Financial Inclusion: How far to go?

As Narendra Modi completes three years in office, a lot of report cards will be out soon. In corporate lingo, these can be called performance assessment. Unlike in the corporate world, the assessment won’t be followed by a bonus or a promotion. The reward will come in the 2019 elections. So for now, as with all things in India, one can describe the performance as a glass half-full, or a glass half-empty. Both happen to be technically correct assessments. On the plus side, from a macro perspective, we have several achievements to report. Inflation is down from 10 to 15 per cent four years ago, to less than 5 per cent, and indeed negative for seasonal items like fruits and vegetables.  Low inflation rate and price stability is essential for sustained economic growth.  The government’s fiscal management also has been prudent, in the sense that the fiscal bonanza of low oil prices was used to shore up investments in infrastructure and rural areas.

The stock markets are at an all-time high, signalling strong confidence of investors about future outlook. Reform measures like the national Goods and Service Tax, new bankruptcy law, an ordinance to deal with NPAs, the UDAY scheme to rescue electricity distribution companies are all in place, and will bear fruit in due course. Growth, too, has been around 7 per cent, and will inch up in the coming quarters. On the negative side are: the still-stagnant private sector investment, the very low growth of bank credit offtake, and most worryingly, the spectre of jobless growth. The agriculture sector too hasn’t seen the kind of robust growth in income that is needed if farm incomes are to double in five years, as per the PM’s vision.

In this column, rather than look at the entire report card, we choose to examine one aspect, namely the agenda for financial inclusion. India has among the highest savings rates in the world, which peaked at almost 36 per cent of GDP a decade ago. This high savings can potentially translate into high investment spending, and lesser dependence on foreign direct investment, for domestic growth. But unfortunately, this is thwarted by the fact that more than half of all savings goes into the non-financial category, i.e. into land and gold. So it represents unproductive savings. It is also true that as of two and half years ago (and reported in the Economic Survey of 2016), the average savings bank penetration across all states of India was merely 46 percent.

Since the days of bank nationalisation of 1969, the banking network indeed did spread to rural areas, far and wide. But despite the early days diktat of branch expansion, access to banking remained poor. The agenda of financial inclusion was to bring the financial sector, savings, loans, insurance and investments to the doorstep of all households of India, rich or poor, rural or urban. By thus connecting them with the formal institutions, this would also lead to deepening of the financial sector, and lead to higher productive savings and investment. One of Prime Minister Modi’s earliest announcement was the Jan Dhan Yojana, wherein the aim was to open one bank account for every household in the country, in an ambitious time of less than 18 months. This initiative turned out to be a huge success, even getting classified as a Guinness Book world record. The banking system led by public sector banks, by working on a war footing, ensured that targets were reached ahead of schedule. As of date, more than 28 crore JDY accounts have been opened.

But this is only the first step. Now these accounts must see transactions. The accounts have been linked to insurance, subject to some minimum balance, and also some limited overdraft facility. One inadvertent side effect was that during the demonetisation phase, as old notes were being returned to the banking system, the JDY accounts saw a suspicious surge in activity. But these accounts, along with earlier initiative on post office bank accounts, are being used to make many government payments directly to beneficiaries – be they cooking gas subsidy, old age pensions, MNREGA wages and so on. 

Two other initiatives also have a significant bearing on financial inclusion. The first is the big push for digital payments, which came alongside demonetisation. The use of e-wallets, apps like BHIM and UPI-based payments have seen a surge.  It is still tiny compared to conventional payment methods but is rising fast. This year, India reached a landmark in that electronic clearing exceeded paper-based clearing in the banking system as a whole. This too is a trend that will accelerate. Of course, cash usage will remain substantial, but the aim is a formal connect with the financial system and not necessarily to be cashless. The second development is the launch of almost ten new payment banks. These will ride on the telecom network, be primarily fintech companies, not allowed by regulation to make loans, but connect the almost billion phone subscribers to banking. The Reserve Bank of India has enabled regulation to make it possible to fast track the “know your customer” process for these new banks. Further by usage of Aadhaar, the process itself is much shorter and simpler.

So in the coming days these three developments, JDY accounts, digital wallets and app based payments, and the new payment banks are bound to make a big impact on financial inclusion. These can also have an impact on the mature but still growing microfinance industry, which meets a big section of credit needs of the informal sector. This is in addition to the Mudra loans which were initiated to help small and medium enterprises. Thus, on the financial inclusion agenda, on the third anniversary of the government, one can safely say that the glass is more than half full, and rapidly filling up.

(The writer is an economist and senior fellow at the Takshashila Institution)