There is tremendous anticipation and excitement about Reserve Bank of India’s policy review. After a long wait the central bank reduced the interest rates by quarter of a per cent. To some extent the media hype and industry frenzy about interest rates is justified.
But a key aspect of growth is usually neglected in the periodic drama we see around
announcement of interest rate changes.
Interest rates are important for institutional and individual borrowers. To use an archaic economic phrase, these are the “haves”. All of them are in the financial mainstream.
Simply put, all of them have a bank account. A simple facility most of us take for granted.
What about the “have-nots”? What about the hundreds of millions that still don’t have a bank account? These millions struggle to manage the little earnings they have. Only two-fifths of India has a bank account.
No economy can move from emerging to emerged status without ensuring that all its citizens are part of the financial mainstream.
RBI took the lead in the matter in 2010 and launched a dedicated programme to enhance financial inclusion. India has 6.5 lakh villages, out of which 2 lakh have now been financially included. They have at least one branch of a commercial bank in the village.
RBI has now asked banks to submit a plan for financial inclusion for the next few years.
The pace of growth of financial inclusion is painfully slow. Private sector banks are loath to open branches in rural areas where costs are much higher than profits. Public sector banks move too slowly to make a significant impact.
Prominent para-banking institutions, chit-funds, daily collection schemes have tried to bridge the gap but have more often than not duped the depositors.
The RBI and finance ministry must place this as their top priority. Bringing millions more into the formal banking sector may not benefit the banks in the short term but will add a big boost to the economy. Extra savings will help the government. Consumers will spend more since they will be secure about their money. This can boost the move towards higher growth.
RBI is planning to issue additional licenses for private banks with conditions that will force the players to have rural branches. This is a great idea but it will not be enough.
Government must work towards encouraging mobile banking and look at every technology option to enable financial empowerment of each citizen.
The direct benefit transfer scheme that hands out cash to people instead of subsidizing products can’t succeed without millions of new bank accounts.
Corporate India has to cheer and participate in this exercise. It has to throw away its perspective on short-term profit and opt for long term gains. A few hundred million more people with bank accounts and money to spend can only be good news for companies struggling with tepid demand.
It is time for government and industry to raise their interest in financial inclusion.
The author tracks India’s political economy and its engagement with the world.
