areas [5]. The bank will provide the initial capital to the BCs. The BCs will need to educate the target masses and incentivize them to save by opening bank accounts. The BCs can charge a commission fee from the bank for each new account opened and for each transaction (deposit) that takes place. They can start doling out credit to the needy after a thorough inspection and interrogation into the potential use of funds. They will need to periodically monitor any misappropriation of funds and the recoverability of the loans. The agents of the BC (if the BC is not an individual), trained not harass the poor for debt recovery; will be paid a fraction of the revenue earned by the BC from the bank, based on the services they render. The BCs must actively pursue only those cases where the loss potential is substantial, more than the costs incurred in ensuring recoverability of loans.

Since this is a high risk and low profit business, private players will be initially reluctant to enter this field. Therefore, regulatory bodies such as the RBI, banks such as NABARD, and public sector banks such as the SBI and the PNB will have to take lead. The RBI could formulate laws mandating all the banks operating in India, whether public or private, to allocate small percentage of their capital to this initiative. This will nullify any initial competitive advantage any bank might have by not entering the microcredit business. The government could fund pilot projects to assess the effectiveness of the ideas aimed at promoting financial inclusion. It also has a role in making the environment more conducive for lending by providing tax subsidies to BCs and banks involved in the business. Initial profits generated by banks and BCs, if any, and the interest expense on loans taken by the poor should be exempt from tax. The government should underwrite to cover some percentage of the debt recovery losses incurred by the banks and BCs by providing them government bonds (GSecs). Outstanding banks and BCs who provide exemplary service and deliver excellent results and individuals who utilize the loans for constructive purposes should be identified and rewarded.

Gradual proliferation of technology such as ATMs, internet infrastructure for online banking and facilities such as mobile banking to reach out to those who live in far flung areas is needed to make the financial services accessible to all. The Government of India set up two funds [3] dedicated to this cause: Financial Inclusion Fund, for capitalizing the BCs, imparting financial education and literacy, supporting pilot projects aimed at achieving financial inclusion. Financial Technology Inclusion Fund, for setting up banking technology infrastructure, such as ATMs & Kiosks, mobile banking facilities and IT infrastructure for internet based banking in backward areas. These funds should be utilized judiciously and voluntary tax-free donations and anonymous donations, with no upper limit, should be sought from well-off people for augmenting the funds. All the aspects of inclusive growth are mutually reinforcing and should not be viewed in isolation. For example, working under NREGS would provide the much needed finances to the rural people. Some of them would deposit these funds in banks and these funds would eventually be used to provide credit to the needy. Introduction of UID would eliminate corruption occurring through fake job cards in NREGS. A NREGS worker might work on digging ponds or wells to promote water harvesting, which in turn will help to reduce dependence on monsoons. Reduced dependence on monsoons will lead to stability in food production, thereby boosting rural economy. Better rural economy would enable the rural youth to invest further in their education and computer literacy. Greater percolation of IT will empower the masses and help them seek better price for their produce. Better education would help them understand the importance of saving. They would also be able to use RTI to enquire into the utilization of funds allocated for their respective villages and highlight any irregularities. It would also help in reducing class differences, prejudices and biases prevalent in our society. Better living

standards in rural areas would also help prevent mass exodus of rural population into cities in search of better means of livelihood. The recent success of microcredit and microfinance, pioneered by Mohammad Yunus of Nobel Prize fame, in Bangladesh, gives us hope. Micro-insurance also presents a big opportunity, where the farmers could insure their losses in case of crop failure. India has close to six lakh villages [4]. The rural economy presents a low profit, but a largely untapped mass market. Therefore, if the concept is successful in the initial phases, private players would also gradually enter. A more prosperous rural India is a win-win situation for all. However, banks and bank correspondents must be cautious to guard against complacency and negative practices. The whole concept of financial inclusion will be defeated if the banks dont act in good faith. They should treat everyone equal and not give preferential access to funds to the rich farmers and rural corporate households. Also, private banks entering this business should be monitored closely as they might tend to deviate from the social equity aspect and focus more on the profits. Therefore, public private partner- ship model could also be pursued, with increased responsibility of oversight on the public agency. Therefore, even though the idea is risky, the government must make all efforts to see it through despite some initial losses. Several hierarchical monitoring levels must be set up, starting from villages, blocks, and going up to districts, states and center where the potential and actual losses could be periodically monitored at each level through reports generated using data warehousing and MIS technologies, the problem areas identified and corrective steps taken. Once the rural economy could be put on the platform of growth, it would prove to be a self-perpetuating engine. All it needs is a helping hand. References: http://economictimes.indiatimes.com/news/economy/indicators/Manufacturing-helps-GDPgrow-74-in-FY10/articleshow/5996613.cms http://www.business-standard.com/india/news/2009-10-fiscal-deficit-stands-at66gdp/396788/ http://indiabudget.nic.in/ub2010-11/bh/bh1.pdf http://www.financialexpress.com/news/The-disappearing-Indian-village/660376/ http://www.fino.co.in/news-pdf/Performance%20Of%20The%20Business%20Model%20%20A%20Mixed%20Bag%20Aug%2028.pdf http://rbi.org.in/scripts/BS_CircularIndexDisplay.aspx?Id=2718 http://www.deccanherald.com/content/20513/campus-corner.html