24 FEB, 2012, 04.02AM IST,
With Niraj Verma, Senior Financial Sector Specialist, World Bank
Ensuring that the poor are able to save, smooth consumption, mitigate risks, invest, and build assets is critical to broad-based and equitable development. In the past decade, policymakers broadened their approach to financial inclusion from an almost exclusive reliance on expanding bank branches to innovating and taking advantage of new technology. The business correspondent model allows agents to operate on behalf of banks; as a result over 130,000 rural banking points are now available, compared to 2,000 in 1970.
Over 20 million kisan credit cards have been issued and index-based crop insurance has been scaled up in recent years. India is unique in having nearly five million self-help groups with loans from banks. And despite having recently run into significant problems, microfinance institutions have helped expand access. The biometric-based Aadhaar initiative of the Unique Identification Authority of India can bridge information gaps and facilitate financial inclusion.
The RBI and the government have recently committed to increasing financial access to 350,000 villages by 2013, covering a significant part of the 100 million households currently lacking adequate access. However, as RBI and the government are aware, scaling up viably and with quality is not easy. We highlight a few of the challenges.
Leveraging existing distribution networks: For "last mile" reach, banks have embarked on an effort to increase banking correspondents. But low transaction volumes are making viability difficult. Could scaling up tie-ups between banks and post offices and co-operatives, and allowing MFIs structured as non-bank finance companies to act as banking correspondents, help optimise capacity utilisation and lower transaction costs? Likely. However, the government's facilitation may be needed for such integration to take place. It is also possible that covering some villages with very small population may never be viable, and would require explicit or implicit subsidies.
Expanding market infrastructure: Credit bureaus have recently expanded coverage of informal sector MFI clients and generate over 500,000 monthly credit reports assessing client indebtedness prior to new lending. Policymakers could facilitate getting rural banks and SHGs to also share information on their borrowers with credit bureaus. Better customer protection is also essential, particularly as delivery channels other than banks expand coverage.
Expanding products: Recent efforts have helped create 90 million no-frills accounts, a creditable achievement as savings help manage risks, investments and cash flows. However, transaction volumes have been low. The experience with South Africa's mzansi (no-frills) accounts shows that linking up with brands that clients recognise and allowing the use of multiple outlets helps increase transactions.
Enabling a better microfinance sector: SHGs and MFIs account for more small-borrower accounts than the entire banking system. Once enacted, the draft microfinance law will bring regulatory clarity and promote customer protection. 'Patient' capital can be mobilised by domestic development banks to help sustainable MFIs scale up.
For SHGs, ensuring quality of lending as scale grows is essential for their long-term sustainability. Also, banks typically price SHG loans at thin spreads over cost, leading to the plateau in disbursements. Pricing that reflect margins better could spur greater lending. India's progress in its financial inclusion efforts, given the numbers and innovation involved, are of great significance. The world is watching.
