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Why Financial Inclusion remains an unfinished Agenda

According to an ASSOCHAM-EY Study, financial services ecosystem lags in terms of physical infrastructure and has failed to reach the poor. Over 19 % of the population are still unbanked 

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Just after assuming office, the NDA government accorded top priority to financial inclusion especially to bring in rural populace under the banking channel. With a broader aim- ‘Sabka Saath, Sabka Vikas,’ Pradhan Mantri Jan Dhan Yojna (PMJDY) was launched on 28 August 2014. The scheme aims to provide every household with a bank account and basic insurance cover.  

However, the much hyped financial inclusion scheme of the government is facing challenges at various fronts. Recently, Banks expressed their inability to carry on with thousands of defunct accounts as they are unable to bear huge operational cost. Banks and financial institutions including public sector banks are mandated to go to rural areas, however, they never touched the required number of branches or outlets in these areas. Thus financial inclusion remains an illusion and unfinished agenda. 

PMJDY had received considerable response and around 15 million accounts were opened on the day of its launch. As of July 27, 2017, total number of beneficiaries touched 30 crore and out of this 17.45 crore people are from rural & semi urban areas. Presently, balance in these functional accounts is Rs 64,777 crore. During demonitisation period, the scheme was widely misused by the powerful and mighty. Post demonitisation, all of a sudden, thousands of accounts saw zero balance which made the banks reconsider their focus on PMJDY. Now the momentum is gone. 

The unbanked People

The main objective of financial inclusion is to ensure access to formal credit for people who depend on informal sources for fulfilling their financial needs, at an affordable cost in a fair and transparent manner, and to promote financial education. 

According to a joint Study by Assocham and EY,despite rationale and a strong institutional credit network, India’s financial services ecosystem lags in terms of physical infrastructure and has failed to reach the poor, more than 19 percent of the population who are unbanked or financially excluded.

Over the years, the Government and the Reserve Bank of India (RBI) have made several concentrated efforts to promote financial inclusion. These efforts include launch of co-operative banks and regional rural banks, introduction of mandated priority sector lending targets, formation of self-help groups, appointment of business correspondents by banks to provide door-step delivery of banking services. Recently, the RBI granted licenses for 11 payments banks in August 2015 and 10 small finance banks in September 2015. These specialized banks have become since 2016–17. These banks are expected to provide further push in terms of accessibility to formal finance channels and in turn contribute to inclusive growth.
These initiatives helped bring in a large section of the unbanked population under the formal financial credit system. However, a significant portion of India’s population still remains devoid of access to basic formal credit facilities mainly due to lack of last mile connectivity. Hence, the Government, with RBI’s support, continues to introduce various new initiatives to fulfil its objective of achieving 100 percent financial inclusion, reveals the study.

The Role of Microfinance Industry 

The Indian microfinance industry is dominated by Non Banking Financial Companies (NBFCs) and Micro Finance Institutions (MFIs) with an 88 percent market share. According to data from Microfinance Institutions Network (MFIN), there are 12 small MFIs (loan book less than Rs 1 billion), another 22 medium-sized MFIs (loan book between Rs 1 billion and Rs 5 billion) and 22 large MFIs (loan book above Rs 5 billion). Large MFIs account for 90 percent of the industry’s gross loan portfolio (GLP), client base and debt funding. 

During FY12–16, the gross loan portfolio (GLP) of MFIs grew at a compound annual growth rate (CAGR) of 48 percent to reach Rs 532.3 billion and the number of clients benefited crossed 32.5 million (as of March 2016). Notably, the sector reported a significant surge of 84 percent in GLP from Rs 289.4 billion in FY15 to Rs 532.3 billion in FY16, since MFIs indulged in issuing large loans to clients after the RBI relaxed indebted exposure to single borrower from Rs 50,000 to Rs 100,000. The 60 percent of the GLP was attributed to the rural sector while the remaining 40 percent was from metros, urban and semi-urban areas (as of March 2016). 
 
In terms of regional breakup, south India had the highest share at 35 percent of GLP followed by west and north India at 25 percent share each. The 31 percent of the loans were given for agriculture and allied activities while 64 percent were given for non agriculture and 5 percent for household finance as of March 2016. Large MFIs, some of which are in the process of converting to small finance banks, reported the highest surge in their loan books.

During the past three years, MFIs have reported a 58 percent jump in average loan size per customer from Rs 10,364 in FY14 to Rs 16,394 in FY16, since during the same period gross loan portfolio has increased 3 times while client base has only increased 2 times. Some industry experts have ascertained the high growth pattern to the rise in clients, increase in general income levels and ease of lending rules by the RBI.However, according to others, increased lending to same clients may be risky for MFIs, since they serve vulnerable segments, which entails increased underlying risk.

The Way Forward 

The main objective of financial inclusion is to ensure access to formal credit for people who depend on informal sources for fulfilling their financial needs, at an affordable cost in a fair and transparent manner, and to promote financial education. India has a substantial network of institutional credit, i.e., credit offered by financial institutions such as banks. Scheduled commercial banks, particularly public sector banks (PSBs) have huge potential to make financial inclusion a big success with wide spread distribution networks. PSBs have aggressively expanded their branch network over the last decade with around 90,000 points of presence as of March 2015 from around 49,000 points of presence as of March 2005. Moreover, in terms of network distribution, PSBs have around 60 percent of their branches in rural and semi-urban areas. The banking system needs a viable and sustainable business model for rural areas and the government should come out with adequate incentives for business correspondent model. 

It is widely recognized that poor people could improve their lives significantly if they have easy access to even basic financial services such as savings accounts, loans and insurance.

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