Having just spent a week in Jharkhand and Chhattisgarh, visiting villages in daytime and returning at night to the booming cities of Ranchi and Raipur, I once again came face to face with two stark issues facing India today—inequitable growth and an uncaring system.
We are well-set on a path of deeply inequitable growth, with all its attendant problems—hopeless unemployment, increasing crime and Naxalism and environmental degradation. The recent rise in food prices makes growth even more inequitable as inflation reduces the real wage rate of the poor.
Yet, our uncaring system continues with its well-rehearsed response, captured in the Hindi proverb—“Andha baante rewri, dey apne ko baar baar” (A blind man distributing candy, gives it to himself again and again). There is no dearth of poverty alleviation schemes, both at the national and the state level. Funding is enormous, typically exceeding Rs 400-500 crore per district per year. But the manner in which all these schemes are implemented, including purposive wrong selection of the non-poor and systematic corruption, ensures that most of the benefit does not go to the poor. The “system”, whose visible face is the local politician and the local administrator, and increasingly, “contractor” NGOs, does not care what happens to the poor, as long it gets its cut.
In this scenario, where does one turn to? One way is to support the livelihood initiatives of a large number of economically active poor households, who need access to finance, with amounts as little as Rs 5,000. Since 1970, the Government has been trying to do this, first by nationalising banks, opening rural branches, and then launching the IRDP in 1980, a programme designed to give subsidised loans to families below the poverty line. When this showed disappointing results (only about 20% of IRDP loans were repaid), a second round of effort was begun with the self-help group (SHG)-bank linkage program, which gathered momentum since 2001, now reaching nearly 60 million households.
If one looks at the list of policy initiatives, institutions and branches, it is impressive. Yet the numbers of the poor reached are low. In the areas that I visited, less than one in ten adults had a bank account, yet almost every household could have benefited from having an account. But one does not have to go to Jharkhand—just ask your maid or driver about their experience of opening a bank account in a big city—to know that India cannot have equitable growth without universal financial inclusion.
What does financial inclusion mean? To me it means step by step enhancement of the ability of the poor to participate in the financial system. The first step of financial inclusion is financial literacy and the second is the opening of a “no-frills” bank account. The poor also need other financial services—payments (such as NREGA or old-age pensions); remittances (from family members who have migrated to cities); savings services with neighbourhood collection/withdrawal facility; and insurance—for life, health, crops, livestock, etcetera. After all this comes consumption credit and finally a loan for working capital or asset purchase.
To make this happen, what India needs is a nationwide electronic financial inclusion system (Nefis) to enable small transactions to happen in an affordable and secure manner. All government payments like the NREGA and old age pensions, as well remittances from family members who have migrated to cities, can be made using Nefis into “no-frills” bank accounts of poor households. All no-frills account holders can be extended group life and group health insurance. Once the cashflow history and savings balance builds up in these accounts, banks can initially give overdrafts and then extend term loans. Future loans can be based on repayment history, which could be made available through Nefis to any lender.
The front-end of Nefis would be the “business correspondent” (BC), a new channel for providing financial services, comparable to the STD PCO for telecom services. RBI had announced its approval of this idea in January 2006 but soon after that RBI started backtracking. First it limited the BC outlets to post offices, retired school masters and NGOs. The idea never took off, with less than 600 BCs in action compared to a million STD PCOs.
More recently, RBI has limited BC outlets to no more than 15 km of a parent bank branch. This is another example of an uncaring system. Who cares if 90% or more of people in 300 districts do not have access to financial services? Who cares if the poor lose their savings to unregulated operators? What matters is that RBI can say that the system which it regulates (a system that includes 10% or less people in 50% of our districts, and several urban areas, as per the Rangarajan Committee on Financial Inclusion), is without blemish. Regulatory reputation and supervisory convenience is more important to RBI than financial inclusion.
With no jobs, and the possibility of self-employment foreclosed due to lack of financial access, one begins to understand why a large number of youth in Jharkhand and Chhatisgarh are joining militant outfits.
Vijay Mahajan is chairman of Basix, a microfinance company. He was a member of the Rangarajan Committee on Financial Inclusion and the Raghuram Rajan Committee on Financial Sector Reforms