Financial Insertion – The Prospects, The Concerns and The Path Ahead

Posted on February 6, 2010 in Society

Praveen Kumar:

Pyramid has most of their mass towards the bottom, and this stabilizes the structure. 42 percent of India’s population is below International Poverty Line. And the distribution of wealth in India is like an inverted pyramid – it has no stability. This lower stratum has almost negligible economic contribution. Through the eleventh Five Year Plan (2007-12), the Government of India has emphasized the initiatives on financial inclusion with a greater focus on inclusive growth through its various initiatives such as the National Rural Employment Guarantee Scheme (NREGS), the Bharat Nirmaan program, the Sarva Shiksha Abhiyan, and the likes. But, there is no coordinated effort and we find that today, out of 604 districts in the country, only 68 districts have so far been covered by the so-called financial inclusion.

Some key statistics of our economy

Banking sector in India currently caters to about 2.4 crore clients which is only a fraction of the market. This means only 10-20 percent credit needs have been catered to. On doing a proper analysis we come across certain strange facts:

1. 59 percent of adult population in India has bank accounts and that there is a large gap between the coverage of banking services in urban (60 percent) as against rural pockets (39 percent).

2. Only 5.2 percent of India‘s 650,000 villages have bank branches even though 39.7 percent of the overall branch network Indian banks i.e. 31,727 is in rural India. The population covered by each branch has come down from 63,000 in 1969 to 16,000 in 2007 and the total number of check-in accounts held at commercial banks, regional rural banks, primary agricultural credit societies, urban co-operative banks and post offices combined, during this period has risen from 454.6 mil-lion to 610.3 million.

3. Only 34 percent of people with annual earnings less than Rs. 50,000 in urban India had a bank account in 2007. The comparative figure in rural India is even lower at 26.8 percent.

4. Around 80 percent of the population is without life insurance, health insurance, non-life insurance cover.

In April 2009, India had around 403 million mobile users but about 46% of them, or 187 million, did not have bank accounts. Ironically, telecom inclusion is on the expressway; financial inclusion has lagged behind.

One of most successful models, Grameen Bank has been partially effective and has certain weaknesses which need to be addressed. It‘s still hinged on government subsidies rather than on leveraging people‘s re-sources. The repayment system of 50 weekly equal instalments is not practical because the poor do not have a stable job and have to migrate to other places for jobs. The communities are mostly agrarian and during lean seasons it becomes impossible for them to repay the loan. This pressure for high repayment drives members to money lenders since micro-finance is time taking process.

Even other models in India like ASA, SHEP-HERD and SPANDANA are also plagued by dearth in availability of skilled people for local level accounting. All these models lack appropriate legal and financial structure. There is a need to have a sub-group to brain-storm on statutory structure/ ownership control/ management/ taxation aspects/ financial sector prudential norms. A forum/ net-work of micro-financier (self regulating or-ganization) is desired. The gap can be bridged with innovation in this field.

Rural poor have little faith on Banks because of complex forms and procedures. Policies like group loan schemes are hard to obtain due to tough guidelines.

Also banks encourage loan repayment within the week. But local money lenders give flexible repayment options and customized solutions. This is one of the biggest reasons that lure the rural poor to obtain credit from money lenders. Solution to this is an increase in awareness and decrease in complexity of application procedures. An offshoot of this solution is to branch out into two more spheres of possible paradigms.

Agricultural Produce as Collateral

Agriculture in India employs 60 percent of our workforce but contributes just 16 percent to the economy. This concept is finding few takers in Asia primarily because of the following three reasons:

* No sophisticated commodities market

* Banks not matured enough to diversify into this field

* Dearth of storage facilities

So investing on the above three deficiencies should be the main focus of any government aiming to encourage flow of credit among its poor.

A current example from the harsh recessionary times is from Italy. Credito Emiliano is a bank in south-eastern Milan, in the Emilia-Romagna region. This bank has been accepting parmesan as collateral for cheese makers since 1953 and has recently been cited in many studies as a successful model of agricultural produce being accepted as collateral. This paradigm is especially important in some Asian countries like India where agriculture still remains the mainstay of the economy.

Son(s)/Daughter(s) as Co-signers

Due to lack of work opportunities in villages, many rural poor see their children migrating to cities to earn better wages. Statistics state that these migrants earn more than Rs.85 per day. Setting aside the costs for their sustenance, this money is enough to act as collateral to loans which could be made available to their parents. This paradigm if implemented would greatly increase the ambit onto which credit could be made available by banks.


To conclude, we identify the trend that the percentage of those without access to banking services will continue to fall while the need to have a bank account will increase. Despite the impact of current policy and practice initiatives to combat financial exclusion, there will continue to be people who cannot take full advantage of banking and other financial services. There are many different reasons for this depending on the different characteristics of particular vulnerable groups. The need of the hour is to identify the requirements of these groups and customize practical solutions for them. Because financial exclusion reinforces social exclusion, it is not just an individual problem: a whole community can suffer from under-investment in financial ser-vices. Conversely, financial inclusion significantly contributes to a route out of poverty.

The writer is a correspondent of Youth Ki Awaaz and also an MBA student at IIFT.