Institutions and Innovations
An essential pre-requisite for inclusive and sustainable growth is capital formation through credit and financial services. While the benefits of growth due to reforms in India, have concentrated in the hands of those already served by the formal financial system, a large section of the rural and urban poor still do not have access to the formal banking channel. The backward regions of the country, too, lack basic financial infrastructure. The Reserve Bank of India (RBI) has, therefore, formulated the policy of financial inclusion with a view to provide banking services at an affordable cost to the disadvantaged and low-income groups. Financial inclusion makes growth broad based and sustainable by progressively encompassing the hitherto excluded population. The idea of financial inclusion in India has its roots in the co-operative movement which started in the year 1904. Historically, nationalization of commercial banks in 1969 was the most significant effort towards financial inclusion, which led to the spread of bank branches in rural and semi-urban areas. The access to banking services has increased considerably, as may be gauged from the fact that the average population per branch has decreased from 64,000 in 1969 to 13,400 as at the end of March 2011. However, there are still some under-banked states in the country like Bihar, Odisha, Rajasthan, Uttar Pradesh, Chhattisgarh, Jharkhand, West Bengal, and the North-Eastern States. Further, in spite of the enhanced outreach of banks in rural areas and the implementation of directed credit, the growing credit needs of farmers, rural artisans and entrepreneurs could not be adequately met from banks during the post-nationalization period. The RBI, therefore, urged banks to review their existing banking practices to align them with the objective of financial inclusion. According to the RBI (RBI, 2008) access to safe, easy and affordable credit and other financial services by the poor and vulnerable groups, disadvantaged areas and lagging sectors is recognized as a pre-condition for accelerating growth and reducing income disparities and poverty. Moreover, access to a well-functioning financial system, by creating equal opportunities, enables economically and socially excluded people to integrate better into the economy and actively contribute to development and also protect themselves against economic shocks. NSSO data reveal that 45.9 million farmer households in the country (51.4 per cent), out of a total of 89.3 million households do not have access to credit, either from institutional or non-institutional sources (Government of India, 2008). Further, despite the vast network of bank branches, only 27 per cent of total farm households are indebted to formal sources (of which one-third also borrow from informal sources). Farm households not accessing credit from formal sources as a proportion to total farm households is especially high at 95.91 per cent, 81.26 per cent and 77.59 per cent in the north-eastern, eastern and central regions respectively. Thus, apart from the fact that exclusion in general is large, it also varies widely across regions, social groups and asset holdings. The poorer the group, the greater is the exclusion (RBI, 2008). The RBI has observed that out of 600,000 habitations in the country, only about 5 per cent have a commercial bank branch (RBI, 2010). Also only about 61 per cent of the population across the country has bank account (savings), and this ratio is much lower in the north-eastern states. Further, 18 per cent of the population has debit cards and about 2 per cent has credit cards (RBI, 2011). India has a significantly low level of financial penetration compared with OECD countries. Further, while the access to bank branches in India fares better than that of China and Indonesia it is worse off when...