dna edit: Waiting for the banker

Yet another study on financial inclusion tells us what we already know: the South Indian states are doing much better than their counterparts in every other part of the country. A new index on financial inclusion, Inclusix, from ratings firm Crisil, however, indicates that since 2009 the country has made slow progress towards financial inclusion.

The Inclusix scores for all-India — 40.2 (on a scale of 100) —  and for the West(38.2), North (37.1), East (28.6), and North-East (28.5) are in contrast to the Southern states (62.2). The numbers tell the tale better: 624 million saving accounts, just 160 million loan accounts and nearly 40 per cent adult population without bank accounts. With new banking licences up for grabs, these scores and figures reflects the opportunities awaiting prospective bankers in terms of branch, deposit and credit penetration.

The Reserve Bank of India’s renewed focus on financial inclusion — while doling out banking licences and other measures -- comes after years of being caught in the thrall of liberalisation. A recent RBI working paper discovered that the share of moneylenders and other non-institutional sources in rural credit fell steadily from 92.8 per cent in 1951 to 36 per cent in 1991 before rising to 42.9 in 2002.

Significantly, the share of institutional agencies like banks in rural credit fell from 64 per cent in 1991 to 57.1 per cent in 2002. Perhaps, as an atonement for this exclusion when India embarked on a mindless state-withdrawal agenda, the RBI is proactively making amends now.

The RBI is now allowing branches in smaller centres without restrictions and has mandated the opening of 25 per cent of new branches in hitherto unbanked areas. Two-thirds of the branches opened in 2011-12 were in rural or semi-urban areas and by March 2012, over one-lakh villages were covered, compared to 28,000 in 2010.

Another reason for this spectacular jump has been the appointment of business correspondents (BC) who visit villages to open accounts, collect deposits and disburse credit. To sustain the BC model, RBI has advised banks to open ultra-small branches to support a ten-BC-cluster in a four-kilometre radius.

But as the RBI is discovering, opening accounts does not ensure automatic financial inclusion. The low number of transactions per account is adversely impacting the viability of financial inclusion efforts and has to be addressed fast before stakeholders lose interest.

The push for direct benefit transfers to Aadhar-linked bank accounts will hasten financial inclusion and increase transaction volumes as subsidies, scholarships and welfare payments are disbursed. But will banks shed mindsets and lend more to rural India? Crisil’s Inclusix index reveals a fundamental problem: South India’s credit penetration score of 77.1 is nearly thrice the rest of India.