Financial inclusion requires public policies targeting the economically powerful in the informal system even as monetary policy steers the banking system towards those left out of its ambit.
More than two years after Finance Minister, Mr P. Chidambaram introduced financial inclusion into the country’s economic lexicon and the Reserve Bank of India turned it into a policy for banks, how have the attempts worked? Mrs Usha Thorat, Deputy Governor recently offered a critique of the no-frills accounts created for the financially excluded. Her observations, valid as they are, point to one of the central weaknesses of the policy as it has evolved so far.
While a good many accounts have been opened, not many of them have become operational, Mrs. Thorat avers, on account of inadequate follow-up and high cost of transactions. She suggests that services move much closer to the customer either through mobile branches, satellite offices, extension counters or self-help groups or through business correspondents using IT to increase scale, access and reduce cost. The credit product too, she feels, has to be simple and covering all the needs of small borrowers. But is the problem of those financially excluded just inadequate money or is it something more basic? Many transactions that the small borrower is involved in today are outside the formal banking system anyway, a condition that renders the creation of a formal credit line like the no-frills account irrelevant as a transactional instrument. Most of those financially excluded do not participate in exchanges or markets within the formal banking system. Thus the no frills accounts work as just a store of value that is rendered irrelevant in the absence of any transactional value.
This means that any policy for financial inclusion must be accompanied by a drive to bring other constituents into the formal exchange mechanisms of the organised economy. Only in that case would the bank accounts become operational in the true sense. Rural employers and merchants, indeed the entire informal economy in which the financially excluded are embedded, must be incorporated into the formal channels. Only then would the financially excluded also enjoy, like the poorest pensioners in villages, the benefits of the savings account as a medium of exchange, not just a store of value. Financial inclusion therefore requires concomitant public policies targeting the economically powerful in the informal system even as monetary policy steers the banking system towards those left out of its ambit so far. Only then will inclusion become inclusive.
