BANKING ACCESS: LIMITED

Even 37 years after the nationalisation of banks, there are only 300 million bank accounts for over a billion people. India Today’s interactive forum ICONS came up with ideas to bridge this gap.

By S S Jeevan

Ironies are part of the Indian political and economic landscape. The spin maestros can’t decide whether India’s 8-plus per cent GDP growth should be dubbed ‘Shining India’ or ‘Rising India’. Yet, even as India gallops towards the promised position of an economic superpower, the reality of the flip side is stark. Thirty-seven years after the nationalisation of banks there are only 300 million bank accounts for a populace of over a billion.

Banks have made huge strides since nationalisation. The number of branches has shot up from 10,000 to a lakh with deposits shooting up. But coverage or financial inclusion is still a far cry from what it should be. Even if one takes into account the number of people holding savings accounts with cooperative banks, only four of 10 people in India have access to the banking system. It gets worse when one looks at the figures (see chart) on other financial instruments, including critical functions like insurance.

To make sense of this paradigm of GDP growth and a high percentage of the population excluded from the financial system, INDIA TODAY brought together bankers, industry, microfinance experts and planners under its interactive forum, ICONS (INDIA TODAY Council for News and Society) in Chennai. The objective, as INDIA TODAY’S Editor Prabhu Chawla said, was to explore the ways of making banking more “inclusive”.

+C. Rangarajan, former RBI governor and chairman of the Prime Minister’s Economic Advisory Council (who also heads the Committee on Financial Inclusion) opened the debate with some startling figures. He revealed that while the national average is around 40 per cent in seven states, less than a third of India’s population is connected to the banking system. The picture is worse in the lower income groups and in the rural sector, where the proportional of institutional credit (to total credit) decreases, while noninstitutional credit (from moneylenders, for example) increases.

Studies have proved that lack of inclusion—or rather, exclusion—from the banking system results in a loss of about 1 per cent to the GDP. Some bankers believe that a huge chunk of cash transactions are not reflected in the national GDP analysis and calculations and, when brought into the system, could add to the overall GDP. Significantly, it is not just a statistical issue or one of getting the numerical picture. Financial inclusion is not just a socio-political imperative but an economic one as well. As Indian Bank Chairman and Managing Director K.C. Chakrabarty says, “There is a huge overlap between poverty and permanent financial exclusion.”

Both poverty and financial exclusion result in lack of choices and lower access to participation in the economy. Venu Srinivasan, chairman, TVS Motors, puts it in perspective: “The need for boosting financial inclusion or rather instituting measures to bring banking to all is both a challenge and a huge economic opportunity.”

As economic and management guru C.K. Prahalad says, “There is growth and gold at the bottom of the pyramid.” According to some studies, India could add as much as 1 per cent to the GDP growth if banking is accessible to all. The question that has dogged the government and the banking sector for decades is how to include the excluded. In fact, Puducherry will soon be the first place in India that can boast of financial inclusion. Under the National Pilot Project for Financial Inclusion launched on January 1, 2006, a number of banks will work to bring banking to every house in Puducherry. The hurdles range from access in rural areas where only 5 per cent of the villages can boast of a bank to literacy and cost of transactions.

Many speakers agreed on a societal problem associated with banking—attitudes of banks and society as a whole. Dr Sethuraman, founder president of micro-finance outfit Maha Semam Trust, said NABARD and RBI officials must live in rural areas for at least a month to understand the poor. Karti Chidambaram, director, CHESS Management Services, said there was acute “information shortage” about banking systems in villages. “Even knowledge on simple procedures like a student’s loan are yet to reach the masses.”

+Venu Srinivasan says lack of penetration of banks may have to do with lack of cost-effective mechanisms and that a lot needs to be done on the “credit and lending ratio”. His prescription: “Work on delivery mechanisms and deliver products without subsidy but on a profitable basis and at the same time with a competitive cost.” Chakrabarty, whose bank is playing a lead role in making Puducherry the first place where “banking for all” will become a reality, said that technology and “attitudinal willpower” can play a vital role, and for this “society must be geared up to involve everyone”.

But it is not just about systems and attitudes. R. Srinivasan, member, Tamil Nadu State Planning Commission, says the most important thing is to “first create a capability for the individual to go to a bank”. What’s the point of a bank when the farmer doesn’t have enough to save or isn’t “credit worthy” for a loan? In a sense it is a Catch 22 situation. Without economic growth there is lack of affordability or need to be a part of the banking system. The flip side is that access to the banking system not just for check-in accounts but to tap into credit and financial instruments is a sine qua non for growth. It is this challenge that will determine the growth of banking.

The solutions on offer at the ICONS meet ranged from improving information systems to tailoring attitudes to using technology to make transactions affordable. The economic opportunity— which could enable the banking system to double its size in keeping with the superpower ambitions—is clearly worth the challenge. And the socio-political imperative critical.

(India Today, October 16, 2006)